Jamie Murray, portfolio manager and Head of Research, Murray Wealth Group

FOCUS: Global equities 

MARKET OUTLOOK:

Markets remain on edge with inflation remaining persistent, weakening end markets in consumer, technology and housing; along with increasing political risk with the war in Ukraine and China. We have seen 2023 earnings per share (EPS) estimates fall sharply since summer as markets start to price in a recession in 2023 and will likely decline from 2022 levels when it’s all said and done.

Despite the weakening macro picture, unemployment remains stubbornly high given the low labour force participation. The market remains laser-focused on the U.S. Federal Reserve and its guidance for future rate hikes with current forecasts of short-term rates breaching five per cent in early 2023. Mega-cap technology companies reported last week and reset expectations lower for 2023 and combined with an anticipated recession, which should provide for a constructive setup in 2024. Despite a rough 2022, we believe the FAANGM story is still intact with combined free cash flow rising from US$167 billion in 2019 to US$254 billion in 2022 with expectations of $400 billion in 2025.

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TOP PICKS:

Microsoft (MSFT NASD)

Following last week’s results, Microsoft is now trading at 22x P/E on 2023 earnings, a year where Azure cloud services growth will decelerate, PC and consumer sales are at cyclical lows and consumer and business confidence are down. However, we believe the cloud remains a big opportunity and that the big three (Microsoft, Amazon and Google) will earn the lion’s share of profits as the segment grows. As well some divisions, like gaming, should return to growth in 2023 with a new product cycle. Despite the slowdown, revenue and free cash flow should grow by 60 per cent. The balance sheet is strong with $40 billion in net cash and the company pays one per cent dividend.

Cogent Communications (CCOI NASD)

Cogent Communications is a low-cost provider of high-speed internet and network access to business customers. The company emerged from the 2000 tech bust, acquiring swaths of networking assets at distressed prices and has grown the network over the years through additional acquisitions and long-term leases of networking capacity. The company is acquiring the Sprint Wireline business from T-Mobile for one dollar with plans to transform the asset base, exit unprofitable business and leverage its sales force to sell new product lines. The chief executive officer owns 10 per cent of the company and is steadfast that cash flow to equity holders will improve every month following the acquisition thanks to US$700 million in purchase commitments from T-Mobile. We believe Cogent will be able to grow its dividend 10 per cent per annum. It currently yields 6.5 per cent.

Chemtrade (CHE.UN TSX)

After years of underperformance, Chemtrade’s fundamentals look strong with chemical pricing in its core products trending higher and its balance sheet much improved. Chemtrade is benefitting from the onshoring of semiconductor manufacturing through its ultrapure sulphuric acid group and has two projects to support new foundries in Ohio and Arizona. Its low-cost electro-chemicals operations in Canada and Brazil are benefitting from the shutdown of high-cost European production. The shares yield 8.5 per cent.