Michael Hakes' Top Picks: January 16, 2024

Michael Hakes, senior portfolio manager at Murray Wealth Group

FOCUS: U.S. and Global Stocks

MARKET OUTLOOK:

Global equities will continue to be choppy over the first quarter as the market is still expecting rate cuts sooner rather than later, but last week we saw more sticky inflation with CPI coming in a little higher than expected, driven by higher shelter and healthcare costs. This sticky inflation could continue with more government spending on green energy, healthcare and the military. The labour market remains resilient overall, however, inflation continues to subside.

Higher rates are continuing to weigh on global GDP growth for 2024.  All developed countries are expected to deliver less than two per cent. Emerging markets are slightly higher and China is the fastest growing at 4.5 per cent.

From a valuation standpoint, looking at forward-price-to-earnings ratios, the U.S. market remains the most expensive, trading at 18.5 times earnings per share (EPS) and the cheapest is the U.K. at 10 times, while Europe is at 12 times. It seems like the U.S. is pricing in a soft landing, while Europe is pricing for more of a recession. There are still some economists expecting recessions in the U.S. and Europe in 2024.

If you strip out the “magnificent seven” and the “Granolas” from the U.S. and European markets respectively, then the U.S. is 16.1 times and Europe 11 times.

The 2024 consensus top-down EPS growth expectations for the U.S. is five per cent (bottom-up 12 per cent) and Europe is seven per cent.

If we achieve a soft landing this year, muted GDP growth, falling inflation and accommodative monetary policy, then this would be very good for large-cap quality stocks, exactly what we hold in our Murray Wealth Group Global Growth fund.

TOP PICKS:

Air Canada (AC TSX)

We like Air Canada at these levels. It is trading at 3.5 times EV/EBITDA versus the average at 4.4 times, and P/E 5.2 times 2024 EPS. We have been talking about the prospect of a recession for two years now and the stock price reflects this. The other overhangs on the stock are pilot negotiations and increased competition. We feel these are manageable.

The balance sheet is looking better with debt levels are much better now than they were in 2022. They are at one times net debt to EBITDA, down from five times in 2022 and we expected that to continue to improve.

Their deployed capacity is almost back to 2019 levels.

International leads the growth with good transpacific capacity increases and Air Canada is much more international today. Less than 30 per cent of passenger revenue is domestic, compared to 43 per cent domestic in 2007.

If the stock just gets back to an average EBITDA multiple of four times, then it will be $32. A healthy return.

LVMH (LVMUY OTC)

This luxury behemoth includes brands such as Tiffany, Sephora and Bulgari and more than 70 more.

Their brands are well-known and enduring with pricing power, high margins and great long-term prospects for growth. The company also benefits from its scale advantages, in marketing, retail and sourcing

This is a good entry point for LVMH as the stock price already reflects weakness in China and the concerns of slower global growth and recession.

It’s trading at a very reasonable 21 times P/E. We believe the stock can work its way up to the $200 level as concerns over global growth subside as rates come down.

Starbucks (SBUX NASD)

We like Starbucks at current levels, trading at a very attractive 21 times this 2024 EPS. The Starbucks management team has a long-term growth algorithm of 5 per cent. Comparable same store sales 10 per cent revenue growth and EPS growth in the mid-teens.

North America is targeting four per cent store growth over the next several years and International has plans for 10 per cent store growth.

As we move through the year, we believe North America will achieve its targets, China will continue to improve and the stock will begin to move up closer to the $120 level.

PAST PICKS: April 14, 2023

Prudential PLC (PUK NYSE)  

Then: US$29.08

Now: US$20.60

Return: -29 per cent

Total Return: -29 per cent

UnitedHealth Group (UNH NYSE)  

Then: US$511.79

Now: US$519.82

Return: 1.6 per cent

Total Return: 2.7 per cent

TH International (THCH NASD)  

Then: US$5.12

Now: US$1.66

Return: -67.6 per cent

Total Return: -67.6 per cent

Total Return Average: -31 per cent