McMurtry Investment Report & Model Portfolios

McMurtry Investment Report Portfolios – April 2020

Also available in PDF: MIR Portfolios April 2020

Investment Commentary April 2020

Fund Flows into Capital Markets

Over the last several weeks fund flows have turned decidedly bullish with monies pouring back into equities after their recent decline. It is quite astonishing how quickly the tide has turned from very bearish to very bullish.

US Yield Curve

The US 10 year minus 2 year Treasury yield curve at 50 basis points has risen marginally from close to zero last month, but remains historically quite low. The yield on the 10 year US Treasury is currently at a low rate of 0.77%.

US Corporate Debt Spreads

US High Yield spreads over US Treasuries rose sharply to over 11% in the midst of the recent security market selloff, but have subsequently fallen back a little to around 9%. While this is not a good sign, the drop back to 9% is positive. The US investment grade corporate bond spread over US Treasuries remains low and stable. This can be attributed to the recent Federal Reserve monetary stimulus.

US / China Trade Issues

No change since last month

China’s Coronavirus Implications

While the trend in both new cases and deaths in China has actually fallen recently, the stats in the rest of the world are not as favourable. The growth in new cases and deaths will eventually begin to level off when the effects of massive government global lockdowns combined with the introduction of some existing anti-viral drugs that may prove effective in slowing the progression of the virus. A vaccine is not likely until at least twelve months, so it is essential that these current lockdowns and quarantines continue.

Equity Market Valuations

P/E Multiples have come down in this market decline, but the recent move back up in the market leaves valuations only modestly lower than previously. The earnings outlook for this year is almost impossible to predict accurately, thus making the P/E multiple estimate difficult to assess in any case.

US Corporate Profit Growth

Year over year earnings growth expectations have collapsed with earnings declines more likely.

Global Economic Recession

We are clearly in the midst of a global economic recession.

Central Bank Monetary Policy

Global central banks continue cutting rates to try to mitigate the economic damages.

Global Fiscal Policy Measures

Every global economy continues to stimulate their domestic economies to try to reduce the negative effects from the current economic problems.

Asset Mix

It is obvious that the equity markets were getting oversold leading to the recent market recovery. Also, the Covid-19 stats are gradually improving somewhat although this can change on a daily basis. As a result of the extreme lockdowns and quarantining in China both the number of new cases and new deaths has fallen. This same trend will eventually transpire in the rest of the world.

I am recommending a reduction of 10% in cash with the monies to be redeployed back into equities. While the overall benchmark US and Canadian equities are still down 19% and 23% respectively from their recent highs, many stocks have fallen substantially more than that.

It is important to keep in mind that the stock market is a leading indicator and traditionally rises up to six months before any improvement in the economy is evident coming out of a recession.

Fixed Income

While I am not recommending any changes from last month, I am adding a new category to the fixed income area- inflation protected US Treasury bonds or TIPS for short. This type of bond tends to perform well when inflation is rising quickly. Currently, in the midst of a recession with inflation being muted, is not a good time to be acquiring TIP bonds. However, when this recession is over it may well be a good time if inflation starts to pick up.

Equity Sector Weights

Taking into consideration the market meltdown of all equity sectors, I am advising that the 10% cash be put back into all sectors, and not simply defensive ones.

Despite rumours of a possible OPEC and Russian agreement in regards to cutting crude oil production, the collapse in demand from the Covid slowdown in global economies will continue to pressure crude prices. I remain underweight Energy until a clearer picture unfolds on production coming from OPEC, Russia and the US.

I remain underweight Financials.

I remain overweight Technology, Industrials, Utilities, Reits and Consumer Discretionary.

I remain market weight Materials and Communications.

I am increasing my weight in Consumer Staples from underweight to market weight.

Lastly, I am increasing my Healthcare weight from market weight to overweight. Healthcare is traditionally a defensive group and today’s announcement of Bernie Saunders stopping his leadership makes the outlook for a massive change in US healthcare seem more unlikely with a Democratic victory in October led by Biden.

Individual Positions

Improve the Quality of your holdings

In this market meltdown, no companies were spared from registering significant price declines. Now is a great time to be making switches from poorer quality, highly leveraged companies into better quality ones that can better the storm of an economic recession.

In a recent blog I added NextEra Energy, the US utility to both portfolios. The regulatory environment in Florida is better than most US states and this is where the company serves over 5.4 million customers. NextEra also owns a majority stake on one of the world’s largest wind and solar renewable energy companies.

In the technology sector, I am adding the Canadian company, CGI to the Growth portfolio. While the company does not pay a dividend, it is a leading global provider of IT services and has a strong balance sheet. The shares have come off over 28% recently and offer reasonable value at current levels with a 16.2 times PE on this year’s earnings.

In the Industrials sector I am removing NFI Group from both portfolios. The company has been experiencing a slowdown in the North American bus market long before the current slowdown caused by the Covid virus. The company’s balance sheet is not pristine and they had to cut their dividend to improve their financial condition somewhat.

In the Communications sector, I am adding Facebook to the Growth Portfolio. The shares are off 22% from their recent highs and the P/E multiple on this years earnings is a reasonable 20.6 times given the company’s long term earnings growth rates both historically and projected.

Also please take note that United Technologies has recently merged with Raytheon. The new company name is Raytheon Technologies with a stock symbol RTX. Shareholders of the former United Technologies will also receive two corporate spinoffs- Carrier Global CARR and Otis OTIS. I am recommending the deletion of both Carrier and Otis from both portfolios. The Carrier and Otis spinoffs are relatively small and are resulting in most institutional investors liquidating their positions.

In the Materials sector, I am adding the US gold bullion ETF, GLD to the Growth portfolio. Gold has traditionally performed well in previous recessions with declining interest rates and very accommodative monetary policy.

Peter McMurtry, B.Com, CFA
Financial Writer
Objective Investment Advice for Everyone
Monthly Investment Newsletter and Sample Portfolios
Personalized Portfolio Reviews

Please see our disclaimer at Copyright ©2019 McMurtry Investment Report™. All rights reserved.

McMurtry Investment Report – Portfolios (April 2020)
  Income Growth
Cash Alterna Bank – High Interest Savings (2.00% current ) Alterna Bank – High Interest Savings (2.00% current)
  EQ Bank – High Interest Savings ( 2.00% current) EQ Bank – High Interest Savings ( 2.00% current)
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
Common Stocks Security Dividend Yield % Security Dividend Yield %
Financials Royal Bank RY 5.04 Royal Bank RY 5.04
  Intact Financial IFC 2.42 Intact Financial IFC 2.42
  TD TD 5.28 TD TD 5.28
  Sun Life SLF 4.78 Sun Life SLF 4.78
  JP Morgan JPM US 3.97 JP Morgan JPM US 3.97
  Manulife Fin’l MFC 6.71 Manulife Fin’l MFC 6.71
  Bank of America BAC US 3.25 Bank of America BAC US 3.25
  Morgan Stanley MS US 3.79 Morgan Stanley MS US 3.79
  T. Rowe Price TROW US 3.53 T. Rowe Price TROW US 3.53
  Allstate ALL US 2.33 Allstate ALL US 2.33
Energy Suncor SU 8.08 Suncor SU 8.08
  Canadian Natural Resources CNQ 9.11 Canadian Natural Resources CNQ 9.11
  Freehold FRU 17.55 Freehold FRU 17.55
  Enbridge ENB 8.23 Enbridge ENB 8.23
  TC Energy TRP 5.06 TC Energy TRP 5.06
  Whitecap Resources WCP 23.59 Whitecap Resources WXP 23.59
      Parex Resources PXT 0.00
Materials Agnico Eagle AEM 1.67 Agnico Eagle AEM 1.67
  Franco Nevada FNV 0.95 Franco Nevada FNV 0.95
  VanEck Vectors Gold ETF GDX US 0.73 VanEck Vectors Gold ETF GDX US 0.73
      SPDR Gold Bullion GLD US 0.00
  BMO Global Base Metals ETF ZMT 3.94 BMO Global Base Metals ETF ZMT 3.94
      Osisko Metals OM.V 0.00
      iShares Global Gold ETF XGD 0.37
Industrials Toromont TIH 1.95 Toromont TIH 1.95
  Air Products APD US 2.65 Air Products APD US 2.65
  WSP Global WSP 1.77 WSP Global WSP 1.77
  CNR 2.05 CNR 2.05
  Raytheon Technologies RTX US 5.09 Raytheon Technologies RTX US 5.09
  Stantec STN 1.57 Stantec STN 1.57
  Aecon Group ARE 5.04 Aecon Group ARE 5.04
  Honeywell HON US 2.66 Honeywell HON US 2.66
  TFI Int’l TFII 3.29 TFI Int’l TFII 3.29
Consumer Discretionary Home Depot HD US 3.12 Home Depot HD US 3.12
  Target TGT US 2.69 Target TGT US 2.69
  Restaurant Brands Int’l QSR 5.35 Restaurant Brands Int’l QSR 5.35
      Amazon AMZN US 0.00
  Lowes LOW US 2.42 Lowes LOW US 2.42
Communication Services Rogers B RCI.B 3.18 Rogers B RCI.B 3.18
  Comcast CMCSA US 2.71 Comcast CMCSA US 2.71
  Telus T 5.07 Telus T 5.07
      Facebook FB US 0.00
      VanEck Video Gaming ESPO US 0.21
      Alphabet GOOGL US 0.00
Consumer Staples Alimentation Couche- Tard ATD.B 0.76 Alimentation Couche Tard ATD.b 0.76
  Loblaws L 1.68 Loblaws L 1.68
  Sysco SYY US 3.91 Sysco SYY US 3.91
  Unilever PLC UL US 3.58 Unilever PLC UL US 3.58
Technology Apple AAPL US 1.19 Apple AAPL US 1.19
  Microsoft MSFT US 1.25 Microsoft MSFT US 1.25
  Open Text OTEX 2.02 Open Text OTEX 2.02
  Paychex PAYX US 3.83 Paychex PAYX US 3.83
  Logitech Int’l LOGI US ADR 1.70 Logitech Int’l LOGI US ADR 1.70
  Qualcomm QCOM US 3.41 Qualcomm QCOM US 3.41
      CGI Inc. GIB.A 0.00
      ETFMG Prime Cyber Sec. HACK US 1.73
      Visa V US 0.71
Utilities Algonquin Power AQN 4.23 Algonquin Power AQN 4.23
  Northland Power NPI 4.21 Northland Power NPI 4.21
  NextEra Energy NEE US 2.45 NextEra Energy NEE US 2.45
  Fortis FTS 3.49 Fortis FTS 3.49
Healthcare Becton Dickinson BDX US 1.33 Becton Dickinson BDX US 1.33
  Merck MRK US 3.11 Merck MRK US 3.11
  United Healthcare UNH US 1.74 United Healthcare UNH US 1.74
  CVS Healthcare CVS US 3.52 CVS Healthcare CVS US 3.52
  Bristol Myers BMY US 3.16 Bristol Myers BMY US 3.16
      Danaher DHR US 0.52
      Thermo Fisher Scientific TMO US 0.30
      Straumann ADR SAUHY US * 0.82
Real Estate Cdn Apt. REIT CAR.un 3.25 Cdn. Apt. REIT CAR.un 3.25
  CT Reit CRT.un 6.49 CT Reit CRT.un 6.49
  US Real Estate SPDR XLRE US 3.50 US Real Estate SPDR XLRE US 3.50
  InterRent REIT IIP.un 2.35 InterRent REIT IIP.un 2.35
  Dream Industrial DIR.un 7.12 Dream Industrial DIR.un 7.12
  WPT Ind. WIR.un 8.54 WPT Ind. WIR.un 8.54
  Summit REIT SMU.un 6.06 Summit REIT SMU.un 6.06
European Equity iShares MSCI Europe XEU 4.31 iShares MSCI Europe XEU 4.31

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

McMurtry Investment Report – Sector Weights (April 2020)
Equity Sector Weights (%)
Sector My Weight TSX Comp S&P 500 55 % US /45% CDN
Financials 19.16 31.60 10.80 20.16
Energy 6.25 13.00 2.60 7.28
Materials 6.90 12.40 2.40 6.90
Industrials 10.00 11.90 8.20 9.87
Consumer Disc. 7.00 3.40 9.80 6.92
Comm. Services 8.87 6.50 10.80 8.87
Consumer Staples 6.47 4.60 8.00 6.47
Technology 17.35 6.90 25.40 17.08
Utilities 5.26 5.60 3.50 4.45
Real Estate 3.25 3.10 3.00 3.05
Healthcare 9.50 1.00 15.50 8.98
Totals 100.00 100.00 100.00 100.00


McMurtry Investment Report Asset Mix April 2020)
Asset Mix – Income and Growth Portfolios
% Income Growth
Cash 30.00 30.00
Bonds – Regular 20.00 10.00
Bonds – High Yield 0.00 0.00
Bonds – Tips 0.00 0.00
Preferreds 0.00 0.00
Equities 50.00 60.00
CDN 21.15 25.65
US 25.85 31.35
Europe 3.00 3.00
Emerging Markets 0.00 0.00

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
Bonds – Regular20.0010.00
Bonds – High Yield5.005.00
Emerging Markets0.000.00

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 (%)
SectorMy WeightTSX CompS&P 50055 % US /45% CDN
Consumer Disc.6.404.1010.107.40
Comm. Services8.505.8010.108.17
Consumer Staples6.253.907.305.77
Real Estate3.753.503.103.28

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
Personalized Portfolio Reviews

Please see our disclaimer at Copyright ©2019 McMurtry Investment Report™. All rights reserved.

McMurtry Investment Report – Portfolios (April 2019)
CashAlterna 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 -RegulariShares XSB Short TermiShares XSB Short Term
 iShares CBO 1-5 Ladder CorpiShares CBO 1-5 Ladder Corp
 iShares CLF 1-5 Ladder Gov’tiShares CLF 1-5 Ladder Gov’t
Bonds – High Yield CORPiShares XHY US High Yield CDN$  iShares XHY US High Yield CDN $ 
Common StocksSecurityDividend Yield %SecurityDividend Yield %
FinancialsRoyal Bank RY4.05Royal Bank RY4.05
 Bank of Montreal BMO4.00Bank of Montreal BMO4.00
 Bank of Nova Scotia BNS4.89Bank of Nova Scotia BNS4.89
 Intact Financial IFC2.69Intact Financial IFC2.69
 TD TD4.08TD TD4.08
 Sun Life SLF3.90Sun Life SLF3.90
 JP Morgan JPM US3.16JP Morgan JPM US3.16
 Bank of America BAC US2.17Bank of America BAC US2.17
 Citibank C US2.89Citibank C US2.89
 Morgan Stanley MS US2.84Morgan Stanley MS US2.84
 T. Rowe Price TROW US3.04T. Rowe Price TROW US3.04
 Keycorp KEY US4.32Keycorp KEY US4.32
 PNC Fin’l PNC US3.10PNC Fin’l PNC US3.10
EnergySuncor SU3.85Suncor SU3.85
 Freehold FRU7.43Freehold FRU7.43
 Torc TOG5.62Torc TOG5.62
 Pembina Pipe Lines PPL4.55Pembina Pipe Lines PPL4.55
 Enbridge ENB6.04Enbridge ENB6.04
 Trans Canada TRP4.91Trans Canada TRP4.91
   Parex Resources PXT0.00
MaterialsAgnico Eagle AEM1.15Agnico Eagle AEM1.15
 Franco Nevada FNV1.29Franco Nevada FNV1.29
   Osisko Metals OM.V0.00
   iShares Global Gold ETF XGD0.20
IndustrialsToromont TIH1.55Toromont TIH1.55
 Air Products APD US2.44Air Products APD US2.44
 WSP Global WSP2.06WSP Global WSP2.06
 Canadian Pacific CP0.94Canadian Pacific CP0.94
 CNR 1.79CNR1.79
 Raytheon RTN US2.03Raytheon RTN US2.03
 Aecon Group ARE3.33Aecon Group ARE3.33
 Guggenheim Eq WT IND RGI US1.35Guggenheim Eq Wt IND RGI US1.35
 Honeywell HON US2.07Honeywell HON US2.07
 TFI Int’l TFII2.45TFI Int’l TFII2.45
Consumer DiscretionaryHome Depot HD US2.80Home Depot HD US2.80
 Sleep Canada ZZZ3.77Sleep Canada ZZZ3.77
 Canadian Tire CTC.A2.88Canadian Tire CTC.A2.88
 Amazon AMZN US0.00Amazon AMZN US0.00
 Lowes LOW US1.75Lowes LOW US1.75
Communication ServicesRogers B RCI.B2.78Rogers B RCI.B2.78
   Facebook FB US0.00
   Alphabet GOOGL US0.00
Consumer StaplesAlimentation Couche- Tard ATD.B0.64Alimentation Couche Tard ATD.b0.64
 Loblaws L1.79Loblaws L1.79
 Constellation Brands STZ US1.69Constellation Brands STZ US1.69
 Unilever PLC UL US3.06Unilever PLC UL US3.06
TechnologyApple AAPL US1.54Apple AAPL US1.54
 Microsoft MSFT US1.56Microsoft MSFT US1.56
 Open Text OTEX1.58Open Text OTEX1.58
 Paychex PAYX US2.79Paychex PAYX US2.79
 Cisco CSCO US2.59Cisco CSCO US2.59
   Kinaxis KXS0.00
   ETFMG Prime Cyber Sec. HACK US0.15
   Visa V US0.64
UtilitiesAlgonquin Power AQN4.58Algonquin Power AQN4.58
 Northland Power NPI5.12Northland Power NPI5.12
 Fortis FTS3.64Fortis FTS3.64
HealthcareAbbott Labs ABT US1.60Abbott Labs ABT US1.60
 Becton Dickinson BDX US1.23Becton Dickinson BDX US1.23
 Merck MRK US2.65Merck MRK US2.65
 US Healthcare iShares ETF IYH US1.84US Healthcare iShares ETF IYH US1.84
 United Healthcare UNH US1.46United Healthcare UNH US1.46
   Danaher DHR US0.52
   Thermo Fisher Scientific TMO US0.28
   Straumann ADR SAUHY US *0.63
   IBB Biotech ETF IBB US 0.28
Real EstateCdn Apt. REIT CAR.un2.76Cdn. Apt. REIT CAR.un2.76
 InterRent REIT IIP.un2.03InterRent REIT IIP.un2.03
 Dream Industrial DIR.un5.83Dream Industrial DIR.un5.83
 Summit REIT SMU.un4.35Summit REIT SMU.un4.35
European EquityiShares MSCI Europe XEU2.96iShares MSCI Europe XEU2.96

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

Peter McMurtry, B.Com, CFA

Please see our disclaimer at disclaimer ©2019 McMurtry Investment Report™. All rights reserved.