McMurtry Investment Report & Model Portfolios

McMurtry Investment Report Portfolios – January 2019

Also available in PDF: MIR Portfolios January 2019

Investment Commentary (January 2019)


Since year end equity markets have experienced a nice rebound. At year end the market was technically oversold as investors panicked in December over rising interest rates, ongoing trade wars and a possible global economic slowdown.

In January the Federal Reserve Chairman has appeared much less hawkish indicating that interest rates will rise more gradually than originally thought. The combination of stable inflationary expectations with improvement in employment productivity led to his more modest stance on rates.

Secondly it is looking more likely that some sort of trade deal will be done between the US and China. Trump’s popularity has been declining sharply and he needs some type of resolution on the trade front to improve his chances of being re-elected in two years.

Resulting from the market decline, S&P 500 PE multiples on 2019 EPS have come down sharply to 14.4 times, considerably lower than historical average of 16-17 times.

The 10 year US Treasury yields have also come down materially in the last thirty days. The yield curve continues to flatten, but remains positively sloped with 10 year rates still above 2 year ones.

US corporate bond spreads have increased from their recent lows but still remain far from levels experienced right before the last recession of 2007-2008.

US corporate profit growth rates are expected to come down to 10% year over year in 2019, compared to last year’s 20% plus.

Many US multinationals like Apple and Federal Express are experiencing headwinds from the ongoing trade war with China.

Global economies continue to struggle, especially the European Union and China. The latter is now expected to stimulate their weakening domestic economy to avoid a major economic collapse.

While the probability of a US recession within the next 2 years is in the range of 25-30%, the less hawkish Federal Reserve combined with a possible trade war compromise should delay a major economic slowdown for a few more years.

Taking all this into consideration, I am reducing my cash weight by 7.5% for both portfolios and redeploying the proceeds back into common equities.

I am maintaining my overweight in the Financials. However I am advising a switch from Goldman Sachs into Morgan Stanley for both portfolios. While Goldman is a very cheap stock, its ongoing issues in Malaysia may continue to haunt the shares. On the other hand Morgan Stanley does not have these issues and the company now derives almost half their earnings from wealth management, a more stable business than investment banking and trading.

I remain overweight the Technology sector and am adding Nokia to both portfolios. The stock offers an attractive dividend, is undergoing a major cost reduction initiative and will significantly benefit from the new 5G implementation over the next few years. The company is also expected to be a beneficiary of the global unpopularity of the Chinese company Huawei.

I remain overweight the REIT sector. It continues to perform well and a more gradual increase in interest rates also helps.

I continue to remain underweight the Materials sector, but am reducing my underweight.

Gold bullion should perform well when the US dollar begins to ease off globally making commodity prices stronger.

I am remaining market weight Healthcare, Communication Services, Energy, Utilities and Industrials.

In the Consumer Discretionary sector I am going from market weight to a slight underweight. I am deleting Magna International from both portfolios with a possible peaking in US domestic car sales.

I am increasing my weight to overweight from market weight for the Consumer Staples sector.

McMurtry Investment Report – Portfolios (January 2019)
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 4.04 TransCanada TRP.PR.B 4.04
Enbridge ENB.PR.Y 5.93 Enbridge ENB.PR.Y 5.93
Royal Bank RY.PR.J 4.12 Royal Bank RY.PR.J 4.12
Industrial Alliance IAF.PR.G 4.39 Industrial Alliance IAF.PR.G 4.39
Common Stocks Security Dividend Yield % Security Dividend Yield %
Financials Royal Bank     RY 4.06 Royal Bank     RY 4.06
Bank of Nova Scotia BNS 4.76 Bank of Nova Scotia 4.76
National Bank 4.37 National Bank 4.37
TD   TD 3.89 TD   TD 3.89
CIBC  CM 5.10 CIBC CM 5.10
Sun Life    SLF 4.25 Sun Life    SLF 4.25
JP Morgan    JPM  US 3.20 JP Morgan   JPM  US 3.20
Bank of America  BAC  US 2.31 Bank of America   BAC  US 2.31
Citibank  C  US 3.18 Citibank  C  US 3.18
Morgan Stanley MS US 2.87 Morgan Stanley MS US 2.87
T. Rowe Price  TROW US 3.10 T. Rowe Price  TROW US 3.10
Keycorp KEY US 4.26 Keycorp KEY US 4.26
Paychex PAYX US 3.33 Paychex PAYX US 3.33
PNC Fin’l PNC US 3.17 PNC Fin’l PNC US 3.17
Energy Suncor   SU 3.57 Suncor   SU 3.57
Freehold    FRU 7.39 Freehold   FRU 7.39
Torc  TOG 5.63 Torc  TOG 5.63
Pembina Pipe Lines PPL 5.21 Pembina Pipe Lines PPL 5.21
Enbridge ENB 6.43 Enbridge ENB 6.43
Trans Canada TRP 5.12 Trans Canada TRP 5.12
Parex Resources PXT 0.00
Materials Agnico Eagle   AEM 1.11 Agnico Eagle  AEM 1.11
Franco Nevada FNV 1.39 Franco Nevada  FNV 1.39
BMO Global Base Metal ETF ZMT 1.97 BMO Global Base Metal ETF ZMT 1.97
iShares Global Gold ETF XGD 0.22
Industrials Toromont TIH 1.63 Toromont TIH 1.63
WSP Global    WSP 2.42 WSP Global  WSP 2.42
Canadian Pacific  CP 1.04 Canadian Pacific  CP 1.04
CNR 1.72 CNR 1.72
Raytheon RTN US 2.18 Raytheon RTN US 2.18
Aecon Group ARE 2.80 Aecon  Group ARE 2.80
Guggenheim Eq WT IND  RGI US 1.41 Guggenheim Eq Wt IND RGI US 1.41
Honeywell HON US 2.39 Honeywell HON US 2.39
Finning FTT 3.19 Finning FTT 3.19
TFI Int’l TFII 2.55 TFI Int’l TFII 2.55
Consumer Discretionary Home Depot      HD  US 2.30 Home Depot      HD  US 2.30
Sleep Canada  ZZZ 3.53 Sleep Canada  ZZZ 3.53
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 1.97 Lowes LOW US 1.97
Communication Services Rogers B  RCI.B 2.65 Rogers B  RCI.B 2.65
Alphabet GOOGL US 0.00
Consumer Staples Alimentation Couche- Tard ATD.B 0.56 Alimentation Couche Tard  ATD.b 0.56
Loblaws L 1.85 Loblaws L 1.85
Constellation Brands STZ US 1.86 Constellation Brands STZ US 1.86
Unilever PLC  UL US 3.43 Unilever PLC UL US 3.43
Technology Apple   AAPL  US 1.92 Apple  AAPL US 1.92
Microsoft  MSFT US 1.69 Microsoft  MSFT US 1.69
Open Text OTEX 1.79 Open Text OTEX 1.79
Nokia NOK US ADR 3.70 Nokia NOK US ADR 3.70
Nvidia NVDA US 0.43
ETFMG Prime Cyber Sec. HACK US 0.18
Shopify SHOP 0.00
Visa V US 0.72
Utilities Algonquin Power AQN 5.08 Algonquin Power AQN 5.08
Fortis   FTS 3.96 Fortis   FTS 3.96
Healthcare Abbott Labs ABT US 1.85 Abbott Labs ABT US 1.85
Johnson & Johnson  JNJ  US 2.77 Johnson & Johnson  JNJ  US 2.77
Merck  MRK US 2.94 Merck  MRK US 2.94
US Healthcare iShares ETF IYH US 1.93 US Healthcare iShares ETF IYH US 1.93
United Healthcare UNH US 1.45 United Healthcare UNH US 1.45
Eli Lilly LLY US 1.94 Eli Lilly LLY US 1.94
CVS US 3.04 CVS US 3.04
Danaher DHR US 0.61
Thermo Fisher Scientific TMO US 0.28
IBB Biotech ETF    IBB  US 0.29
Real Estate Cdn Apt. REIT   CAR.un 2.97 Cdn. Apt. REIT  CAR.un 2.97
InterRent REIT   IIP.un 2.20 InterRent REIT IIP.un 2.20
Summit REIT SMU.un 5.21 Summit REIT SMU.un 5.21
European Equity iShares MSCI Europe XEU 3.27 iShares MSCI Europe XEU 3.27
McMurtry Investment Report – Sector Weights (January 2019)
Equity Sector Weights (%)
Sector My Weight TSX Comp S&P 500 55 % US /45% CDN
Financials 23.00 32.90 13.30 22.12
Energy 10.93 17.80 5.30 10.93
Materials 5.25 11.30 2.70 6.57
Industrials 9.92 10.80 9.20 9.92
Consumer Disc. 7.25 4.30 9.90 7.38
Comm. Services 8.26 6.00 10.10 8.26
Consumer Staples 6.00 4.00 7.40 5.87
Technology 13.30 4.00 20.10 12.86
Utilities 3.66 4.10 3.30 3.66
Real Estate 3.20 3.20 3.00 3.09
Healthcare 9.25 1.60 15.50 9.25
Totals 100.00 100.00 99.80 99.89
McMurtry Investment Report Asset Mix (January 2019)
Asset Mix – Income and Growth Portfolios
% Income  Growth
Cash 35.00 30.00
Bonds 10.00 5.00
Preferreds 15.00 10.00
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


Please see our disclaimer at Copyright ©2019 McMurtry Investment Report™. All rights reserved.

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

Please see our disclaimer at disclaimer ©2019 McMurtry Investment Report™. All rights reserved.