Dec 27, 2018

Jamie Murray's Top Picks: Dec. 27, 2018

BNN Bloomberg

Jamie Murray , BNN Bloomberg

Jamie Murray, head of research at Murray Wealth Group

Focus: North American equities

MARKET OUTLOOK

The stock market, as measured by the S&P 500, peaked at the beginning of autumn, closing just above 2925 on the first two days of October. After tumultuous activity, with large swings in both directions during October and November, we have seen capitulation in December. The market is currently more than 15 per cent off its early autumn highs.

While signs of slowing economic activity abound, it was unreasonable to expect that U.S. economic growth could be sustained at levels approaching four per cent for an extended period of time. U.S. GDP growth was 3.4 per cent in Q3. This is not the stuff that recessions are made of. Members of the U.S. Federal Reserve Board are still concerned enough about economic activity reaching inflationary levels that they are normalizing (raising) interest rates to slow the economy. At this morning’s S&P 500 index levels, the market is currently trading at about 14.5 times 2019 earnings estimates. This is a very modest level. We continue to believe that this is another so called “correction” although it is now severe. Market wise sentiment and funds flow is indicative of extreme negativity which is a contrarian indicator and indicates positive surprises could be ahead.

Other positives: Unemployment has dropped although we believe “underemployment” is still prevalent (especially among young adults), commodity prices are low (e.g. gasoline prices have fallen to levels about 10 cents below the average of the last 25 years), there are no signs of inflation, and productivity which is benefitting from the increased use of artificial intelligence, is holding down prices across almost the whole of the consumer goods sector.

We remain optimistic on the outlook for the next several years and continue to believe that well run companies with solid growth prospects will provide superior investment returns to patient investors.

TOP PICKS

NIKE (NKE.N)

Nike is a global sports apparel company. The company is transitioning its sales strategy to a direct-to-consumer approach through branded Nike stores and online sales. This will drive revenue and earnings growth as Nike captures a larger percentage of sale price per unit but marks a shift from its previous capital-light distribution model. Nike will need to prove that the additional customer data, inventory management and branding control is translating into higher sales and return on invested capital. Its recent results announced just before Christmas indicated ongoing success in these initiatives with North American sales accelerating nine per cent and China sales growing 31 per cent in constant currency.

APPLE (AAPL.O)

Apple shares have underperformed the broader market this year on downgraded iPhone sales expectations. We have seen iPhone cycles play out before with share price drawdowns between 25 to 40 per cent peak to trough (currently 35 per cent at today’s price). However replacement is eventually required for phones and we expect sales will recover as the Apple ecosystem is alive and well in North American households. The services story (revenue such as apps and advertising) is still in early innings and should augment margins and provide valuation support as its consistent stream of high quality revenue grows. Apple shares trade at 11 times 2020 earnings per share (EPS), a very attractive valuation level and below its recent average forward price-earnings (P/E) of 14 times.

BP PLC (BP.N)

Energy companies are increasingly using the vast amounts of data at their disposal to help design, drill and complete wells more efficiently, enhance well productivity and schedule logistics. The result is lower costs, higher returns and more free cash flow for shareholders. BP is at the forefront of this technological change and the execution is starting to show through in results. Free cash flow should grow to US$15 billion even in a low oil price world by 2021 with a diversified slate of major projects coming on stream. With oil prices approaching the marginal cost of U.S. shale plays (about US$45 a barrel) we believe now is an attractive entry point for BP.