Also available in PDF: MIR Portfolios January 2021
Investment Commentary January 2021
US Yield Curve
The ten minus two- year US Treasury yield curve has jumped to 0.99% as of January 8, 2021 from 0.68% in November. This is positive for the economy. In particular the ten- year US treasury yield has risen to 1.13%.
US Corporate Debt Spreads
As of January 7th of this year both the Aaa and the Baa rated US corporate bond yield spreads over ten year US Treasuries remain at low levels despite rising back marginally in January from year end. 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
Both the number of daily cases and deaths in addition to hospitalizations is sharply increasing in the US and globally. This is anticipated until the positive effects from the distribution of the vaccines are widely completed by the second half of this year.
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 recent rebound in economic growth from the lows recorded during the height of the lockdowns is most definitely now levelling out as evidenced by the weaker than expected US December employment numbers. This is principally a result of the recent spike of new daily cases of the virus both in the US and globally.
US Election Results in Georgia
The Democrats swept both seats in the recent runoff Senate election in Georgia. Consequently, Kamala Harris is now the effective Head of the Senate as the VP – elect and the Democrats will control the Senate as well as the House of Representatives. This is of major significance in terms of the proposed Democratic policies more likely to be passed. We can expect to see a new stimulus package passed shortly once Joe Biden becomes President on January 20th.
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
This month I am making two changes to my asset mix percentages. I am reducing cash levels by 6% with a 3% increase in both US High Yield Fixed Income and a 3% increase in equities. I am adding a new fixed income ETF, iShares CHB US High Yield Canadian dollar hedged. This ETF is similar to the iShares XHY US High Yield, but it offers a higher average yield to maturity of 4.83% compared to XHY’s 4.52%. It also trades in Canada.
Equity Sector Weights
Equity markets are in the middle of an equity sector rotation out of defensive and growth stocks into more cyclical ones. This makes sense with the economy rebounding and with positive news on the vaccine front.
In this context, I am increasing both the Materials and Energy sectors to overweight my benchmark 50% Canada 50% US North American benchmark weight. Last month both sectors were market weight. OPEC has recently agreed to cut production to ensure a favourable global supply / demand balance for crude oil. Base metal, precious metals and industrial gas commodity prices are in an uptrend predicated on an economic global rebound commencing in the second half of this year.
After these changes my model portfolios will be overweight the cyclical sectors – namely Financials, Energy, Materials, Industrials and Consumer Discretionary. In addition as I have summarized in my newsletter, I am overweight the REIT sector as it has become much more cyclical in this current economy.
I am increasing my underweight in the Communications sector. The Democrats are quite likely to impose more regulation on the social media companies in particular. However, I would still like to point out that I am not negative on the telecom stocks at this time. It is unfortunate that they are part of the same sector that includes the social media stocks.
I am maintaining my overweight position in Utilities as it is in a secular long- term uptrend from the growth in renewable energy. The election of the Democrats will accelerate this trend. Some of you may question being overweight both Energy and Utilities. The answer lies in the fact that Energy is in a cyclical rebound while Utilities are in a long- term secular uptrend.
Individual Equity Changes
In a portfolio blog dated December 17th, I added General Motors to the Growth Portfolio in the Consumer Discretionary sector. The company is benefitting from a cyclical global pickup in auto demand in addition to the long- term trend of the electrification of cars and trucks. I am also adding Magna International to both portfolios. Despite its recent share price runup, it is still trading at a reasonable Enterprise Value to Forward EBITDA of 6.6 times. The company is benefitting from strong current auto demand and from both the electrification of automobiles and the eventual trend towards autonomous driving. Its recent alliance with Fisker will help both companies’ development of this advanced driver assistance technology. Both Magna’s earnings per share and EBITDA are expected to grow nicely over the next several years.
In the Energy sector I am adding Meg Energy to the Growth Portfolio. The stock currently offers a free cash flow yield of over 15%. However, it does not pay a dividend. While its balance sheet is not as healthy as some of its peers, its debt / equity ratio has declined from 1.5 times in December 2016 to the current level of 0.87 times. This company is a strong generator of both operating and EBITDA. The company has very high price leverage to rising crude prices and continues to focus on lowering its unit costs. This is a speculative play on rising crude prices. Its valuation is also not the cheapest at 8.2 times Enterprise Value / Forward EBITDA, but its EBITDA growth prospects over the next few years in a rising crude pricing environment are quite favourable.
In the Industrials sector, I am making a switch in both portfolios out of 3M into CSX, the US rail company. The recent Democratic victory in both the Senate and the House of Representatives ensures that more regulation in regards to environmental clean up is likely. 3M faces the possibility of a major environmental fine and lawsuits from several of its products. On the other hand, CSX is benefitting from the recent pickup in railcar loadings and the expectation of an economic rebound this year. I am adding CSX to both portfolios with its dividend yield of 1.1% that is well covered by cash flow. Both its earnings per share and EBITDA are expected to grow nicely over the next few years.
I am also adding Finning International to both portfolios in the Industrials sector. The company offers an attractive dividend of 2.78% with a relatively low payout ratio. The company is the western Canada distributor and service provider of Caterpillar products as well as being a distributor in South America as well. In the UK the company is involved with high -speed rail opportunities. A global economic rebound benefitting both energy and base metal and other commodity prices will help the company grow both its earnings per share and EBITDA over the next few years.
In the Financial sector I am adding Citigroup to both portfolios. The stock offers a dividend yield of over 3% with a reasonable PE multiple on forward earnings of 10.95 times. This US bank has much more exposure to Emerging Markets than either JPMorgan or Bank of America. The improvement expected in the global economy will also benefit Emerging Markets and Citibank will benefit from this as well.
In the Healthcare sector I am removing United Healthcare from both portfolios. The company has greatly benefitted over the last several years from Trump’s attempts to decimate Obamacare. The recent election of the Democrats will most likely put pressure on this company’s profitability as one of the largest US private medical insurance providers.
Also, in the Healthcare sector, I am adding Curaleaf, the world’s largest producer of cannabis measured by revenues after its recent acquisition of Grassroots to my Growth portfolio. While the company does not pay a dividend, it is showing a sharp increase in its EBITDA. For the last quarter ending September 30th, the company registered EBITDA of $170.59 million for the trailing twelve- month period compared to only $7.86 million previously. The company is expected to see strong growth of EBITDA continuing this year and next. It has a low debt / equity ratio of 0.2 times with its Financial Debt to trailing twelve- month EBITDA at only 1.68 times. The company is a US company but its main trading platform is in Canada in the Canadian Securities Exchange. Its symbol in Canada is CURA.CX. Once again the recent election of the Democrats will help to speed up the legalization of cannabis throughout the US with individual states wanting to participate in the increase in revenues projected from taxes.
In the Materials sector, I am adding Hudbay Minerals to the Growth portfolio. The company is a Canadian mining company that produces copper, gold, silver and zinc. Its mines are located in both North and South America. The company is currently trading at a reasonable Enterprise Value to Forward EBITDA ratio of 5.31 times. Its projected growth in EBITDA over the next several years is in the range of 118%.
Peter McMurtry, B.Com, CFA
Financial Writer
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| McMurtry Investment Report – Portfolios (January 2021) | ||||
| Income | Growth | |||
| Cash | Alterna Bank – High Interest Savings (1.20% current ) | Alterna Bank – High Interest Savings (1.20% current) | ||
| EQ Bank – Savings Plus ( 1.50% current) | EQ Bank – Savings Plus ( 1.50% current) | |||
| 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 | iShares XHY.TO US High Yield Cdn $ | iShares XHY.TO US High Yield Cdn $ | ||
| iShares CHB.TO US High Yield Cdn $ | iShares CHB.TO US High Yield Cdn. $ | |||
| Common Stocks | Security | Dividend Yield % | Security | Dividend Yield % |
| Financials | Royal Bank RY | 4.00 | Royal Bank RY | 4.00 |
| Intact Financial IFC | 2.29 | Intact Financial IFC | 2.29 | |
| Bank of Nova Scotia BNS | 5.22 | Bank of Nova Scotia BNS | 5.22 | |
| Brookfield Asset MGT. BAM.A | 1.24 | Brookfield Asset MGT. BAM.A | 1.24 | |
| TD TD | 4.27 | TD TD | 4.27 | |
| Citigroup C US | 3.09 | Citigroup C US | 3.09 | |
| Fiserv FISV US | 0.00 | |||
| Sun Life SLF | 3.62 | Sun Life SLF | 3.62 | |
| JP Morgan JPM US | 2.65 | JP Morgan JPM US | 2.65 | |
| Manulife Fin’l MFC | 4.67 | Manulife Fin’l MFC | 4.67 | |
| Bank of America BAC US | 2.19 | Bank of America BAC US | 2.19 | |
| Morgan Stanley MS US | 1.87 | Morgan Stanley MS US | 1.87 | |
| T. Rowe Price TROW US | 2.33 | T. Rowe Price TROW US | 2.33 | |
| Allstate ALL US | 1.96 | Allstate ALL US | 1.96 | |
| Energy | Suncor SU | 3.53 | Suncor SU | 3.53 |
| Canadian Natural Resources CNQ | 4.94 | Canadian Natural Resources CNQ | 4.94 | |
| Freehold FRU | 4.31 | Freehold FRU | 4.31 | |
| Enbridge ENB | 7.81 | Enbridge ENB | 7.81 | |
| TC Energy TRP | 5.96 | TC Energy TRP | 5.96 | |
| Whitecap Resources WCP | 3.31 | Whitecap Resources WXP | 3.31 | |
| Meg Energy MEG | 0.00 | |||
| Parex Resources PXT | 0.00 | |||
| Materials | Agnico Eagle AEM | 1.85 | Agnico Eagle AEM | 1.85 |
| Air Products APD US | 1.88 | Air Products APD US | 1.88 | |
| Pan American Silver PAAS | 0.75 | Pan American Silver PAAS | 0.75 | |
| Capstone Mining CS | 0.00 | |||
| Barrick Gold ABX | 1.46 | Barrick Gold ABX | 1.46 | |
| Franco Nevada FNV | 0.80 | Franco Nevada FNV | 0.80 | |
| VanEck Vectors Gold ETF GDX US | 0.52 | VanEck Vectors Gold ETF GDX US | 0.52 | |
| BMO Global Base Metals ETF ZMT | 1.89 | BMO Global Base Metals ETF ZMT | 1.89 | |
| Osisko Metals OM.V | 0.00 | |||
| Hudbay Minerals HBM | 0.21 | |||
| Industrials | Toromont TIH | 1.42 | Toromont TIH | 1.42 |
| Finning Int’l FTT | 2.78 | Finning Int’l FTT | 2.78 | |
| CSX US | 1.11 | CSX US | 1.11 | |
| WSP Global WSP | 1.22 | WSP Global WSP | 1.22 | |
| CNR | 1.60 | CNR | 1.60 | |
| Canadian Pacific CP | 0.81 | Canadian Pacific CP | 0.81 | |
| Raytheon Technologies RTX US | 2.72 | Raytheon Technologies RTX US | 2.72 | |
| Stantec STN | 1.46 | Stantec STN | 1.46 | |
| Aecon Group ARE | 3.86 | Aecon Group ARE | 3.86 | |
| Honeywell HON US | 1.75 | Honeywell HON US | 1.75 | |
| TFI Int’l TFII | 1.71 | TFI Int’l TFII | 1.71 | |
| Consumer Discretionary | Home Depot HD US | 2.25 | Home Depot HD US | 2.25 |
| Martinrea International MRE | 1.27 | Martinrea International MRE | 1.27 | |
| Gentex GNTX US | 1.31 | Gentex GNTX US | 1.31 | |
| Target TGT US | 1.42 | Target TGT US | 1.42 | |
| Dollarama DOL | 0.35 | Dollarama DOL | 0.35 | |
| Magna Int’l MG | 2.18 | Magna Int’l MG | 2.18 | |
| General Motors GM US | 0.00 | |||
| Amazon AMZN US | 0.00 | |||
| Lowes LOW US | 1.47 | Lowes LOW US | 1.47 | |
| Communication Services | Rogers B RCI.B | 3.31 | Rogers B RCI.B | 3.31 |
| Activision Blizzard ATVI US | 0.46 | Activision Blizzard ATVI US | 0.46 | |
| Comcast CMCSA US | 1.82 | Comcast CMCSA US | 1.82 | |
| Telus T | 4.73 | Telus T | 4.73 | |
| Shaw Commications SJR.B | 5.25 | Shaw Communications SJR.B | 5.25 | |
| Facebook FB US | 0.00 | |||
| Alphabet GOOGL US | 0.00 | |||
| Consumer Staples | Alimentation Couche- Tard ATD.B | 0.82 | Alimentation Couche Tard ATD.b | 0.82 |
| Loblaws L | 2.08 | Loblaws L | 2.08 | |
| Sysco SYY US | 2.38 | Sysco SYY US | 2.38 | |
| General Mills GIS US | 3.52 | General Mills GIS US | 3.52 | |
| Unilever PLC UL US | 3.24 | Unilever PLC UL US | 3.24 | |
| Technology | Apple AAPL US | 0.63 | Apple AAPL US | 0.63 |
| Microsoft MSFT US | 1.03 | Microsoft MSFT US | 1.03 | |
| Open Text OTEX | 1.82 | Open Text OTEX | 1.82 | |
| Paychex PAYX US | 2.71 | Paychex PAYX US | 2.71 | |
| Qualcomm QCOM US | 1.67 | Qualcomm QCOM US | 1.67 | |
| SPDR S&P Semi ETF XSD US | 0.24 | |||
| CGI Inc. GIB.A | 0.00 | |||
| ETFMG Prime Cyber Sec. HACK US | 1.09 | |||
| Visa V US | 0.60 | |||
| Keysight KEYS US | 0.00 | |||
| Utilities | Algonquin Power AQN | 3.71 | Algonquin Power AQN | 3.71 |
| Capital Power CPX | 5.73 | Capital Power CPX | 5.73 | |
| Northland Power NPI | 2.49 | Northland Power NPI | 2.49 | |
| NextEra Energy NEE US | 1.77 | NextEra Energy NEE US | 1.77 | |
| Fortis FTS | 3.96 | Fortis FTS | 3.96 | |
| Healthcare | AbbVie ABBV US | 4.87 | AbbVie ABBV US | 4.87 |
| Merck MRK US | 3.09 | Merck MRK US | 3.09 | |
| CVS Healthcare CVS US | 2.68 | CVS Healthcare CVS US | 2.68 | |
| Bristol Myers BMY US | 3.14 | Bristol Myers BMY US | 3.14 | |
| Curaleaf Holdings CURA.CX | 0.00 | |||
| Danaher DHR US | 0.30 | |||
| Thermo Fisher Scientific TMO US | 0.18 | |||
| Perkin Elmer PKI US | 0.17 | |||
| Real Estate | Cdn Apt. REIT CAR.un | 2.77 | Cdn. Apt. REIT CAR.un | 2.77 |
| CT Reit CRT.un | 5.11 | CT Reit CRT.un | 5.11 | |
| Minto Apartment Reit MI.un | 2.31 | Minto Apartment Reit MI.un | 2.31 | |
| Dream Industrial DIR.un | 5.43 | Dream Industrial DIR.un | 5.43 | |
| Granite REIT GRT.un | 3.87 | Granite REIT GRT.un | 3.87 | |
| Summit Industrial REIT SMU.un | 4.07 | Summit Industrial REIT SMU.un | 4.07 | |
| European Equity | iShares MSCI Europe XEU | 1.90 | iShares MSCI Europe XEU | 1.90 |
| Emerging Markets | BMO Emerging Markets ZEM | 3.23 | BMO Emerging Markets ZEM | 3.23 |
| McMurtry Investment Report – Sector Weights (January 2021) | ||||
| Equity Sector Weights (%) | ||||
| Sector | My Weight | TSX Comp | S&P 500 | 50% US /50% CDN |
| Financials | 21.00 | 30.20 | 10.40 | 20.30 |
| Energy | 7.00 | 11.20 | 2.30 | 6.75 |
| Materials | 8.45 | 13.70 | 2.60 | 8.15 |
| Industrials | 11.00 | 12.50 | 8.40 | 10.45 |
| Consumer Disc. | 9.30 | 3.90 | 12.70 | 8.30 |
| Comm. Services | 5.35 | 4.90 | 10.80 | 7.85 |
| Consumer Staples | 4.25 | 3.80 | 6.50 | 5.15 |
| Technology | 18.95 | 10.30 | 27.60 | 18.95 |
| Utilities | 4.25 | 5.10 | 2.80 | 3.95 |
| Real Estate | 3.15 | 3.10 | 2.40 | 2.75 |
| Healthcare | 7.30 | 1.10 | 13.50 | 7.30 |
| Totals | 100.00 | 99.80 | 100.00 | 99.90 |
| McMurtry Invest. Report Asset Mix January 2021) | ||
| Asset Mix – Income and Growth Portfolios | ||
| % | Income | Growth |
| Cash | 14.00 | 14.00 |
| Bonds – Reg. Bonds | 20.00 | 10.00 |
| Bonds – High Yield | 8.00 | 8.00 |
| Bonds – Tips | 0.00 | 0.00 |
| Preferreds | 0.00 | 0.00 |
| Equities | 58.00 | 68.00 |
| CDN | 26.00 | 31.00 |
| US | 26.00 | 31.00 |
| Europe | 3.00 | 3.00 |
| Emerging Markets | 3.00 | 3.00 |