McMurtry Investment Report Portfolios – August 2017

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McMurtry Investment Report – Portfolios (August 2017)

	Income		Growth
Cash	Alterna Bank – High Interest Savings (1.9% current rate)		Alterna Bank – High Interest Savings (1.9% 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	4.22	Enbridge Pfd V Enb.pr.V US	4.22
	Horizons Active Mgt. Pfd HPR	3.95	Horizons Active Mgt. Pfd HPR	3.95
Common Stocks	Security	Dividend Yield %	Security	Dividend Yield %
Financials	Royal Bank RY	3.74	Royal Bank RY	3.74
	TD TD	3.73	TD TD	3.73
	Sun Life SLF	3.64	Sun Life SLF	3.64
	JP Morgan JPM US	2.18	JP Morgan JPM US	2.18
	Bank of America BAC US	1.99	Bank of America BAC US	1.99
	Citibank C	1.17	Citibank C	1.17
	Manulife MFC	3.19	Manulife MFC	3.19
	T. Rowe Price TROW US	2.76	T. Rowe Price TROW US	2.76
	iUnits US Regional Banks IAT US	1.46	iUnits US Regional Banks IAT US	1.46
	Keycorp KEY US	1.94	Keycorp KEY US	1.94
	Blackrock BLK US	2.34	Blackrock BLK US	2.34
			Visa V US	0.66
			First Data FD US	0.00
Energy	Suncor SU	3.15	Suncor SU	3.15
	Freehold FRU	4.22	Freehold FRU	4.22
	Whitecap WCP	3.04	Whitecap WCP	3.04
	Torc TOG	4.28	Torc TOG	4.28
	Pembina Pipe Lines PPL	4.80	Pembina Pipe Lines PPL	4.80
	Enbridge ENB	4.72	Enbridge ENB	4.72
	Inter Pipeline IPL	6.38	Centennial Resources CDEV US	0.00
			Spartan SPE	0.00
Materials	Agnico Eagle AEM	0.86	Agnico Eagle AEM	0.86
	Franco Nevada FN	1.33	Franco Nevada FN	1.33
			Lundin LUN	1.34
			Trevali Mining TV	0.00
			Roxgold ROXG	0.00
Industrials	New Flyer Ind NFI	2.56	New Flyer Ind NFI	2.56
	WSP Global WSP	2.96	WSP Global WSP	2.96
	Canadian Pacific CP	1.15	Canadian Pacific CP	1.15
	General Dynamics GD US	1.71	General Dynamics GD US	1.71
	SNC Lavalin SNC	1.99	SNC Lavalin SNC	1.99
	Apogee APOG US	1.08	Apogee APOG US	1.08
			Winpak WPK	0.22
Consumer Discretionary	Home Depot HD US	2.38	Home Depot HD US	2.38
	Sleep Canada ZZZ	1.74	Sleep Canada ZZZ	1.74
	Stanley Black and Decker SWK US	1.79	Stanley Black and Decker SWK US	1.79
	Canadian Tire CTC.A	1.83	Canadian Tire CTC.A	1.83
			Dollarama DOL	0.36
Telecom	BCE BCE	4.90	BCE BCE	4.90
	Rogers B RCI.B	2.96	Rogers B RCI.B	2.96
Consumer Staples	Alimentation Couche Tard ATD.b	0.61	Alimentation Couche Tard ATD.b	0.61
	Loblaws L	1.59	Loblaws L	1.59
	Pepsico PEP US	2.76	Pepsico PEP US	2.76
	Kraft Heinz KHC US	2.74	Kraft Heinz KHC US	2.74
Technology	Apple AAPL US	1.69	Apple AAPL US	1.69
	Microsoft MSFT US	2.15	Microsoft MSFT US	2.15
			Amazon AMZN US	0.00
			Shopify SH	0.00
			Facebook FB US	0.00
			Nvidia NVDA US	0.34
			Alphabet GOOGL US	0.00
Utilities	Emera EMA	4.50	Emera EMA	4.50
	Fortis FTS	3.52	Fortis FTS	3.52
Healthcare	Johnson & Johnson JNJ US	2.53	Johnson & Johnson JNJ US	2.53
	Merck MRK	2.94	Merck MRK	2.94
	US Healthcare iShares ETF IYH US	1.13	US Healthcare iShares ETF IYH US	1.13
			Thermo Fisher Scientific TMO US	0.34
			Aphria APH	0.00
			Knight Therapeutics GUD	0.00
			IBB Biotech ETF IBB US	0.20
Real Estate	Cdn Apt. REIT CAR.un	3.95	Cdn. Apt. REIT CAR.un	3.95
	Chartwell REIT CSH.un	3.76	Chartwell REIT CSH.un	3.76
	Pure Multi-family RUF.un	5.53	Pure Multi-family RUF.un	5.53
	Pure Industrial AAR.un	4.90	Pure Industrial AAR.un	4.90
European Equity	BMO European ETF ZEQ	1.93	BMO European ETF ZEQ	1.93
Emerging Markets	iShares MSCI Emer. Mkts XEC	1.55	iShares MSCI Emer. Mkts XEC	1.55

Investment Commentary August 2017

I am maintaining the same total equity exposure for both portfolios as last month.

However I am reducing my North American equity weight by 2% and increasing the European equity exposure by 2%. European markets are cheaper than either Canadian or US equities.

Despite none of Trump’s proposed pro growth policies likely to pass both Houses of Government anytime soon, US equity markets have continued to rally. US corporate profit growth for the second quarter is reaching a 10% year over year improvement with more of the same expected for the third quarter.

Canadian equity markets have not fared nearly as well this year as other global equity markets, possibly a result of the strong loonie and continuing weak crude oil markets. The whole debacle with Home Capital also did not help Canadian financial stocks. Historically Canadian equity markets have followed their US counterparts when economic growth starts to accelerate and I expect this to happen once again.

World economies are currently experiencing a synchronized economic rebound which is positive for equity valuations.

Bank of America Merrill Lynch’s Bull and Bear Sentiment indicator indicates that the US equity market is very overbought short term and is due for a market correction of anywhere up to 15-20%.

As I have mentioned in previous newsletters, any type of equity correction without any signs of an impending recession should be viewed as a buying opportunity and not the beginning of a long term bear market.

I remain overweight the 50 / 50 benchmark weight the following equity sectors:

Financials
High Tech
Industrials
Consumer Discretionary

I remain underweight:

Telcos
Materials – remain underweight but have increased my weight materially from last month.
Utilities
Real Estate
Energy
Consumer staples – remain underweight but have increased my weight materially from last month.

I remain market weight:

Healthcare

In the energy sector I have added Enbridge to both portfolios. The stock is off considerably from its recent high and is just starting to reap the benefits of its major US acquisition of Spectra Energy that will both better diversify the consolidated company’s products and provide more growth opportunities.

In the Consumer Discretionary area I am adding Amazon to the Growth portfolio. Although the stock is not cheap on a PE basis, sales growth remains very solid and the company continues to expand its footprint in new areas like Artificial Intelligence, video and film content, medical database management, online drug and grocery retailing. I recommend a small exposure initially with the intention of adding to my position upon any material share price pullbacks.

In the Materials sector, I remain underweight but have materially lowered my underweight. The weak US dollar is helping both base metal and precious metal prices. In addition at some point inflationary pressures will start to rise once again and this sector will be a beneficiary. I continue to like both Lundin and Trevali Mining for the base metal exposure.

In the Financials area, I am adding Keycorp, a Cleveland Midwestern regional bank that has just acquired First Niagara in 2016. The bank is expected to benefit by over $340 million in operating cost savings from the merger.

In the healthcare sector, I am recommending the most changes from last month.

I am removing Walgreens, CVS and AmerisourceBergen as a result of an industry wide problem with generic drug pricing. The pharmacy benefit managers, that include both CVS and AmerisourceBergen, are faced with more regulations regarding generic drug pricing and this is very negative for overall profitability. While most of Walgreens pharmacy benefit business is handled by AmerisourceBergen, the drug retailer along with CVS’s drug dispensing business will both be negatively affected by Amazon’s recent decision to sell drugs online at lower prices than their competitors.

I recommend using the proceeds from the sales of these above mentioned healthcare stocks to buy more Johnson & Johnson and Merck that both offer solid dividends and good growth prospects.

I am adding Thermal Fisher Scientific to the healthcare sector of the Growth Portfolio. The company is the maker of scientific instrument and laboratory supplies. The company recently reported their second quarter earnings and beat both the top and bottom line estimates and raised their outlook for the remainder of this year. The company is expected to grow its revenues, cash flow and earnings at double digit rates for the next five years.

I remain underweight Consumer Staples, but have materially reduced my underweight. Kraft Heinz just reported a strong bottom line as a result of its massive ongoing cost cutting efforts. Revenues continued to decline but were better than expected.

I have not made any other changes to Real Estate, Utilities, Telcos, Industrials and Technology.

Finally I am replacing Horizons Active Emerging Market ETF HAJ with iShares MSCI Emerging market ETF XEC. The performance of the Horizons ETF has been disappointing relative to the iShares Emerging Market ETF and this is my rational for the change.

McMurtry Investment Report – Sector Weights (August 2017)

Equity Sector Weights (%)
Sector	My Weight	TSX Comp	S&P 500	50/50
Financials	29.00	34.60	14.50	24.55
Energy	10.00	20.40	6.00	13.20
Materials	5.75	11.70	2.90	7.30
Industrials	13.50	9.30	10.10	9.70
Consumer Disc.	10.00	5.30	12.30	8.80
Telecom	1.50	5.00	2.20	3.60
Consumer Staples	3.50	3.70	8.70	6.20
Technology	16.20	3.30	22.80	13.05
Utilities	2.00	3.20	3.20	3.20
Real Estate	2.00	2.90	3.00	2.95
Healthcare	7.55	0.70	14.40	7.55
Totals	101.00	100.10	100.10	100.10

McMurtry Investment Report Asset Mix (August 2017)

Asset Mix – Income and Growth Portfolios
%	Income	Growth
Cash	32.50	22.50
Bonds	10.00	5.00
Preferreds	10.00	10.00
Equities	47.50	62.50
CDN	20.75	28.25
US	20.75	28.25
Europe	4.00	4.00
Emerging Markets	2.00	2.00

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
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
Personalized Portfolio Reviews
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 – August 2017

Investment Commentary (April 2019)

Peter McMurtry, B.Com, CFA

MCMURTRY INVESTMENT REPORT™

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