McMurtry Investment Report Portfolios – December 2018

Also available in PDF: MIR Portfolios December 2018

Investment Commentary (December 2018)

Asset Mix Changes

I am recommending a 5% increase in the cash weight for both portfolios. A recent Reuters poll just came out indicating there is a 40% chance of an economic recession within the next two years and this is the highest reading since 2008. After this change the Income and Growth portfolios will have a cash weight of 42.5% and 37.5% respectively. The new cash positions in each portfolio will provide sufficient downside protection and can be used to increase equity exposure as opportunities present themselves.

I am increasing the Canadian equity content of the North American component from the current 40% Canada 60% US to 45% Canada and 55% US. The Canadian market is considerably cheaper than the US one. In addition the recent signing of the new USMCA agreement combined with the substantial narrowing of the Western Canadian Select crude price discount from $45 to under $15 per barrel should help the Canadian market.

Most of my changes this month to both the equity sector weights and to the addition and deletion of individual companies and ETF’s, are to improve the overall quality of the portfolio in case financial markets go a lot further down than expected.

Preferred Shares

The preferred share market has gone down much more than I anticipated. Differing from high yield securities most of the Canadian rate reset preferreds and ETF’s are of investment grade. Preferreds are nevertheless much less liquid than bonds or common equities. The large Canadian ETF issuers such as Horizons have received considerable redemptions recently forcing them to liquidate positions at very inopportune prices. There is a lot of uncertainty in regards to where interest rates are headed and the camp that believes rates are headed a lot lower has been selling their rate reset preferreds.

I am recommending several changes to my preferred share recommendations. First I am deleting the Horizons preferred ETF HPR. I am also deleting Enbridge’s US Preferred V after a strong US dollar run against the Canadian loonie.

I am replacing these positions with two new additions to both portfolios. I am adding the Enbridge Preferred Y rate reset preferred. It offers a current yield of 6.18% and is expected to be reset in September 2019 with an increase in the dividend per share to $1.1125 from the current $1.00 per share. This assumes that the five year Canada rate of 2.07% stays the same until the preferred is reset next year. The expected new dividend per share using today’s share price offers an expected dividend yield of 6.87%, an increase from the current 6.18% yield.

I am also adding the Trans Canada Pipeline rate reset preferred B. It has a rate reset date of June 30, 2020 with an anticipated yield of over 6%. While the current yield is just under 4% the new yield will be considerably higher at 6% assuming that 5 year Canada bond yields remain the same. The issue’s current dividend per share is $0.54 with the new rate expected to be $0.8375.

The four rate reset preferreds will provide solid current yields and their reset yields will most likely be higher than their current yields unless 5 year Canada yields fall from the current 2.07% and an economic recession unfolds over the next few years. As I have mentioned previously you do not want to own rate reset preferreds in a recession where interest rates are dropping.

Equity Sector Weights.

In terms of equity sectors I am making several changes to overall weights.

I remain overweight the new North American benchmark weight for Financials and Technology.

I am increasing my weight from underweight to market weight for the following: Energy, Consumer Staples and Utilities.

I am going from market weight to overweight for the Reits.

I remain market weight Healthcare and Communication Services

I am going from overweight to market weight for the Consumer Discretionary and Industrial sectors.

Lastly I remain underweight the Materials sector.

These changes will increase the exposure to the more defensive sectors while still providing exposure to the fast growing Technology sector. By having exposure to all sectors also offers a high level of diversification, a necessary factor in this environment.

Common Equity Stock and ETF changes

In the Financial sector I am adding Bank of Nova Scotia to both portfolios. The shares have sharply underperformed their peers over the last few years and the current valuation offers good upside.

I am removing the US Regional bank ETF IAT as these banks are of inferior overall quality to their larger NY City counterparts.

In the Energy sector I am deleting Whitecap from both portfolios. The company is having a very difficult time in this current crude oil environment. I am also deleting Step Energy from the Growth portfolio with less overall demand for their services. I am adding Trans Canada Pipelines to both portfolios. The company offers a solid dividend yield with plenty of growth opportunities both in cash flow and dividend increases over the next several years. I am deleting Centennial Energy, a US energy stock from the Growth portfolio as it is a highly volatile stock.

In the Materials sector I am deleting Trevali Mining and suggesting using the proceeds to purchase the BMO ZMT Global Base Metals ETF. I am also advising a switch out of Roxgold into the XGD Gold ETF. While Roxgold remains a high quality low cost gold producer, its mine is in Burkina Fasso, Africa where political unrest is significantly increasing.

Finally I am deleting Fedex from the Growth portfolio in the Industrial sector. The company is experiencing continuing issues with the ongoing US / China trade war and is now about to experience a brand new competitor to their space, the formidable Amazon.

McMurtry Investment Report – Portfolios (December 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 %
	Trans Canada TRP.PR.B	3.93	TransCanada TRP.PR.B	3.93
	Enbridge ENB.PR.Y	6.08	Enbridge ENB.PR.Y	6.08
	Royal Bank RY.PR.J	4.22	Royal Bank RY.PR.J	4.22
	Industrial Alliance IAG.PR.G	4.52	Industrial Alliance IAG.PR.G	4.52
Common Stocks	Security	Dividend Yield %	Security	Dividend Yield %
Financials	Royal Bank RY	4.02	Royal Bank RY	4.02
	Bank of Nova Scotia BNS	4.70	Bank of Nova Scotia	4.70
	National Bank	4.42	National Bank	4.42
	TD TD	3.64	TD TD	3.64
	CIBC CM	4.88	CIBC CM	4.88
	Sun Life SLF	4.08	Sun Life SLF	4.08
	JP Morgan JPM US	2.88	JP Morgan JPM US	2.88
	Bank of America BAC US	2.11	Bank of America BAC US	2.11
	Citibank C US	2.78	Citibank C US	2.78
	Goldman Sachs GS US	1.68	Goldman Sachs GS US	1.68
	T. Rowe Price TROW US	2.82	T. Rowe Price TROW US	2.82
	Keycorp KEY US	3.71	Keycorp KEY US	3.71
	Paychex PAYX US	3.17	Paychex PAYX US	3.17
	PNC Fin’l PNC US	2.80	PNC Fin’l PNC US	2.80
Energy	Suncor SU	3.36	Suncor SU	3.36
	Freehold FRU	7.31	Freehold FRU	7.31
	Torc TOG	5.49	Torc TOG	5.49
	Pembina Pipe Lines PPL	5.12	Pembina Pipe Lines PPL	5.12
	Enbridge ENB	6.95	Enbridge ENB	6.95
	Trans Canada TRP	5.18	Trans Canada TRP	5.18
			Parex Resources PXT	0.00
Materials	Agnico Eagle AEM	1.17	Agnico Eagle AEM	1.17
	Franco Nevada FNV	1.53	Franco Nevada FNV	1.53
	BMO Global Base Metal ETF ZMT	1.65	BMO Global Base Metal ETF ZMT	1.65
			iShares Global Gold ETF XGD	0.23
Industrials	Toromont TIH	1.59	Toromont TIH	1.59
	WSP Global WSP	2.29	WSP Global WSP	2.29
	Canadian Pacific CP	0.93	Canadian Pacific CP	0.93
	CNR	1.59	CNR	1.59
	Raytheon RTN US	1.98	Raytheon RTN US	1.98
	Aecon Group ARE	2.67	Aecon Group ARE	2.67
	Guggenheim Eq WT IND RGI US	1.08	Guggenheim Eq Wt IND RGI US	1.08
	Honeywell HON US	2.24	Honeywell HON US	2.24
	Finning FTT	2.90	Finning FTT	2.90
	TFI Int’l TFII	1.90	TFI Int’l TFII	1.90
Consumer Discretionary	Home Depot HD US	2.28	Home Depot HD US	2.28
	Sleep Canada ZZZ	3.35	Sleep Canada ZZZ	3.35
	Canadian Tire CTC.A	2.80	Canadian Tire CTC.A	2.80
	Amazon AMZN US	0.00	Amazon AMZN US	0.00
	Magna MG	2.64	Magna MG	2.64
	Lowes LOW US	2.03	Lowes LOW US	2.03
Communication Services	Rogers B RCI.B	2.71	Rogers B RCI.B	2.71
			Alphabet GOOGL US	0.00
Consumer Staples	Alimentation Couche- Tard ATD.B	0.57	Alimentation Couche Tard ATD.b	0.57
	Loblaws L	1.93	Loblaws L	1.93
	Constellation Brands STZ US	1.51	Constellation Brands STZ US	1.51
	Unilever PLC UL US	3.31	Unilever PLC UL US	3.31
Technology	Apple AAPL US	1.64	Apple AAPL US	1.64
	Microsoft MSFT US	1.66	Microsoft MSFT US	1.66
	Open Text OTEX	1.77	Open Text OTEX	1.77
			Nvidia NVDA US	0.39
			ETFMG Prime Cyber Sec. HACK US	0.01
			Shopify SHOP	0.00
			Visa V US	0.71
Utilities	Algonquin Power AQN	4.77	Algonquin Power AQN	4.77
	Fortis FTS	3.90	Fortis FTS	3.90
Healthcare	Abbott Labs ABT US	1.51	Abbott Labs ABT US	1.51
	Johnson & Johnson JNJ US	2.45	Johnson & Johnson JNJ US	2.45
	Merck MRK US	2.77	Merck MRK US	2.77
	US Healthcare iShares ETF IYH US	1.03	US Healthcare iShares ETF IYH US	1.03
	United Healthcare UNH US	1.28	United Healthcare UNH US	1.28
	Eli Lilly LLY US	1.90	Eli Lilly LLY US	1.90
	CVS US	2.49	CVS US	2.49
			Danaher DHR US	0.58
			Thermo Fisher Scientific TMO US	0.27
			IBB Biotech ETF IBB US	0.28
Real Estate	Cdn Apt. REIT CAR.un	2.94	Cdn. Apt. REIT CAR.un	2.94
	InterRent REIT IIP.un	2.18	InterRent REIT IIP.un	2.18
	Summit REIT SMU.un	5.45	Summit REIT SMU.un	5.45
European Equity	iShares MSCI Europe XEU	2.80	iShares MSCI Europe XEU	2.80

McMurtry Investment Report – Sector Weights (December 2018)

Equity Sector Weights (%)
Sector	My Weight	TSX Comp	S&P 500	55 % US /45% CDN
Financials	23.25	34.20	13.70	22.93
Energy	11.04	17.80	5.40	11.04
Materials	4.19	10.20	2.60	6.02
Industrials	9.99	10.70	9.40	9.99
Consumer Disc.	7.43	4.40	9.90	7.43
Comm. Services	8.10	5.90	9.90	8.10
Consumer Staples	5.78	3.80	7.40	5.78
Technology	14.23	4.10	19.90	12.79
Utilities	3.51	4.00	3.10	3.51
Real Estate	3.10	3.20	2.90	3.04
Healthcare	9.41	1.60	15.80	9.41
Totals	100.00	99.90	100.00	100.01

McMurtry Investment Report Asset Mix (December 2018)

Asset Mix – Income and Growth Portfolios
%	Income	Growth
Cash	42.50	37.50
Bonds	10.00	5.00
Preferreds	15.00	10.00
Equities	32.50	47.50
CDN	12.38	19.12
US	15.12	23.38
Europe	5.00	5.00
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
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
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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 & Model Portfolios

McMurtry Investment Report Portfolios – December 2018

Investment Commentary (December 2018)

McMurtry Investment Report – Portfolios (December 2018)

McMurtry Investment Report – Sector Weights (December 2018)

McMurtry Investment Report Asset Mix (December 2018)

Investment Commentary (April 2019)

Peter McMurtry, B.Com, CFA

MCMURTRY INVESTMENT REPORT

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