McMurtry Investment Report & Model Portfolios

McMurtry Investment Report Portfolios April 2022

Also available in PDF: McMurtry Investment Report Portfolio – April 2022

Investment Commentary April 2022

US Yield Curve

For the first time since July, 2019, the 10-2 year US Treasury yield curve actually inverted to the current level of minus 0.06%, from last month’s already low 0.24%. The US Federal Reserve has become much more hawkish and this has resulted in short rates rising much faster than longer term maturities. US domestic inflation is at the highest level in many years propelled by the continuation of goods supply shortages, rising labour costs and record high commodity prices.

This inversion of the yield curve has frequently been a good signal of an impending recession. However, this indicator may prove not to be nearly as reliable as in the past with the massive Central Bank bond buying of longer dated maturities. Nevertheless, this inversion should still put all investors on high alert for a slowing of economic growth later this year and next.

US Corporate Debt Spreads

As of March 31st 2022, Baa rated US corporate bond spreads relative to 10-year US Treasuries actually narrowed modestly by 31 basis points to the current level of 1.93%. This narrowing is in sharp contrast to the inversion of the yield curve and most likely indicates that more evidence is needed before predicting a recession in the near future.

Covid – 19 Health Stats

All the recent pressure by the truckers in both Canada and the US led to all levels of government backing off on mandated pandemic lockdowns. This is now resulting in an increase in the number of Covid cases and is a clear signal how short sighted the truckers were. Fortunately, most of these new cases are much milder than previously and are not resulting in a sharp increase in hospitalizations.

Equity Market Valuations

The forward PE multiple of the S&P 500 is 19.60 as of April 1st compared to 19.2 times last month and the long- term average of 19.6 times.

Central Bank Monetary Policy

Faced with rising inflationary pressures, the US Federal Reserve Bank remains totally committed to controlling inflation by reducing the balance sheet and increasing interest rates.

Asset Mix

The combination of increased geopolitical risk from the Ukraine war, a very hawkish Federal Reserve, less accommodative fiscal policy, sharply rising energy and commodity prices, and a labour shortage is creating a great deal of uncertainty regarding the sustainability of this economic cycle. A recent inversion of the 10 less 2 year US Treasury yield curve also adds to the uncertainty.

Consequently, I am recommending an increase in my cash weight of 5% for both portfolios to a new level of 30%, with equities simultaneously being reduced by the same amount.

I am also increasing my Canadian North American equity benchmark percentage by 5% to the new level of 75% Canada and 25% US. As highlighted in previous newsletters and blogs, the outlook for Canadian equities in a rising commodity environment is much more favourable than is the case for US equities.

I am reducing the European equity weight to 3% for both portfolios, largely based on the Euro being much more susceptible to rising energy prices than North America.

I am increasing my GIC weight to 5% for both portfolios. I am replacing my real return fixed income exposure by deleting the US Tip ETF and adding the iShares Floating Rate ETF XFR as a replacement. The latter ETF is priced in Canadian dollars. Lastly, I am reducing the high yield weight to 2% for both portfolios. This is predicated on a gradual reduction in overall economic growth but no immediate recession on the horizon.

Although it is much too early to predict an economic recession, all these headwinds will clearly result in economic growth slowing somewhat this year and next. Having some extra cash will provide a nice cushion from falling markets and also provide an opportunity to add to your equity exposure as market opportunities unfold.

Equity Sector Weights

While I remain overweight Financials, Energy, Materials, Industrials, Consumer Discretionary and Reits, I am making some adjustments to these overweight positions. Based on the negative effect that higher rates and rising commodities have on the consumer, I am reducing my Consumer Discretionary overweight, but still remain overweight. I am doing the same thing for Financials, Industrials and Reits. On the other hand, I am reducing my under exposure to Healthcare and Utilities sectors. I remain underexposed to both the Technology and Communications sectors.

Individual Equity Changes

In a blog dated March 8th, I added Old Dominion Freight to both portfolios in the Industrials sector. The company is one of the largest trucking firms in the US and has a solid balance sheet with strong EBITDA and Revenue growth prospects this year. The company is also a consistent dividend grower despite its low dividend yield.

In the technology sector in a blog dated March 3oth, I added Micron Technology to the Growth portfolio. The company recently reported year over year growth in its fiscal 2nd quarter of 25% in total revenues. EPS also rose sharply to $2.14 per share compared to $0.98 last year. Revenues are expanding as a result of the switch to the business cloud and the rapid increase in data center activity. This latter trend is getting a lot of help from the increase in bitcoin production.

After the addition of Micron, I will have three companies in my model portfolios exposed to the semiconductor industry, namely Applied Materials, Qualcomm and Micron Technology. Consequently, I have decided to delete the US semiconductor ETF, XSD.

In a blog dated March 11th, I recommended a switch out of Allstate into Chubb in the property and casualty insurance industry. Chubb is expected to grow its EPS at a much faster clip than Allstate, yet its valuation is only marginally higher.

Finally in a blog dated March 18th, I added Hudbay Minerals to the Growth portfolio. The company is a major producer of copper and gold with operations in both Canada and Peru. The company is trading at a reasonable valuation relative to its peers and is expected to see strong production growth in both copper and gold over the next two years.





Please see our disclaimer at

Copyright © McMurtry Investment Report™. All rights reserved.

Strategies for do-it-yourself investors

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.