Jamie Murray, portfolio manager, Murray Wealth Group

FOCUS: North American and global equities 

MARKET OUTLOOK:

The market has rebounded strongly from its fall 2022 lows and should grind higher as the inflation outlook improves. Many commodity prices are now lower year-over-year and the stickiest inflation contributor, housing, is rolling over. As well, data from Truflation is showing stabilization in items such as food and travel as the inflation shock brought on by the Russian invasion is lapped.

An economic slowdown is now the base case for many forecasters, as lending standards tighten and capital availability slows. However, stocks are long-term discounting machines and we think the lows for the market occurred in 2022. At current interest rates, we prefer companies that have strong demand outlooks and can finance growth opportunities with internal liquidity.

The technology sector has rebounded strongly with the benchmark Nasdaq Index up 16 per cent year-to-date. We expect results to improve in the back half of the year with cyclical improvement in cloud computing, e-commerce and new drivers like AI. As well, housing has likely bottomed with homebuilders noting accelerating activity.

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TOP PICKS:

Adyen ADR (ADYEY OTC)

Adyen is a high-growth payments processor for large global companies like Nike, Uber and Netflix. The company was bootstrapped with just $250 million of capital and now generates close to $1 billion in free cash flow. Adyen’s advantage comes down to its deep vertical integration and built-from-the-ground-up software base. Although it charges a premium, it typically outperforms competitors on authorization and fraud rates to the benefit of the merchant. Margins should recover back to the 65 per cent level (most of the flows through to free cash flow) in 2025 after dipping into the 50s this year as the company invested in headcount for new products. We think the company has a long runway of 20 per cent revenue growth ahead of it, and with a highly recurring revenue base, a three per cent free cash flow yield is attractive.

Gibson Energy (GEI TSX)

Gibson’s strong financial profile presents an opportunity. Gibson owns a network of oil storage facilities in Edmonton and Hardisty Alberta as well as ancillary assets including a small refinery, pipelines and DRU unit. Gibson‘s yield of seven per cent equals ~60 per cent of its cash flow, very defensive given the recurring nature of its infrastructure portfolio. While growth expectations are low in the absence of new oil sands projects, Gibson will use its excess free cash flow to buy back shares. Its marketing arm has generated in excess of $100 million in EBITDA in good years and is a free option in our view. Debt levels are below target as well at 2.7x EBITDA, providing ample room for acquisitions and dividend increases.

Morgan Stanley (MS NYSE)

At times of financial turmoil, look to the stalwarts. Morgan Stanley has built a powerhouse in investment management over the past decade led by Chief Executive Officer James Gorman. Financial returns have improved to 16 per cent from 10 per cent in 2010 which supports a much higher multiple than the current 11x P/E. Asset management firms are great businesses so long as net flows are positive as the long-term growth in markets adds leverage to the natural business growth. We think Morgan Stanley can continue to take market share and expand margins over time. The investment banking arm holds a top-three market position and is currently at a cyclical low. It can be a meaningful generator of excess capital when times are good. The company has a 3.5 per cent dividend yield and bought back six per cent of shares in 2022.

PAST PICKS: June 7, 2022

Aritzia (ATZ TSX)

• Then: $37.43
• Now: $43.06
• Return: 15%
• Total Return: 15%

Linamar (LNR TSX)

• Then: $56.90
• Now: $64.33
• Return: 13%
• Total Return: 14%

Airbus (EADSY OTC)

• Then: $29.63
• Now: $34.56
• Return: 17%
• Total Return: 18%

Total Return Average: 16%