McMurtry Investment Report Portfolios – August 2018

Also available in PDF: MIR Portfolios August 2018

Investment Commentary (August 2018)

As a result of ongoing headwinds from rising interest rates and ongoing global trade protectionist policies, I am reducing my equity content by 2.5% with cash weights going up by the same amount.

After these changes cash will represent 37.5% and 32.5% of the Income and Growth portfolios respectively.

I am reducing my equity weight for both Europe and the Emerging Markets to a combined total of 6%. Last month the weight was 8.8%. The US has a much stronger economy currently and has the upper hand in these ongoing trade talks.

Further exacerbating the current problems are financial concerns in some Emerging Market countries like Turkey and Argentina. Most of these countries’ debts are denominated in US dollars, so the recent US greenback strength puts enormous financial hardship in Emerging Market countries.

Saudi Arabia’s reaction to a recent Canadian government tweet in regards to a human rights issue seemed quite extreme to me. It looks like Trump and company gave their full blessing to the Saudis to go after Canada. It just shows you how slimy Trump really is.

In regards to NAFTA, I think the Canadian government must give some concessions to the US to get the deal done. Revoking the supply management dairy tariffs seems like a no brainer to me, but at the moment all three Canadian political parties are against getting rid of it. Alternatively, accepting a five year sunset clause seems like a good compromise to me that would be palatable to all three Canadian political parties in addition to the US.

However nothing has been resolved at the moment and this creates a lot of uncertainty in the capital markets.

In terms of North American equity sectors, I remain overweight the 65% US 35% Canada benchmark weights for Financials, Energy, Industrials, Consumer Discretionary and Technology.

I remain underweight Telcos, Consumer Staples, Utilities and Real Estate.

I have just gone to underweight the Materials sector with ongoing headwinds from a rising US dollar globally, combined with slowing of economic growth in China and the continuation of the trade wars.

I remain market weight the Healthcare sector.

I added Shopify to the Growth portfolio in the Technology sector several weeks ago. Their recent quarter showed the continuation of strong revenue growth.

I am removing Facebook from the Growth portfolio’s technology sector. The share price has recovered somewhat from its recent price weakness, but the company indicated in its last quarter that revenue growth would slow markedly and expenses would climb. Alphabet, already in my Growth portfolio, does not appear to have the same negative issues as Facebook and yet it still offers significant growth opportunities.

In the healthcare sector I added Danaher to both portfolios. The US company offers a solid dividend and continues to provide strong growth in free cash flow and dividends.

I am adding Finning International to both portfolios in the Industrial Sector. The company is the Caterpillar dealer for western Canada and offers a solid dividend and good earnings growth prospects.

In the Utilities sector, I am switching out of Emera into Algonquin Power for both portfolios. Algonquin offers better growth prospects and it is much less leveraged than Emera.

Lastly in the Consumer Discretionary sector, I am removing JD.com from the Growth portfolio. While I continue to like the company over the long term, it is facing some very serious financial issues in China predicated largely from Trump’s ongoing trade war. In this current environment in China, I favour only having the larger and stronger Alibaba.

McMurtry Investment Report – Portfolios (August 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	6.20	Enbridge Pfd V Enb.pr.V US	6.20
	Horizons Active Mgt. Pfd HPR	3.78	Horizons Active Mgt. Pfd HPR	3.78
	Industrial Alliance IAG.PR.G	3.94	Industrial Alliance IAG.PR.G	3.94
Common Stocks	Security	Dividend Yield %	Security	Dividend Yield %
Financials	Royal Bank RY	3.70	Royal Bank RY	3.70
	National Bank	3.89	National Bank	3.89
	TD TD	3.47	TD TD	3.47
	CIBC CM	4.48	CIBC CM	4.48
	Sun Life SLF	3.57	Sun Life SLF	3.57
	JP Morgan JPM US	1.95	JP Morgan JPM US	1.95
	Bank of America BAC US	1.94	Bank of America BAC US	1.94
	Citibank C US	2.50	Citibank C US	2.50
	Goldman Sachs GS US	1.35	Goldman Sachs GS US	1.35
	Manulife MFC	3.64	Manulife MFC	3.64
	T. Rowe Price TROW US	2.35	T. Rowe Price TROW US	2.35
	iUnits US Regional Banks IAT US	1.64	iUnits US Regional Banks IAT US	1.65
	Keycorp KEY US	2.40	Keycorp KEY US	2.40
	Blackrock BLK US	2.49	Blackrock BLK US	2.49
	Paychex PAYX US	3.25	Paychex PAYX US	3.25
	PNC Fin’l PNC US	2.62	PNC Fin’l PNC US	2.62
			Visa V US	0.61
Energy	Suncor SU	2.63	Suncor SU	2.63
	Freehold FRU	5.41	Freehold FRU	5.41
	Whitecap WCP	3.77	Whitecap WCP	3.77
	Torc TOG	3.78	Torc TOG	3.78
	Pembina Pipe Lines PPL	4.87	Pembina Pipe Lines PPL	4.87
	Enbridge ENB	5.81	Enbridge ENB	5.81
	Vermilion Energy VET	6.86	Vermilion Energy VET	6.86
			Centennial Resources CDEV US	0.00
			Step Energy STEP	0.00
			Parex Resources PXT	0.00
Materials	Agnico Eagle AEM	1.14	Agnico Eagle AEM	1.14
	Franco Nevada FNV	1.35	Franco Nevada FNV	1.35
	BMO Global Base Metal ETF ZMT	2.61	BMO Global Base Metal ETF ZMT	2.61
			Lundin LUN	1.90
			Trevali Mining TV	0.00
			Hudbay Minerals HBM	0.34
			Roxgold ROXG	0.00
Industrials	DowDuPont DWDP US	2.21	DowDuPont DWDP US	2.21
	Applied Materials AMAT US	1.65	Applied Materials AMAT US	1.65
	Toromont TIH	1.38	Toromont TIH	1.38
	WSP Global WSP	2.03	WSP Global WSP	2.03
	Canadian Pacific CP	1.01	Canadian Pacific CP	1.01
	General Dynamics GD US	1.86	General Dynamics GD US	1.86
	SNC Lavalin SNC	2.17	SNC Lavalin SNC	2.17
	Guggenheim Eq WT IND RGI US	1.14	Guggenheim Eq Wt IND RGI US	1.14
	Honeywell HON US	1.87	Honeywell HON US	1.87
	Finning FTT	2.58	Finning FTT	2.58
			Fedex FDX US	1.06
Consumer Discretionary	Home Depot HD US	2.09	Home Depot HD US	2.09
	Sleep Canada ZZZ	2.39	Sleep Canada ZZZ	2.39
	Stanley Black and Decker SWK US	1.77	Stanley Black and Decker SWK US	1.77
	Canadian Tire CTC.A	2.21	Canadian Tire CTC.A	2.21
	Amazon AMZN US	0.00	Amazon AMZN US	0.00
	Kohl’s KSS US	3.30	Kohl’s KSS US	3.30
	Magna MG	2.49	Magna MG	2.49
	Lowes LOW US	1.93	Lowes LOW US	1.93
	Carnival Cruise CCL US	3.38	Carnival Cruise CCL US	3.38
			Dollarama DOL	0.33
			Alibaba BABA US	0.00
Telecom	Rogers B RCI.B	2.80	Rogers B RCI.B	2.80
Consumer Staples	Alimentation Couche Tard ATD.b	0.67	Alimentation Couche Tard ATD.b	0.67
	Loblaws L	1.72	Loblaws L	1.72
	Constellation Brands STZ US	1.42	Constellation Brands STZ US	1.42
	Unilever PLC UL US	3.18	Unilever PLC UL US	3.18
Technology	Apple AAPL US	1.53	Apple AAPL US	1.53
	Microsoft MSFT US	1.58	Microsoft MSFT US	1.58
	Open Text OTEX	1.67	Open Text OTEX	1.67
			Nvidia NVDA US	0.25
			ETFMG Prime Cyber Sec. HACK US	0.11
			Shopify SHOP	0.00
			Alphabet GOOGL US	0.00
Utilities	Algonquin Power AQN	5.14	Algonquin Power AQN	5.14
	Fortis FTS	3.97	Fortis FTS	3.97
Healthcare	Abbott Labs ABT US	1.71	Abbott Labs ABT US	1.71
	Johnson & Johnson JNJ US	2.72	Johnson & Johnson JNJ US	2.72
	Merck MRK US	2.91	Merck MRK US	2.91
	US Healthcare iShares ETF IYH US	1.06	US Healthcare iShares ETF IYH US	1.06
	United Healthcare UNH US	1.42	United Healthcare UNH US	1.42
	Eli Lilly LLY US	2.28	Eli Lilly LLY US	2.28
	CVS US	3.09	CVS US	3.09
			Danaher DHR US	0.64
			Thermo Fisher Scientific TMO US	0.29
			IBB Biotech ETF IBB US	0.27
Real Estate	Cdn Apt. REIT CAR.un	2.87	Cdn. Apt. REIT CAR.un	2.87
	InterRent REIT IIP.un	2.42	InterRent REIT IIP.un	2.42
	Summit REIT SMU.un	5.82	Summit REIT SMU.un	5.82
	Chartwell REIT CSH.un	3.86	Chartwell REIT CSH.un	3.86
European Equity	iShares MSCI Europe XEU	4.39	iShares MSCI Europe XEU	4.39
Emerging Markets	iShares MSCI Emer. Mkts XEC	0.96	iShares MSCI Emer. Mkts XEC	0.96

McMurtry Investment Report – Sector Weights (August 2018)

Equity Sector Weights (%)
Sector	My Weight	TSX Comp	S&P 500	65 % US / 35% CDN
Financials	22.80	33.50	14.10	20.89
Energy	12.00	19.90	6.20	11.00
Materials	4.63	11.10	2.60	5.58
Industrials	11.00	10.30	9.90	10.04
Consumer Disc.	11.00	5.70	12.70	10.25
Telecom	1.50	4.50	1.90	2.81
Consumer Staples	4.00	3.40	6.90	5.68
Technology	18.88	3.80	25.60	17.97
Utilities	2.35	3.80	2.90	3.22
Real Estate	2.00	2.80	2.80	2.80
Healthcare	9.85	1.20	14.50	9.85
Totals	100.00	100.00	100.10	100.07

McMurtry Investment Report Asset Mix (August 2018)

Asset Mix – Income and Growth Portfolios
%	Income	Growth
Cash	37.50	32.50
Bonds	10.00	5.00
Preferreds	15.00	10.00
Equities	37.50	52.50
CDN	11.03	16.28
US	20.48	30.23
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
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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 – August 2018

Investment Commentary (August 2018)

McMurtry Investment Report – Portfolios (August 2018)

McMurtry Investment Report – Sector Weights (August 2018)

McMurtry Investment Report Asset Mix (August 2018)

Investment Commentary (April 2019)

Peter McMurtry, B.Com, CFA

MCMURTRY INVESTMENT REPORT™

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