McMurtry Investment Report and Model Portfolios™

McMurtry Investment Report Portfolios February 2023

Also available in PDF: McMurtry Investment Report Portfolio – December 2022
Investment Commentary February 2023

There has recently been a major technical chartist price reversal in the Standard and Poors 500 Index. The price has broken through both its 50- and 200-day moving averages on the upside and this is considered significant amongst technicians. While I am not a chartist and rely on both fundamental and economic data for my recommendations, I still look at these trends with interest.


In addition, the Stock Trader’s Almanac has a long -held belief that “As January goes, so goes the full year”. As we all know, January was a strong month for the equity markets this year.


The US consensus earnings estimate provider, Zacks, recently wrote an interesting article on the earnings estimate downgrades for 2023. As many of the investment gurus have pointed out, corporate earnings estimates were too high and had to come down to more realistic levels. Zacks has indicated that the overall S&P 500 index earnings estimates are distorted as a result of high energy earnings estimates. According to Zacks, if you ex out the energy sector, the consensus estimates for the rest of the market have already come down by over 10%. While this is just Zacks’ opinion, they are obviously more in the know than some of the analysts with their only business being providing consensus earnings estimates. Factset, another US investment research outfit, says that analysts’ earnings projections for the 1st and 2nd quarter of this year call for a year over year decline of 4.2% and 2.9% respectively for the two first quarters, followed by increases of 3.4% and 10.5% year over year for the 3rd and 4th quarters. While all of this is a little confusing, it does imply that corporate profit growth is definitely on a downtrend this year, but not to the levels that many bear strategists have predicted.

US Yield Curve

The inversion of the 10-2-year US Treasury yield curve has increased marginally to a negative 77 basis points on February 3, 2023 from a negative 69 basis points on January 6th of this year.

US Corporate Debt Spreads

Corporate debt spreads have declined by 21 basis points to 1.88% as of February 3rd, 2023. These spreads are much lower than the 4.3% in 2020 or the 6% plus level in the recession of 2008. This narrowing indicates the strength of the domestic US economy.

Covid – 19 Health Stats

Corporate debt spreads have declined by 21 basis points to 1.88% as of February 3rd, 2023. These spreads are much lower than the 4.3% in 2020 or the 6% plus level in the recession of 2008. This narrowing indicates the strength of the domestic US economy.

Equity Market Valuations

The strong rebound in equity prices recently has led to the Forward PE multiple of the S&P 500 index to rise back up to the February 3rd’s level of 18.2 times from last month’s 17 times.

Central Bank Monetary Policy

Both Chairman Powell and his Vice Chairman have toned down their hawkish rhetoric. This was principally a result of the clear downtrend in the growth rates of both CPI and PPI over the last several months. In addition, the same decline in the growth rate is evident in the average hourly earnings of US workers. This is a significant change in their language from previous meetings and does clearly show that their policies are data dependent and can change if the evidence becomes apparent.

Asset Mix

Based on my expectation of a peaking in inflation, interest rates and the US dollar globally over the next several months, I am reducing the cash weight for both portfolios by an additional 3% to 21% for both portfolios. The extra 3% is to go directly back into more equities for both the Income and Growth portfolios respectively. After these changes my equity weight goes to 46% and 56% for the Income and Growth portfolios respectively. Please note that I am adding back a Chinese equity ETF, iShares MSCI China, MCHI- US to both portfolios in the Emerging Market equity section. While I am not increasing the Emerging Market weight at this time, I am spreading out the weight amongst both non- Chinese and Chinese Emerging Markets ETF’s. The reopening of the Chinese economy is the main rational for this change.


Last year equity markets were afraid of rising inflation and interest rates. As a result of declining growth rates in inflation over the last several months, equity markets have rebounded sharply with the possibility of interest rates peaking. >

Topping it off this week was a significantly higher than consensus January non farm employment number in the US. This number was accompanied by a continuation of the slower growth rates in average hourly earnings. Does this now indicate the possibility of a US recession sometime this year is diminishing with the strong employment growth?

Equity Sector Weights

Based on my expectation for declining inflation, a peaking of interest rates and the US dollar globally combined with a much lower probability of a hard landing, I am making several changes to my equity sector weights. As you can see, I am taking a more risk on approach to the equity sectors by reducing the exposure in the defensive sectors such as Staples, Utilities and Healthcare. At the same time, I am increasing my weight in the more cyclical sectors like Consumer Cyclicals, Industrials and Reits. I am leaving a small underweight in both the Financials, Technology and Communications sectors at this time.


In the healthcare sector, I am reducing my overweight position back to market weight.


In the Utilities sector I am also reducing my overweight back to market weight.


In the Industrials sector, I am increasing my exposure from underweight back to market weight.


In the Consumer Discretionary sector, I am also increasing my exposure from underweight to market weight.


In the Reit sector, I am increasing my exposure from market weight to overweight.


I am leaving the Financials sector as a modest underweight.


I am leaving the Materials sector at market weight.


I am leaving my overweight in Energy.


I am reducing my Consumer Staples weight back to market weight from overweight.


Lastly, I am leaving both my Technology and Communications weight at a small underweight.

Individual Equity Changes

In a blog dated February 2nd, I added the US home furnishings company, Williams- Sonoma, WSM-US, to both portfolios in the Consumer Discretionary Sector. The company operates both bricks and mortar and online stores and offers both high end cooking essentials and casual home accessories through its ownership in Pottery Barn. The shares are trading at a reasonable valuation on an Enterprise Value to forward EBITDA basis of 6.23 times and offers solid growth prospects. In addition, the company has a very healthy balance sheet with no long- term debt and has a dividend yield of 2.22% with a low cash flow payout.


In a portfolio blog date February 2nd, I replaced Ford with General Motors for both portfolios. Ford is having some unique company specific operating difficulties that are not affecting its competitors to the same extent. Its recent quarter saw a negative earnings surprise of 15% while GM showed a positive earnings surprise over consensus of 25.7%. In addition, GM has recently secured a long -term supply of lithium through its $650 million investment in Lithium Americas. GM offers a dividend yield of 0.88%.


In a blog dated January 29th, I added the US IT consulting company, Perficient, PRFT – US, to the Growth portfolio in the Technology sector. The company provides IT consulting, data analytics, system integration and enterprise content management. Differing from CGI, Perficient deals principally with non government public and private companies. The shares are trading at a reasonable valuation. The company is involved in the healthcare, financial services, automotive, leisure and manufacturing industries. The company is exhibiting strong growth in revenues, EBITDA and EPS. As the shares do not pay a dividend, I am only adding the name to the Growth portfolio.


In a portfolio blog dated January 20th, I added Tamarack Valley to both portfolios in the Energy sector. The company is principally a heavy oil producer that will stand to benefit when the differential between the Canadian and US oil prices narrows from current levels. The shares are trading at a very cheap 2.6 times Enterprise Value to Forward EBITDA basis and offers a dividend yield of 3.28%.


In a portfolio blog dated January 11th, I added Hudbay Minerals to the Growth portfolio in the Materials sector. The shares are currently trading at a very reasonable 3.1 times Enterprise Value to forward EBITDA. The company is a major producer of copper and stands to benefit from money flowing out of First Quantum into companies like Hudbay. First Quantum is also a major copper producer but is currently experiencing a very serious issue with the government of Panama where their major mine is located. The government of Panama is demanding materially higher royalty and tax payments from First Quantum that may call into question the long- term economic viability of the mine.

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