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

MARKET OUTLOOK:

After a strong first half mainly led by a rebounding technology sector, we expect continued market strength in the second half of 2023. Supporting this view is rapid disinflation from pandemic-induced dislocations. Despite the recent rise in bond yields, we expect further declines in the U.S. consumer price index (CPI) with rents rolling over and consumer spending slowing. As this plays out, input costs will roll over, providing expanding profit margins that will more than offset any economic weakness, particularly with contracted pricing now fully reflecting last year’s cost base. Consensus is now pricing in further rate hikes by central banks and the risk of over-tightening remains ever present, but a soft landing would provide for lower short-term rates and a steepening of the yield curve (healthy for the economy).

We believe leading growth companies with demand tailwinds will be able to grow through any slowdown in economic activity and are set up for a new performance cycle. In technology, we believe AI applications will improve existing products and provide new revenue streams. The medium-term commodity outlook is positive with emerging market demand growth and a need for new supply. Financials remain cheap but will need financial conditions to loosen before re-rating.

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TOP PICKS:

Thermo Fisher (TMO NYSE)

Thermo Fisher is a behemoth in the medical industry providing a one-stop shop of products and services for life sciences and pharmaceutical companies. A strong allocator of capital, it has tripled its earnings per share over the past decade through organic growth and acquisitions. Thermo saw a large spike in revenue in the aftermath of COVID-19, from the sale of diagnostic tests and the provision of supplies to vaccine developers. As COVID-19 cases declined globally, Thermo suffered a corresponding decline in its revenue. As well, some inventory oversupply built up in its end markets, leading to weakness in its quarterly results. As a result, the stock is trading at the low end of its historical valuation range (20-30x P/E multiple) providing a very attractive entry point. We have a $600 target price on Thermo Fisher.

Broadcom (AVGO NASD)

Shares of Broadcom have been very strong this year given the excitement around generative AI and the role Broadcom plays in this market. Broadcom provides necessary networking equipment such as switches, network processors and ethernet connectivity necessary to build large AI networks by essentially providing the pathways for GPU processors to work together. We think this trend will accelerate over the next 18 months and Broadcom is poised to see a large surge in revenue in these product lines. In addition, we believe the acquisition of VmWare should prove immensely accretive, with Broadcom extracting $4 billion in synergies and adding to its growing software base. Trading at just 19 times earnings, we think the company is a low-risk/high-upside play on the AI theme. Our target price is $960.

Air Canada (AC TSX)

Air Canada raised its 2023 guidance by $1 billion in early May on lower fuel costs, highlighting the upside to earnings as travel demand remains healthy. Consolidation in the Canadian market should benefit Air Canada as its duopoly with WestJet remains firmly entrenched. International travel, particularly to Asian countries, should provide additional growth in 2024. As well, with corporate travel owning a smaller share of the market post-pandemic, we believe air travel will be slightly more resilient in future recessions. Air Canada will generate over $2 billion in free cash flow which will be used to reduce debt in the short term, but longer term may be used for share buybacks or further route expansion. Our target price is $30.

PAST PICKS: August 10, 2022

Blackstone (BX NYSE)

• Then: US$107.94
• Now: US$92.27
• Return: -15%
• Total Return: -12%

BP PLC (BP NYSE)

• Then: US$30.80
• Now: US$35.18
• Return: 14%
• Total Return: 19%

Intuitive Surgical (ISRG NASD)

• Then: US$237.85
• Now: US$330.81
• Return: 39%
• Total Return: 39%

Total Return Average: 15%