Bruce Murray, CEO and CIO, The Murray Wealth Group

FOCUS: North American growth stocks

MARKET OUTLOOK:

We have had four months of a very negative market environment. The selloff has been fueled by many fears -- the most important of which is the inflationary outburst which has led to the need for higher interest rates and hence lower P/E ratios.

This all of course flows back to the pandemic, the shutdowns and subsidies which led to new, more-efficient remote working for a white-collar economy. The goods economy, however, has not caught up to shutdowns and increased demand from a stimulated global economy. This is continuing due to the current massive COVID shutdown in China. Add onto this the war which has resulted in more dislocations for energy, foodstuffs and certain metals.

So where do we go to from here? Higher rates should slow demand, especially for housing as mortgage carrying costs rise, and the corporate sector is working to reduce shortages.

This action should slow the economy but not to the point of a recession -- with solid employment and numerous industrial and consumer shortages, a recession is hard to see. An industrial slowdown may occur down the road when deliveries catch up to over-ordering, which is certainly going on at least in the commodity sectors. Pricing in sectors like steel is likely at peak levels, which may hold for a few more months with the reopening of China after the COVID shutdown. Energy will take a while longer to subside given Europe’s reliance on Russia.

Turning to the growth stock collapse, I believe most of the damage has been done. P/E for FB, for example, is now trading at 16.5X earnings with 16 per cent earnings growth and $18/share of cash.

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TOP PICKS:

Alphabet (GOOGL NASD)

Extremely high-class company with still-incredible revenue growth rate and earnings of 18-19 per cent, and selling at 22.5 X 202 with a buyback of $70 billion or five per cent of market cap. The Google cloud business is #3 behind AWS and MSFT, and is growing nicely. This is a company that spends over $30 billion on R&D, but is still losing $5 billion on other businesses like Waymo.

Airbus (EADS OTC)

We like Airbus. The 320 Neo is outselling the 373 Max with a massive backlog of over 7,000 and will remain the leading narrow body plane for the remainder of this generation given Boeing’s problems with the Max which cannot meet the Neo’s performance. EADS defense business will be a major beneficiary of higher European spending brought on by the Ukraine war. Selling about 20 X eps, revenue and earnings are expected to grow mid- to low-teens for much of the next decade and expect the stock to follow.

Air Canada (AC TSX)

We are expecting to see the strong rebound in air traffic continue, most analysts agree with us as the average target price is $30. While Air Canada has a strong financial position, the pandemic led to several financing that dilute the ultimate potential stock appreciation to the mid-$30 range versus a price of over $50 in January 2021.

PAST PICKS: May 20, 2021

Amazon (AMZN NASD)

• Then: $3247.68
• Now: $2417.59
• Return: -26%
• Total Return: -26%

Zalando SE ADR (ZLNDY OTC)

• Then: $53.24
• Now: $19.53
• Return: -63%
• Total Return: -63%

Major Drilling (MDI TSX)

• Then: $10.70
• Now: $11.30
• Return: 3%
• Total Return: 3%

Total Return Average: -28%