McMurtry Investment Report & Model Portfolios

McMurtry Investment Report Portfolios December 2022

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

Investment Commentary December 2022
US Yield Curve
The inversion of the 10-2-year US Treasury yield curve is increasing from the negative 41 basis points on October 31 to the negative 77 basis points as of December 2nd. This implies that the probability of a recession in 2023 is increasing.

US Corporate Debt Spreads
Corporate debt spreads continue to widen to the December 1 level of 2.30%. However, these spreads are much lower than the 4.3% in 2020 or the 6% plus level in the recession of 2008. This may indicate the severity of the upcoming recession may be milder than in 2008.

Covid – 19 Health Stats
Covid cases and lockdowns continue to escalate in China. Major Chinese cities are almost totally locked down. It is quite obvious to me that the Communist government has been hiding a lot of the negative stats on Covid for the last several years in order to save face. Now that it has gotten totally out of hand, they have no choice but to respond. There have been several large protests in China with citizens justifiably wondering why the lockdowns continue with the rest of the world ending most lockdowns. It is quite obvious to me that the Communist Party incorrectly opted for a locally made vaccination rather than relying on either Pfizer’s or Moderna’s more proven vaccinations. All of this has led to a sharp growth slowdown in China affecting the demand for many commodities and ultimately reducing the level of global economic growth. No one knows for sure how long these lockdowns will continue, but should China opt to change vaccination suppliers to either Pfizer or Moderna, the situation will immediately improve.

Equity Market Valuations
The forward PE of the S& P 500 has risen from 16 times last month to 17.7 times as of December 2nd. This is totally a result of equity prices rebounding with earnings projections continuing to decline.
Central Bank Monetary Policy
Chairman Powell recently indicated that the rate of future interest rate increases will most likely be lower than was the case for this year. However, he did not imply that rates will back off materially anytime soon.
Asset Mix
I am reducing cash by 10% for both portfolios with the proceeds being redirected into 5% more equities and 7% into domestic investment grade corporate bonds with a maturity up to three years. 2% is being added back to cash with the sale of the position in floating rate bonds.
Short term ( 1-3 year) Investment grade corporate bonds are yielding anywhere from 4-5% depending on the maturity and the credit. This is the best yields offered in some time from this asset class and warrants an increase in weight. I am still recommending a 1-5 year Government of Canada bond ladder, but have replaced the 1-5 year corporate bond ladder with the 1-3 year investment grade bonds.
I am not increasing the GIC weight beyond last month’s 5% for either portfolio and continue to only advise a one- year term.
The potential peaking in inflation and interest rates is also helping the equity market. At 40% and 50% for the Income and Growth portfolios, my position on equities is becoming more favourable, but is still neutral overall. Normally in a bull market my percentage of equities would be much higher.

Equity Sector Weights
I remain overweight my North American benchmark Energy, Healthcare, Consumer Staples and Utilities.
I remain underweight Technology, Financials, Industrials and Consumer Discretionary.
I remain market weight Reits and Communications.
My major change this month is to go from an underweight position in Materials to market weight. The main reason for this change is that US interest rates and inflation may be peaking shortly. This will eventually lead to a peaking in the US dollar globally as well. Lower interest rates and a falling US dollar are both good for commodity prices, especially base metals and gold. In addition, the recent collapse in a bitcoin exchange has caused a major decline in cryptocurrency investments. Bitcoin had been viewed by many investors as an alternative to gold and now this group may go back into gold investments instead.

Individual Equity Changes
In a recent blog dated November 30th, I added the US global provider of data centers, Equinix, EQIX US to both portfolios in the Reit sector. Currently the company has 240 data centers in 66 markets worldwide and is planning on more next year. The current dividend of 1.79% is well covered with a funds from operations payout ratio of 45%. While the stock is not cheap at 24 times trailing 12- month funds from operations, it is reasonable taking into account the growth projections. The 3rd quarter saw revenues, gross profit and funds from operations grow year over year by 10%, 15% and 20% respectively. Equinix’s financial position is enhanced by its 8.6 year average term on its debt and its blended borrowing rate of 1.96%.
In a portfolio blog dated November 11th, I recommended that investors sell half their positions in Algonquin Power from both portfolios in the Utilities sector and to invest the proceeds into Capital
Power. Algonquin has exhibited very poor financial performance recently and its financial debt as a percentage of trailing twelve- month EBITDA is at a very high 9.6 times. As a result of their consistent earnings and cash flows, many utilities can have much more debt than other companies in different industries normally have. However, in the case of Algonquin, this was not the case with their earnings and cash flows not being able to keep up with their debt obligations. At this point I recommend that you totally exit your position and redeploy your funds into other domestic utilities like Capital Power, Boralex, Northland Power, Brookfield Renewable, Brookfield Infrastructure and Fortis.
In a portfolio blog dated November 11th, I added Capital Power to both portfolios in the Utilities sector. Capital Power offers a solid dividend of 4.94% with a reasonable cash flow payout of 74%. The company has a strong balance sheet with financial debt representing 3.442 times trailing twelve- month EBITDA, much lower than Algonquin’s 9.6 times.
On November 7th there was an offer to purchase Summit Industrial Reit by the Singapore Wealth Fund and by Dream Industrial Reit at a price of $23.50 per share. I am leaving Summit on the list as the offer is 5% higher than the current share price.

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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
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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

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