McMurtry Investment Report Portfolios – April 2018

Also available in PDF: MIR Portfolios April 2018

McMurtry Investment Report – Portfolios (April 2018)

	Income		Growth
Cash	Alterna Bank – High Interest Savings (2.05% current rate)		Alterna Bank – High Interest Savings (2.05% current rate)
	EQ Bank – High Interest Savings ( 2.30% current rate)		EQ Bank – High Interest Savings ( 2.30% current rate)
Bonds	iShares XSB Short Term		iShares XSB Short Term
	iShares XFR Floating Rate		iShares XFR Floating Rate
	iShares CBO 1-5 Ladder Corp		iShares CBO 1-5 Ladder Corp
	iShares CLF 1-5 Ladder Gov’t		iShares CLF 1-5 Ladder Gov’t
Preferreds	Security	Dividend Yield %	Security	Dividend Yield %
	Enbridge Pfd V Enb.pr.V US	4.20	Enbridge Pfd V Enb.pr.V US	4.20
	Horizons Active Mgt. Pfd HPR	3.86	Horizons Active Mgt. Pfd HPR	3.86
	Industrial Alliance IAG.PR.G	4.06	Industrial Alliance IAG.PR.G	4.06
Common Stocks	Security	Dividend Yield %	Security	Dividend Yield %
Financials	Royal Bank RY	3.78	Royal Bank RY	3.78
	National Bank	3.96	National Bank	3.96
	TD TD	3.67	TD TD	3.67
	CIBC CM	4.57	CIBC CM	4.57
	Sun Life SLF	3.44	Sun Life SLF	3.44
	JP Morgan JPM US	2.04	JP Morgan JPM US	2.04
	Bank of America BAC US	1.60	Bank of America BAC US	1.60
	Citibank C US	1.90	Citibank C US	1.90
	Manulife MFC	3.68	Manulife MFC	3.68
	T. Rowe Price TROW US	2.59	T. Rowe Price TROW US	2.59
	iUnits US Regional Banks IAT US	2.40	iUnits US Regional Banks IAT US	2.40
	Keycorp KEY US	2.15	Keycorp KEY US	2.15
	Blackrock BLK US	2.13	Blackrock BLK US	2.13
	Paychex PAYX US	3.25	Paychex PAYX US	3.25
	PNC Fin’l PNC US	1.98	PNC Fin’l PNC US	1.98
			Visa V US	0.70
Energy	Suncor SU	3.24	Suncor SU	3.24
	Freehold FRU	5.10	Freehold FRU	5.10
	Whitecap WCP	3.91	Whitecap WCP	3.91
	Torc TOG	3.64	Torc TOG	3.64
	Pembina Pipe Lines PPL	5.37	Pembina Pipe Lines PPL	5.37
	Enbridge ENB	6.62	Enbridge ENB	6.62
			Centennial Resources CDEV US	0.00
			Parex Resources PXT	0.00
Materials	Agnico Eagle AEM	1.01	Agnico Eagle AEM	1.01
	Franco Nevada FNV	1.35	Franco Nevada FNV	1.35
	BMO Global Base Metal ETF ZMT	1.42	BMO Global Base Metal ETF ZMT	1.42
			Lundin LUN	1.42
			Trevali Mining TV	0.00
			Hudbay Minerals HBM	0.22
			Roxgold ROXG	0.00
Industrials	DowDuPont DWDP US	2.39	DowDuPont DWDP US	2.39
	Applied Materials AMAT US	0.72	Applied Materials AMAT US	0.72
	Toromont TIH	1.72	Toromont TIH	1.72
	WSP Global WSP	2.53	WSP Global WSP	2.53
	Canadian Pacific CP	0.99	Canadian Pacific CP	0.99
	General Dynamics GD US	1.68	General Dynamics GD US	1.68
	SNC Lavalin SNC	2.03	SNC Lavalin SNC	2.03
	Guggenheim Eq WT IND RGI US	1.19	Guggenheim Eq Wt IND RGI US	1.19
	Honeywell HON US	2.06	Honeywell HON US	2.06
			Fedex FDX US	0.85
Consumer Discretionary	Home Depot HD US	2.31	Home Depot HD US	2.31
	Sleep Canada ZZZ	1.93	Sleep Canada ZZZ	1.93
	Stanley Black and Decker SWK US	1.64	Stanley Black and Decker SWK US	1.64
	Canadian Tire CTC.A	2.13	Canadian Tire CTC.A	2.13
	Amazon AMZN US	0.00	Amazon AMZN US	0.00
	Kohl’s KSS US	3.72	Kohl’s KSS US	3.72
	Magna MG	2.35	Magna MG	2.35
	Lowes LOW US	1.87	Lowes LOW US	1.87
			Dollarama DOL	0.31
			Alibaba BABA US	0.00
			JD.com JD US	0.00
Telecom	Rogers B RCI.B	3.34	Rogers B RCI.B	3.34
Consumer Staples	Alimentation Couche Tard ATD.b	0.62	Alimentation Couche Tard ATD.b	0.62
	Loblaws L	1.66	Loblaws L	1.66
	Pepsico PEP US	2.95	Pepsico PEP US	2.95
	Unilever PLC UL US	3.21	Unilever PLC UL US	3.21
Technology	Apple AAPL US	1.50	Apple AAPL US	1.50
	Microsoft MSFT US	1.84	Microsoft MSFT US	1.84
	Open Text OTEX	1.52	Open Text OTEX	1.52
			Facebook FB US	0.00
			Nvidia NVDA US	0.26
			ETFMG Prime Cyber Sec. HACK US	0.01
			Alphabet GOOGL US	0.00
Utilities	Emera EMA	5.54	Emera EMA	5.54
	Fortis FTS	3.91	Fortis FTS	3.91
Healthcare	Abbott Labs ABT US	1.87	Abbott Labs ABT US	1.87
	Bristol Myers BMY US	2.53	Bristol Myers BMY US	2.53
	Johnson & Johnson JNJ US	2.62	Johnson & Johnson JNJ US	2.62
	Merck MRK US	3.52	Merck MRK US	3.52
	US Healthcare iShares ETF IYH US	1.46	US Healthcare iShares ETF IYH US	1.46
	United Healthcare UNH US	1.40	United Healthcare UNH US	1.40
			Thermo Fisher Scientific TMO US	0.30
			IBB Biotech ETF IBB US	0.42
Real Estate	Cdn Apt. REIT CAR.un	3.45	Cdn. Apt. REIT CAR.un	3.45
	InterRent REIT IIP.un	2.67	InterRent REIT IIP.un	2.67
	Sienna Senior Living SIA	5.06	Sienna Senior Living	5.06
	Chartwell REIT CSH.un	3.76	Chartwell REIT CSH.un	3.76
European Equity	iShares MSCI Europe XEU	2.24	iShares MSCI Europe XEU	2.24
Emerging Markets	iShares MSCI Emer. Mkts XEC	2.02	iShares MSCI Emer. Mkts XEC	2.02

Investment Commentary April 2018

Global growth continues but is now faced with the threat of a possible trade war between the US and China that could derail a lot of the positive economic outlook that we are currently experiencing.

Currently there are a lot of announcements of additional tariffs between both countries. These are only threats and have not yet been put into actual policy.

However over the next 4-6 weeks this bantering back and forth will most likely escalate before anything is resolved. Markets do not like uncertainty and clearly do not like these recent developments.

It is possible that Trump is only using these tactics as a bargaining ploy, but he is not dealing with the unsophisticated. He is dealing with a Communist country with a leader that can remain in power for the remainder of his life.

Robert Shiller, the Yale economist and Nobel laureate, firmly believes that global economic chaos will result if these current trade protectionist threats escalate into an all out trade war.

The US did impose massive import tariffs in 1929 and this strategy extended the Great Depression by 10 years.

Donald Trump reminds me of a kid in elementary school who wants to get back at one of his classmates who got the better of him. His sole purpose seems to be revenge. It is frightening that he is in such a position of power taking into account his personality. In addition it astonishes me how little he understands basic economics. Trade wars rarely work and have historically hurt global growth.

As a result of these recent developments I have lost confidence in the strength of the economic recovery, but am still not prepared to throw in the towel just yet.

Consequently I am only recommending raising an additional 5% in cash for both portfolios. This will result in cash levels reaching 24.5% for the Income portfolio and 19.5% for the Growth one and provide sufficient buying power should markets correct further from current levels. I will not hesitate to raise more cash if these trade wars escalate.

Another headwind is the Federal Reserve is becoming more hawkish and will continue to increase interest rates to ensure that inflation is kept under control.

In regards to the ongoing NAFTA talks, it is starting to look a little more promising for Canada. However Trump is very unpredictable and no one really knows for sure what will happen at this time.

I am advising a reduction of 2% for Canadian equities and a 3% decrease in US equities, while keeping the European and Emerging market weights the same as last month.

I am leaving both the fixed income and preferred equity weight the same as last month.

In regards to my equity sector bets, I am leaving the overweights, underweights and market weights the same as last month.

I remain overweight the benchmark weight for Financials, Industrials, Technology and Consumer Discretionary.

I remain market weight Healthcare and Materials.

I remain underweight Energy, Utilities, REIT’s, Telcos and Consumer Staples

Please note that I have reduced my underweight somewhat for the Energy and REIT sectors.

There are several Canadian REIT’s performing very well, namely retirement homes and apartment ones. They have the ability to increase dividends with growth in their operating cash flows. I am adding Sienna Senior Living to both portfolios. The dividend yield is over 5% and the growing cash flows and reasonable valuation make it a solid investment choice.

The long term outlook for Energy is looking more promising with the supply glut gradually improving. However US rig counts continue to rise and this does not help the price of the commodity over the short term. The differential between Canadian Western select crude prices and the US WTI has shrunk quite a bit recently as a result of some new Canadian refinery capacity coming on stream shortly. Canadian energy stocks offer good value at current prices, but their share prices will remain volatile until the long term outlook for crude oil materially improves.

In the technology sector, I am adding a US cyber security ETF with the symbol HACK to the Growth portfolio. Taking into account all the data breach issues affecting the social media companies, the demand for cyber security will continue to grow.

I am keeping both Facebook and Alphabet in my Growth portfolio despite all the negative publicity about data breaches. These two platforms continue to offer the only viable way to advertise online for small businesses. It is likely that additional regulation will result in their growth rates slowing somewhat but they still represent solid investments.

In the Industrial sector, I am replacing New Flyer with Toromont. The earnings growth rate of New Flyer is declining over the next few years, while the growth outlook for Toromont is increasing with the recent addition of Hewitt that expands its territory into Quebec and the Maritimes. Toromont is one of the largest Caterpillar dealerships and also a market leader in the fabrication and servicing of refrigeration systems for the recreational and industrial markets.

I am also adding Fedex to the Growth portfolio. This is one of the largest logistics companies whose clients include Amazon. The company is exhibiting solid growth and trades at a reasonable valuation.

Despite all of Trump’s unfounded tirades against Amazon, the company remains in a very solid position both in online retailing and in cloud computing, its main profit contributor. Trump is totally misinformed about Amazon and does not realize that the company does pay its fair share of state taxes. Trump’s arguments against Amazon taking advantage of the post office are ridiculous as the company is one of the post office’s largest customers. Trump‘s views on Amazon are largely political. Jeff Bezos, Amazon’s President and founder, personally owns The Washington Post whose articles continuously criticize Trump.

McMurtry Investment Report – Sector Weights (April 2018)

Equity Sector Weights (%)
Sector	My Weight	TSX Comp	S&P 500	60 % US / 40 % CDN
Financials	27.71	34.80	14.70	22.74
Energy	9.00	18.50	5.70	10.82
Materials	6.34	11.50	2.90	6.34
Industrials	12.00	9.70	10.20	10.00
Consumer Disc.	10.50	5.50	12.70	9.82
Telecom	1.25	4.60	1.90	2.98
Consumer Staples	3.00	3.60	7.70	6.06
Technology	18.00	3.80	24.90	16.46
Utilities	1.50	3.70	2.90	3.22
Real Estate	2.00	3.00	2.80	2.88
Healthcare	8.70	1.20	13.70	8.70
Totals	100.00	99.90	100.10	100.02

McMurtry Investment Report Asset Mix (April 2018)

Asset Mix – Income and Growth Portfolios
%	Income	Growth
Cash	24.50	19.50
Bonds	10.00	5.00
Preferreds	15.00	10.00
Equities	50.50	65.50
CDN	16.00	22.00
US	24.00	33.00
Europe	5.25	5.25
Emerging Markets	5.25	5.25

Also available in PDF: MIR Portfolios April 2019

Investment Commentary (April 2019)

Asset Mix Changes

Last week both the Canadian and US yield curve inverted where short rates exceeded longer maturities. For most of the past economic recessions, an inverted yield curve occurred 6-18 months before the onslaught of an economic slowdown. Consequently, this signal should not be taken lightly and brushed off as is frequently the case with economists stating that things are different this time.

This week the inversion of the curve went away in both Canada and the US with longer rates now slightly exceeding shorter maturities. However, the negative yield curve is still present in Europe where their economy continues to suffer.

US corporate bond spreads for both investment and High Yield securities had been creeping up in late December. However, year to date corporate spreads over US Treasuries have been coming down once again. Historically when corporate spreads widen this is a danger signal for an economic slowdown. The recent reduction is spreads is a positive sign that the economy may not be as weak as many pundits are saying.

Overall economic activity is definitely slowing globally. This is also true in the US but their economy is still growing on a relative basis much faster than Europe and Canada. Economic growth in the Chinese economy had been coming down sharply, but this week an announcement came out stating that their domestic industrial production started to revive after nearly nine months of decline. Several months ago the Chinese authorities began stimulating their domestic economy by lowering corporate taxes and increasing government spending. Once again this is a positive development.

The Federal Reserve has stopped increasing rates by emphatically stating that there will be no more rate increases for the remainder of the year.

US corporate profit growth has slowed dramatically from last year, while equity prices have rebounded sharply year to date. Equity valuations are no longer cheap as they were in late December.

This week the US / China trade talks have taken a more positive tone which is good for markets.

Taking all these factors into consideration, I have decided to leave the asset mix for both portfolios the same as last month. The jury is still out if an economic recession is imminent or only years away.

McMurtry Investment Report Asset Mix (April 2019)

Asset Mix – Income and Growth Portfolios
%	Income	Growth
Cash	35.00	30.00
Bonds – Regular	20.00	10.00
Bonds – High Yield	5.00	5.00
Preferreds	0.00	0.00
Equities	40.00	55.00
CDN	15.75	22.50
US	19.25	27.50
Europe	5.00	5.00
Emerging Markets	0.00	0.00

Equity Sectors

The main change to my equity sector recommendations is to reduce the Financial equity exposure from overweight to market weight the 55% US 45% Canada benchmark. This works out to a new weight of 21.25% of my North American equity exposure.

The reason for my reduction in weight for the Financial sector is all to do with interest rates and the slope of the yield curve. Lower rates combined with either a flat or inverted yield curve is not positive for the bank’s net interest margins. A slowing economy normally results in an increase in loan losses, another possible headwind.

For the other groups I remain market weight Energy, Utilities and Healthcare.

I remain overweight Technology, Industrials, Real Estate, Communication Services and Consumer Staples

I remain underweight Materials and Consumer Discretionary.

McMurtry Investment Report – Sector Weights (April 2019)

Equity Sector Weights (%)
Sector	My Weight	TSX Comp	S&P 500	55 % US /45% CDN
Financials	21.25	31.70	12.70	21.25
Energy	11.07	18.00	5.40	11.07
Materials	5.66	11.20	2.60	6.47
Industrials	10.40	10.90	9.50	10.13
Consumer Disc.	6.40	4.10	10.10	7.40
Comm. Services	8.50	5.80	10.10	8.17
Consumer Staples	6.25	3.90	7.30	5.77
Technology	14.00	4.50	21.20	13.69
Utilities	3.71	4.20	3.30	3.71
Real Estate	3.75	3.50	3.10	3.28
Healthcare	9.02	2.20	14.60	9.02
Totals	100.00	100.00	99.90	99.95

Common Equity Changes

In the Financial Services sector, I am replacing National Bank with Intact Financial for both portfolios. Intact is the largest property / casualty company in Canada and will benefit from the recent departure of AIG, a large US competitor from the Canadian market. Intact is raising insurance rates in Ontario and this will help to increase operating margins. Differing from life insurance companies, property and casualty insurance companies have much shorter term liabilities and are consequently not as negatively affected from flat to falling interest rates as the life companies are.

In the Technology sector, I am deleting Nokia from both portfolios. Huawei, the Chinese company and major competitor to Nokia has been continuously lobbying the global wireless providers to encourage them to continue buying their products. It is only in the US that the Chinese company has been banned with its alleged cybersecurity activities. Thus, Nokia has not been as much of a beneficiary from the 5G wireless ramp up as originally expected. In addition, a law firm has recently alleged that Nokia’s Alcatel – Lucent division has some very serious potential claims for security law violations. This creates a lot of uncertainty. My recommendation is to sell your Nokia shares and use the proceeds to purchase more Cisco, which will be a major beneficiary from the upcoming 5G implementation.

In the healthcare sector I am adding the Swiss dental implant company, Straumann Holdings ADR to my Growth portfolio. This American Depositary Receipt is not very liquid in the US market, so please always use limit orders when buying and selling this security. Despite this shortfall, this is a good quality company and one of the global leaders in the dental implant industry. The company is experiencing strong annual revenue and gross profit growth in addition to record EBITDA margins. The company has strong organic growth and operates in 100 countries globally. The global dental implant market is expected to grow at 4-5% globally this year and Straumann’s organic growth is sharply outperforming its competitors.

Lastly in the Materials sector, I am adding Osisko Metals to my Growth portfolio. The company is a small cap zinc exploration company that operates in both the Far North and in New Brunswick. The company has no long term debt and the level of insider buying is unusually high. Normally I do not even discuss insider buying, but the level of insider buying for this company is extraordinary. The supply / demand situation for zinc is the most favourable for all the base metals with inventory stockpiles at very low levels. Should the Chinese economy rebound the demand for zinc will increase accordingly.

Peter McMurtry, B.Com, CFA
Financial Writer
Objective Investment Advice for Everyone
Monthly Investment Newsletter and Sample Portfolios
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https://mcmurtryinvestmentreport.ca

McMurtry Investment Report – Portfolios (April 2019)

	Income		Growth
Cash	Alterna Bank – High Interest Savings (2.35% current rate)		Alterna Bank – High Interest Savings (2.35% current rate)
	EQ Bank – High Interest Savings ( 2.30% current rate)		EQ Bank – High Interest Savings ( 2.30% current rate)
Bonds -Regular	iShares XSB Short Term		iShares XSB Short Term
	iShares CBO 1-5 Ladder Corp		iShares CBO 1-5 Ladder Corp
	iShares CLF 1-5 Ladder Gov’t		iShares CLF 1-5 Ladder Gov’t
Bonds – High Yield CORP	iShares XHY US High Yield CDN$		iShares XHY US High Yield CDN $
Common Stocks	Security	Dividend Yield %	Security	Dividend Yield %
Financials	Royal Bank RY	4.05	Royal Bank RY	4.05
	Bank of Montreal BMO	4.00	Bank of Montreal BMO	4.00
	Bank of Nova Scotia BNS	4.89	Bank of Nova Scotia BNS	4.89
	Intact Financial IFC	2.69	Intact Financial IFC	2.69
	TD TD	4.08	TD TD	4.08
	Sun Life SLF	3.90	Sun Life SLF	3.90
	JP Morgan JPM US	3.16	JP Morgan JPM US	3.16
	Bank of America BAC US	2.17	Bank of America BAC US	2.17
	Citibank C US	2.89	Citibank C US	2.89
	Morgan Stanley MS US	2.84	Morgan Stanley MS US	2.84
	T. Rowe Price TROW US	3.04	T. Rowe Price TROW US	3.04
	Keycorp KEY US	4.32	Keycorp KEY US	4.32
	PNC Fin’l PNC US	3.10	PNC Fin’l PNC US	3.10
Energy	Suncor SU	3.85	Suncor SU	3.85
	Freehold FRU	7.43	Freehold FRU	7.43
	Torc TOG	5.62	Torc TOG	5.62
	Pembina Pipe Lines PPL	4.55	Pembina Pipe Lines PPL	4.55
	Enbridge ENB	6.04	Enbridge ENB	6.04
	Trans Canada TRP	4.91	Trans Canada TRP	4.91
			Parex Resources PXT	0.00
Materials	Agnico Eagle AEM	1.15	Agnico Eagle AEM	1.15
	Franco Nevada FNV	1.29	Franco Nevada FNV	1.29
			Osisko Metals OM.V	0.00
			iShares Global Gold ETF XGD	0.20
Industrials	Toromont TIH	1.55	Toromont TIH	1.55
	Air Products APD US	2.44	Air Products APD US	2.44
	WSP Global WSP	2.06	WSP Global WSP	2.06
	Canadian Pacific CP	0.94	Canadian Pacific CP	0.94
	CNR	1.79	CNR	1.79
	Raytheon RTN US	2.03	Raytheon RTN US	2.03
	Aecon Group ARE	3.33	Aecon Group ARE	3.33
	Guggenheim Eq WT IND RGI US	1.35	Guggenheim Eq Wt IND RGI US	1.35
	Honeywell HON US	2.07	Honeywell HON US	2.07
	TFI Int’l TFII	2.45	TFI Int’l TFII	2.45
Consumer Discretionary	Home Depot HD US	2.80	Home Depot HD US	2.80
	Sleep Canada ZZZ	3.77	Sleep Canada ZZZ	3.77
	Canadian Tire CTC.A	2.88	Canadian Tire CTC.A	2.88
	Amazon AMZN US	0.00	Amazon AMZN US	0.00
	Lowes LOW US	1.75	Lowes LOW US	1.75
Communication Services	Rogers B RCI.B	2.78	Rogers B RCI.B	2.78
			Facebook FB US	0.00
			Alphabet GOOGL US	0.00
Consumer Staples	Alimentation Couche- Tard ATD.B	0.64	Alimentation Couche Tard ATD.b	0.64
	Loblaws L	1.79	Loblaws L	1.79
	Constellation Brands STZ US	1.69	Constellation Brands STZ US	1.69
	Unilever PLC UL US	3.06	Unilever PLC UL US	3.06
Technology	Apple AAPL US	1.54	Apple AAPL US	1.54
	Microsoft MSFT US	1.56	Microsoft MSFT US	1.56
	Open Text OTEX	1.58	Open Text OTEX	1.58
	Paychex PAYX US	2.79	Paychex PAYX US	2.79
	Cisco CSCO US	2.59	Cisco CSCO US	2.59
			Kinaxis KXS	0.00
			ETFMG Prime Cyber Sec. HACK US	0.15
			Visa V US	0.64
Utilities	Algonquin Power AQN	4.58	Algonquin Power AQN	4.58
	Northland Power NPI	5.12	Northland Power NPI	5.12
	Fortis FTS	3.64	Fortis FTS	3.64
Healthcare	Abbott Labs ABT US	1.60	Abbott Labs ABT US	1.60
	Becton Dickinson BDX US	1.23	Becton Dickinson BDX US	1.23
	Merck MRK US	2.65	Merck MRK US	2.65
	US Healthcare iShares ETF IYH US	1.84	US Healthcare iShares ETF IYH US	1.84
	United Healthcare UNH US	1.46	United Healthcare UNH US	1.46
			Danaher DHR US	0.52
			Thermo Fisher Scientific TMO US	0.28
			Straumann ADR SAUHY US *	0.63
			IBB Biotech ETF IBB US	0.28
Real Estate	Cdn Apt. REIT CAR.un	2.76	Cdn. Apt. REIT CAR.un	2.76
	InterRent REIT IIP.un	2.03	InterRent REIT IIP.un	2.03
	Dream Industrial DIR.un	5.83	Dream Industrial DIR.un	5.83
	Summit REIT SMU.un	4.35	Summit REIT SMU.un	4.35
European Equity	iShares MSCI Europe XEU	2.96	iShares MSCI Europe XEU	2.96

* Be careful purchasing and selling Straumann ADR’s as it is very illiquid. Always use a limit order.

McMurtry Investment Report and Model Portfolios™

McMurtry Investment Report Portfolios – April 2018

Investment Commentary (April 2019)

Peter McMurtry, B.Com, CFA

MCMURTRY INVESTMENT REPORT™

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