Bruce Murray, CEO, The Murray Wealth

FOCUS: North American Growth Stocks

MARKET OUTLOOK:

The market over the last few months has been recovering from the fear that higher interest rates and the Ukrainian war would set off a major recession. This is the first time central banks in decades have raised interest rates into a slowing economy and investors are unsure how to react to it. It now appears we passed maximum fear levels in 2022. Our take is that equity valuations have adjusted to the lower P/E valuations and that there are certain pockets of the market that are attractive. Certain material industries are still seeing substantial recovery opportunities (i.e. autos), China still has to reopen and lower government subsidies are pushing people back to work.

We still see substantial opportunities for productivity gains to offset higher wages and thus inflation. The energy crisis sparked by the war has dissipated, but the Chinese reopening may rekindle commodity prices. This, combined with stabilizing or even declining prices for physical assets, should allow for central banks to ease pressure on the economy. There are strong arguments for avoiding a recession, employment is strong with only the major internet technology company’s laying off and these people will have good severance pay and can likely find new employment easily.

We look for market gains in early cyclical sectors, medical fuelled by new drugs and techniques such as MRNA. The is evidence from recently reported earnings that the FAANG companies have ample fat to cut and are still growing. We think their P/E’s are now at levels, which will hold, and earnings growth will again be reflected in stock prices.

In summary, we are constructive and are finding many stocks we believe have appreciation potential.

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TOP PICKS:

Qualcomm (QCOM NASD)

A technology leader in cellphones with hundreds of patents. Apple is looking to make its own chips, so stock is off 30 per cent from late 2021 high. Revenue has doubled since 2020 but is expected to decline by 15 per cent this year but recover after that. We feel the cellphone market and technology will continue to grow so the slowdown is temporary. Also leading provider of communication chips both for safety and passenger amenities will grow as the auto industry moves to smarter and safer vehicles. Selling at a mid-teen’s multiple with 2 per cent+ dividend yield. A little improvement in the outlook for semiconductor chips and QCOM fly’s.

Air Canada (AC TSX)

Revenue dropped by two-thirds in 2020 and 2021 from 2019 levels. We are looking for recovery to prior levels this year and 5-10 per cent growth per annum beyond that. The stock was over $50 just before the pandemic and we look for operating income to recover and exceed 2019 levels. Debt levels though grew by $7 billion up over 50 per cent to fund pandemic losses. Cash flow has turned positive and debt stabilizing, and we look for this to gradually improve and believe the stock can approach $30.

Bank of Nova Scotia (BNS TSX)

It’s been the poorest performer of the major banks, there is controversy over the new CEO, though his business experience is very wide and through Finning he has experience in Latin America. The stock was 25 per cent higher last year and is selling for under 9X next year’s eps of $8.25, the Dividend yield is 5.6 per cent and is expected to grow 3-5 per cent this year. Look for continuous improvement. In the stock price over the next 12 months.

PAST PICKS: March 8, 2022

Chemtrade Logistics Income Fund (CHE.UN TSX)

Then: $7.76
Now: $9.88
Return: 27%
Total Return: 36%

Meta (META NASD)

Then: $190.29
Now: $178.13
Return: -6%
Total Return: -6%

Linamar (LNR TSX)

Then: $51.05
Now: $71.14
Return: 39%
Total Return: 41%

Total Return Average: 24%