McMurtry Investment Report Portfolios – February 2021

Also available in PDF: MIR Portfollios February 2021

Investment Commentary February 2021

US Yield Curve

The ten minus two- year US Treasury yield curve has jumped to 1.10% as of February 5, 2021 from 0.68% in November. This is positive for the economy. In particular the ten- year US treasury yield has risen to 1.19 %.

US Corporate Debt Spreads

As of February 4^th, Aaa rated US corporate bond spreads relative to 10 year US Treasuries backed up to 1.46%, from the December 28^th level of 1.31%. The Baa rated US corporate bond yield spreads are approximately what they were at year end while High Yield spreads continue to remain at low levels at 300 basis points. Once again this is positive for the US economy and indicates that the probability of the US dipping into another recession at this point is low.

US / China Trade Issues

Joe Biden and the Democrats are expected to be more conciliatory with China, although it is too early to tell at this point.

Covid – 19 Health Stats

The number of new cases in the US is starting to see a decline from the high levels over the last several months. In addition, the number of people being vaccinated is considerably higher than the number of new daily cases. As a result of no current drug vaccine manufacturing being available domestically, Canada’s percentage of people being vaccinated remains very low. But this is about to change over the next few months with several agreements with the major drug companies including Pfizer and Moderna promising a material increase in vaccine shipments.

Equity Market Valuations

Historically both the S&P 500 Forward and Trailing PE multiples are at high levels. However, when you take the current low level of interest rates, equity market valuations seem more reasonable.

US Domestic Economic Growth

The US economy is slowing down as evidenced by the recent weak payroll employment number. However, the improving trend on the vaccine front combined with more fiscal stimulus on the way bode well for the economy in the second half of this year.

Central Bank Monetary Policy

Global central bank policies continue to be very accommodating. Some investment pundits are concerned about the possibility of much higher interest rates this year and next to combat an increase in the rate of inflation. However, Jerome Powell, the Chairman of the Federal Reserve has stated on several occasions that the central bank is prepared for somewhat higher inflation before they are likely to even consider raising rates materially.

Asset Mix

I am maintaining the same asset mix as last month for both portfolios.

Equity Sector Weights

I am not making any change from last month in relation to the benchmark weights. I remain overweight Financials, Energy, Materials, Industrials, Consumer Discretionary, Utilities and Real Estate. I remain underweight Communications, and Consumer Staples. Lastly, I remain market weight both Technology and Healthcare.

Individual Equity Changes

In a portfolio blog dated January 21^st, I added Cascades to both portfolios in the Materials sector. The company is a major producer of containerboard and packaging products in Canada, the US and Europe. The company is a strong generator of free cash flow and offers a dividend yield of 1.99% that is well covered by cash flow.

In a portfolio blog dated January 15^th, I removed Northland Power from both portfolios as a result of its high valuation and mediocre growth prospects over the next few years relative to its peers. However, I still like the company and would consider adding it back to the portfolios should its expected earnings growth rate start to accelerate once again.

In a portfolio blog dated January 19^th, I deleted Alimentation Couche-Tard from both portfolios. The company has a history of making accretive acquisitions, but is having difficulty finding acquisition candidates that will be as beneficial to their bottom line. Consequently, its growth prospects are decreasing. Its latest failed takeover of a French grocery store company with some convenience stores was fortunately rejected by the French government. Furthermore, the grocery business is totally different than its core convenience store business and has much lower operating margins.

I am adding two new companies to both portfolios in the Materials sector- namely Nurtien and Linde PLC.

Linde, an Irish company merged with the US company, Praxair several years ago. The combined company is the largest industrial gas supplier globally where it competes directly against Air Products. The industry is dominated by only 4-5 companies. Its recent 4^th quarter sales climbed 30% year over year while its operating profit and adjusted earnings per share rising by 20% and 22% respectively. Its operating cash flow also rose by 12% over the same period. For the full year operating profit and adjusted earnings per share rose by 10% and 12% respectively. Operating cash flow for the full year rose by 21%. The company expects adjusted earnings per share to grow by 11-13% this year. Differing from Air Products, Linde has consistently beaten their quarterly earnings per share consensus estimates for the last eight quarters. Air Products record was more volatile and inconsistent in this regard. At current prices after its recent price runup last Friday, both companies trade at approximately the same valuation on 2021 earnings per share. Both companies have comparable growth prospects in earnings per share. Linde offers a dividend yield of 1.65% that is well covered by cash flow. The overall industrial gas industry is expected to show solid growth this year and next with both companies benefitting from this recovery.

I am also adding the Canadian fertilizer company, Nutrien to both portfolios. The company is the largest potash producer globally and also produces nitrogen and phosphate. As a result of its size and access to low -cost natural gas feedstock, the company has one of the lowest costs in the industry in regards to both potash and nitrogen. On the other hand, it is a relatively higher cost producer of phosphate -based fertilizer. Nutrien offers investors an opportunity to participate in rising fertilizer demand from higher global crop prices. The company also has a very large retail distribution channel where it sells all types of fertilizer products directly to farmers at over 2,000 retail locations throughout North and South America and Australia. The company has a strong balance sheet with a debt/equity ratio of 0.53. Revenues, cash flow and earnings per share are expected to see solid growth in 2021. While the company’s share price is not cheap, its industry leading cost advantage in potash and its growing retail distribution network make the company an attractive purchase. The company pays a dividend of 3.34% that is well covered by cash flow.

Peter McMurtry, B.Com, CFA
Financial Writer
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https://mcmurtryinvestmentreport.ca

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.

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 – February 2021

Investment Commentary February 2021

Investment Commentary (April 2019)

Peter McMurtry, B.Com, CFA

MCMURTRY INVESTMENT REPORT

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