Jamie Murray, portfolio manager and head of research at Murray Wealth Group

FOCUS: North American stocks

MARKET OUTLOOK:

Markets continue to push to all time highs but we see further upside with economies still in recovery mode, and COVID-19 vaccination levels rising. Service-based industries should benefit from pent-up demand for dining, experiences and tourism which could make for tough comparisons in the durable goods/home improvement markets. Although valuation’s are at the high end of historical range, markets are still in early phases of recovery and its typical for a 3-4 year bull market following a recession. The bond market is telling markets not to expect a step change in inflation with rates staying lower for longer. Stay invested in cyclicals and high quality growth names with strong return on equity ratios.

TOP PICKS:

Amazon (AMZN NASD) – We believe Amazon is undergoing a massive change in profitability with free cash flow per share growth of 30 per cent over the next five years which we view as a significant discount to other technology companies with similar growth opportunities and strategic position. The driver of the profit growth in the near term will come from its higher margin business including AWS, subscription growth and digital advertising. With limited competitors (we’d argue Microsoft and Walmart are its only true competitors with scale), Amazon should enjoy strong returns through the next decade. Ongoing investment in the traditional ecommerce delivery business will continue to keep profit margins low but further increases the company’s moat built on convenience.

Dollar Tree (DLTR NASD) – Dollar Tree is the second-largest operator of discount variety stores across North America, offering a range of basic and seasonal goods. The company’s brands include Dollar Tree and Family Dollar, split between roughly 15,000 locations. This is our second round owning Dollar Tree stock. A new CEO has rekindled our interest in the company. Dollar Tree is starting to execute (in earnest) its multi-price strategy within its Dollar Tree banner. Through the creation of Dollar Tree Plus, Dollar Tree is expanding its current product line to offer new items at prices of US$3.00 and US$5.00. Bernstein Research believes gross margins may expand by as much as 1000 bps over the next decade if Dollarama is used as a comparable (~43 per cent). We think Dollar Tree can sustain low-teens EPS growth for many years, an attractive growth rate for a company that trades at 16x P/E. We believe the risk/reward is strong with Dollar Tree.

Converge Technology Solutions (CTS TSX) - Converge Technology is a Canadian-based technology service provider across North America. The company has embarked on an acquisition program to consolidate local IT service providers across North America, acting as a middleman between clients and IT vendors. After an acquisition, Converge uses its scale to achieve margin, working capital and purchasing power synergies across its brand portfolio. This strategy has proven both successful and repeatable, with 22 acquisitions completed to date. The company has guided to $5B of revenue in 2025 (from $1.5B this year) based on the breadth of its acquisition pipeline. We expect the company to move up-market into higher margin services as well as expand into Europe. We believe the shares can double if the company achieves its 2025 revenue guidance.

PAST PICKS: July 14, 2020

Mastercard (MA NYSE)

• Then: $298.95
• Now: $373.27
• Return: 25%
• Total Return: 25%

Nike (NKE NYSE)

• Then: $96.76
• Now: $160.91
• Return: 66%
• Total Return: 68%

Boston Scientific (BSX NYSE)

• Then: $35.22
• Now: $43.40
• Return: 23%
• Total Return: 23%

Total Return Average: 39%

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