Jamie Murray, Portfolio Manager and Head of Research, Murray Wealth Group
FOCUS: Global Equities
MARKET OUTLOOK:
Markets remain on edge as inflation remains persistent, weakening consumer, technology and housing end markets; with increasing political risk with the war in Ukraine and China. We’ve seen earnings per share (EPS) estimates for 2023 fall sharply since the summer, as markets begin to price in a recession in 2023 and will likely decline from 2022 levels when all is said and done.
Despite the weakening macroeconomic situation, unemployment remains stubbornly high given the low labor force participation. The market remains focused on the US Federal Reserve and its expectations for future rate hikes, with current expectations for short-term rates to top 5% in early 2023 with an anticipated recession, which should allow for a constructive setup in 2024. Despite a challenging 2022, we believe FAANGM’s story is still intact with combined free cash flow growing from $167 billion in 2019 to $254 billion in 2022 with expectations of $400 billion in 2025.
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TOP CHOICES:
Microsoft (MSFTNASD)
Following last week’s results, Microsoft is now trading at 22x P/E on 2023 earnings, a year when Azure cloud services growth will slow, PC and consumer sales are at cyclical lows and consumer confidence consumers and businesses is down. However, we believe the cloud remains a big opportunity and the big three (Microsoft, Amazon, and Google) will carve out the lion’s share of profits as the segment grows. Likewise, some divisions, such as games, are expected to return to growth in 2023 with a new product cycle. Despite the slowdown, revenue and free cash flow are expected to grow by 60%. The balance sheet is strong with $40 billion in net cash and the company pays a 1% 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 technology crash of 2000, acquiring swaths of network assets at ridiculous prices, and has grown the network over the years through additional acquisitions and long-term leases of network capacity. The company is acquiring T-Mobile’s Sprint Wireline business for one dollar with plans to transform the asset base, exit unprofitable businesses and leverage its sales force to sell new product lines. The CEO owns 10% of the company and is confident that cash flow to shareholders will improve each month after the acquisition thanks to T-Mobile’s $700 million purchase commitments. We believe that Cogent will be able to increase its dividend by 10% per year. It currently yields 6.5%.
Chemtrade (CHE.UN TSX)
After years of underperformance, Chemtrade’s fundamentals look strong, with commodity chemical prices trending higher and its balance sheet improving significantly. Chemtrade is benefiting from the relocation of semiconductor manufacturing through its ultrapure sulfuric acid group and has two projects to support new smelters in Ohio and Arizona. Its low-cost electrochemical operations in Canada and Brazil are benefiting from the shutdown of high-cost European production. Stocks yield 8.5%.
PAST CHOICES: October 25, 2021
Zalando SE ADR (ZLNDY OTC)
- So: $46.45
- Now: $11.78
- Return: -75%
- Total return: -75%
Dollar Tree (DLTR NASD)
- So: $105.02
- Now: $158.63
- Return: 51%
- Total return: 51%
Enbridge (ENB TSX)
- So: $52.86
- Now: $52.95
- Yield: 0.1%
- Total return: 7%
Average total return: -6%
ZLNDY OTC | Yes | NOT | Yes |
DLTRNASD | NOT | NOT | NOT |
ENB TSX | Yes | NOT | Yes |
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