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

FOCUS: North American equities

MARKET OUTLOOK:

With third-quarter earnings almost in the bag, companies have reported earnings beats mostly in line with historical levels. Earnings beats have been tilted toward the communications services, information technology and industrial sectors. Misses are found in the interest rate-sensitive sectors like real estate and utilities as well as consumer discretionary. Despite the solid earnings prints, market pessimism remains high with investors focused on the effects of higher interest rates and a potential recession.

Despite a headline S&P 500 Index return of 13.5 per cent, this has been predominantly led by large technology companies that have proportionally large weightings in the indices. Only 28 per cent of companies in the S&P 500 have outperformed the index and the median return is negative one per cent. However, margins are improving and corporate balance sheets are in good shape, setting up a strong profitability cycle over the coming years particularly as financial conditions normalize. With the market trading at 17.6 times P/E, we believe the setup into 2024 is strong as financial conditions loosen and consumer finances recover.

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TOP PICKS:

Aritzia (ATZ TSX)

Aritzia is a mall-based fashion retailer with stores in Canada and the U.S. Its products resonate well with its target female consumers and the company is slowly building out its men's business through its “Reigning Champ” brand. The company grew extremely quickly through 2020-2022 and is dealing with a hangover from this rapid growth as operational execution has been poor and sales flatlined at a high level. After its most recent quarter, we believe the operational issues are fixed and margins should revert back to pre-pandemic levels. That leaves sales growth as the missing element and this should be fixed with a slew of new store openings/expansions, web marketing and improved product assortment. Aritzia has a very strong balance sheet and historically generates high returns on equity and cash flow. There remains a large growth opportunity in the U.S. and Internationally. With the shares trading at just 13x next year’s earnings, we see 60 per cent upside in the company.

Exchange Income (EIF TSX)

Exchange Income owns a diversified group of Industrial businesses centred on aerospace and manufacturing. The aerospace side has a strong, integrated market position in remote communities across Canada’s North with passenger and cargo arms as well as flight training, government surveillance, parts and medical evacuation. We believe these businesses face much lower competition than commercial air travel therefore allowing Exchange to earn high return on capital. On the manufacturing side, Exchange operates niche businesses that are benefitting from secular trends such as environmental access matting and cell tower services. The company is gearing up for a heavy period of organic growth which should drive EPS toward $5 per share in 2025 with new government contracts coming into effect. The shares yield 5.5 per cent and historically buying the company at 11x P/E has proven to be a good entry point.

Aon PLC (AON NYSE)

Aon is a provider of risk and retirement solutions across the globe with operations in 120 countries. The company has built out its Aon United platform which aligns Aon capabilities to client needs to help manage risk and improve service delivery. This provides a high recurring revenue base and cross-selling opportunities which has helped Aon grow its earnings per share from $8 to $14 over the past five years. The company should execute the same playbook of five per cent revenue growth and incremental margin improvement while allocating free cash flow to share buybacks and acquisitions. We believe Aon can trade upward of $380 in 18 months’ time. 

PAST PICKS:

Microsoft (MSFT NASD)

• Then: US$232.13
• Now: US$361.85
• Return: 56%
• Total Return: 57%

Cogent Communications (CCOI NASD)

• Then: US$52.51
• Now: US$66.44
• Return: 27%
• Total Return: 34%

Chemtrade Logistics (CHE.UN TSX)

• Then: $7.37
• Now: $8.24
• Return: 12%
• Total Return: 20%

Total Return Average: 37%