Bruce Murray, CEO and chief investment officer at The Murray Wealth Group

Focus: North American equities
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MARKET OUTLOOK
I am a student of history and draw lessons from past markets to aid in making investment decisions. There are parallels found in today’s market that remind me of the last sustained period of low interest rates, which extended from about 1930 through 1970. Stocks of the leading growth companies, having outperformed the markets through the last half of the 1960s, peaked at very high multiples in 1972.  It wasn’t unusual for companies with growing businesses like Coca-Cola and Johnson & Johnson to sport P/E ratios of higher than 40x. Leading consumer products companies, like Avon Products, International Flavors & Fragrance, Walt Disney and McDonalds, as well as some pharmaceuticals, sold at north of 60x earnings. Polaroid was at the top, with a 90x P/E. These stocks, dubbed the Nifty Fifty, were then hit the hardest in 1973-74, when the Arab oil embargo lead to economic turbulence that helped feed the growing inflationary pressures that dominated the economy for the better part of a decade.

The conventional thinking at the time was that these stocks had been in a bubble akin to the Tulip bubble Holland experienced 300 years earlier. In 1998, however, a study authored by Jeremy Siegel, a professor at the Wharton School of the University of Pennsylvania, investigated the performance of these stocks from the stock market peak in 1972 through 1998. Siegel showed that while a portfolio of these stocks did underperform the market during that period, they did so by a very marginal 0.2 per cent per annum on a rebalanced portfolio. At a high level, this implies that at peak valuations, the Nifty Fifty were more or less priced efficiently, even after accounting for their large underperformance in the 1973 market decline.

More importantly, he discovered that stock selection was key. Consumer brands and pharmaceutical stocks were, in many cases, massively underpriced for the return they ultimately delivered. Stocks like Pfizer and Coca-Cola should have been priced at P/E ratios of 72x and 82x instead of 28x and 46.5x, respectively. Underperformers in the group were mostly comprised of companies that ultimately saw their business models collapse: mainframe computer and photography companies, which were badly hurt by the arrival of the personal computer a decade later; energy companies (oil prices were low throughout the 1990s) and companies like Kresge (Kmart) and Avon products.

I believe there are a group of companies that can replicate the strong business models and earnings growth in a new Nifty Fifty environment given today’s interest rates. Companies that distribute their products and services via the Internet should continue to perform well with P/E ratios rising as investors gain increasing confidence in their business models. A Morgan Stanley report pointed out last year that the market has never had leading-value companies with business models as strong as current Internet companies like Facebook and Google, where their cost of goods sold is virtually zero and their capital requirements are low relative to cash flow. While there will be disappointments, a portfolio that includes these stocks, diversified across a number of names, will, in my opinion, deliver as strong of a performance as a portfolio of branded consumer stocks did at the peak of the Nifty Fifty boom.

TOP PICKS

AMAZON (AMZN.O)

MORGAN STANLEY (MS.N)

ENBRIDGE (ENB.TO)
 

PAST PICKS: JULY 13, 2016

ROYAL CARIBBEAN CRUISES (RCL.N)

• Three per cent weight last year at the end of July 2016
• Increased to 4.5 per cent of the portfolio during September at about $70
• Held weight at five per cent max as it rose, selling bits in December, January and February at an average of $88.45
• Then reduced the target weight to 4.0 per cent at $97.15 in March
• Now through stock appreciation, it’s back to 4.4 per cent of the portfolio
   
• Then: $72.58
• Now: $111.64
• Return: 53.81%
• TR: 57.17%

LINAMAR (LNR.TO)

• Started with a 4.5 per cent position in June/July last year at $50.88
• Took it back to 4.0 per cent in late March at $62.40
   
• Then: $50.39
• Now: $61.76
• Return: 22.56%
• TR: 23.50%

FACEBOOK (FB.O)

• Built a 2.5 per cent position in late 2015, which we still had in July last year
• We continue to learn more about the FB business model and increase our confidence
• Took position to 4.0 per cent across the fall last year at an average price of $127.50
• Since been holding the position at 4.5 per cent with minor sales to fund other purchases
   
• Then: $116.78
• Now: $152.30
• Return: 30.41%
• TR: 30.41%

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TOTAL RETURN AVERAGE: 37.02%