McMurtry Investment Report Portfolios – July 2019

Also available in PDF: MIR Portfolios July 2019

Investment Commentary July 2019

Asset Mix Changes

I am not making any asset mix changes at this time. There remains enough political and economic uncertainty to maintain a high cash surplus. While Trump has temporarily backed off increasing the amount of Chinese goods subject to tariffs, nothing has yet been resolved. In addition, he is now considering increasing car import tariffs on European producers.

US corporate earnings growth rates continue to ratchet down to 3-4% from double digits last year. Market valuations on 2019 earnings are at 17 times, not cheap by historical measures and up considerably from the low last December of under 14 times.

Global economic growth remains challenged with both Germany and Japan having negative interest rates. US manufacturing ISM numbers fell for the third straight month to the lowest level since September 2016.

Inflationary expectations continue to remain historically low causing a great deal of uncertainty at the Federal Reserve Bank.

Given the weak global economic outlook combined with the ongoing trade war between the US and China, the probability of several interest rate cuts in the US this year has gone up dramatically.

Probability of an Impending US Recession

The yield cure in the US remains either inverted or at very flat levels depending on the maturities reviewed. As I mentioned previously, this does not automatically indicate that a recession is imminent.

Us Corporate spreads over Treasuries remain relatively low implying that the threat of an impending recession is low at this time.

Slow global economic growth, especially in industrial production, does not mean that we are heading into a recession. The US consumer remains healthy with low unemployment and plenty of job opportunities available in most industries.

US / China Trade War Continues

This trade war remains ongoing but the rhetoric over the last week has become more conciliatory.

Prospects of lower rates

At least two or three interest rate cuts are widely anticipated in the US for the balance of this year. The Bank of Canada Governor does not appear nearly as dovish, but he does not have Trump breathing down his neck at every opportunity. I think it would be unlikely that Canada would not follow the US in further interest rate cuts because doing so would only cause the loonie to rise vs the American greenback and make our country less competitive.

Equity Sectors

I remain overweight Industrials, Consumer Staples, Technology, Utilities and REIT’s.

I remain market weight Financials, Energy, Healthcare and Communication Services.

I remain underweight Materials, and Consumer Discretionary but am reducing my Materials underweight with the prospect of both falling US interest rates and a US dollar.

I continue to have a barbell approach in regards to equity sectors by remaining overweight the cyclical sectors Technology and Industrials, while also keeping my overweight in the interest sensitive sectors Reits, Utilities and Consumer Staples.

Interest sensitive stocks continue to perform well in this period of flat to falling interest rates.

Financial stocks continue to have difficulty with the combination of an inverted yield curve, falling net interest margins and rising non performing loans.

Common Equity Changes

In the Energy sector, I am deleting Torc Resources from both portfolios. Despite its high yield, the company’s dividend is not covered by operating cash flow after deducting for capital expenditures.

In the Industrial sector I added Logitech, a Swiss producer of computer keyboards, computer mice and video gaming hardware to both portfolios in a blog late last month. The company has no long term debt and is benefitting from the secular trend towards video gaming, E-sports and video collaboration devices used in business.

In the Consumer Staples sector I am adding Sysco, the US food distributor to restaurants, hospitals, governments, schools, nursing homes and hotels to both portfolios. It is twice the size of its next largest US competitor, US Foods. The company is aggressively lowering its operating costs which is helping operating margins. The company is a strong generator of free cash flow and expects EPS growth in fiscal 2020 to be around 10%. Its fiscal year end for 2019 is June 29th.

Peter McMurtry, B.Com, CFA
Financial Writer
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Monthly Investment Newsletter and Sample Portfolios
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https://mcmurtryinvestmentreport.ca

McMurtry Investment Report – Portfolios (July 2019)

	Income		Growth
Cash	Alterna Bank – High Interest Savings (2.05% current )		Alterna Bank – High Interest Savings (2.05% current)
	EQ Bank – High Interest Savings ( 2.30% current)		EQ Bank – High Interest Savings ( 2.30% 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 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	3.92	Royal Bank RY	3.92
	Bank of Montreal BMO	4.16	Bank of Montreal BMO	5.16
	Intact Financial IFC	2.51	Intact Financial IFC	2.51
	TD TD	3.87	TD TD	3.87
	Sun Life SLF	3.87	Sun Life SLF	3.87
	JP Morgan JPM US	2.86	JP Morgan JPM US	2.86
	Bank of America BAC US	2.07	Bank of America BAC US	2.07
	Citibank C US	2.57	Citibank C US	2.57
	Morgan Stanley MS US	2.74	Morgan Stanley MS US	2.74
	T. Rowe Price TROW US	2.77	T. Rowe Price TROW US	2.77
	PNC Fin’l PNC US	2.77	PNC Fin’l PNC US	2.77
Energy	Suncor SU	4.11	Suncor SU	4.11
	Canadian Natural Resources CNQ	4.25	Canadian Natural Resources CNQ	4.25
	Freehold FRU	7.44	Freehold FRU	7.44
	Pembina Pipe Lines PPL	4.92	Pembina Pipe Lines PPL	4.92
	Enbridge ENB	6.24	Enbridge ENB	6.24
	Trans Canada TRP	4.62	Trans Canada TRP	4.62
			Parex Resources PXT	0.00
Materials	Agnico Eagle AEM	1.01	Agnico Eagle AEM	1.01
	Franco Nevada FNV	1.18	Franco Nevada FNV	1.18
			Osisko Metals OM.V	0.00
			iShares Global Gold ETF XGD	0.00
Industrials	Toromont TIH	1.74	Toromont TIH	1.74
	NFI Group NFI	4.61	NFI Group[ NFI	4.61
	Air Products APD US	2.05	Air Products APD US	2.05
	WSP Global WSP	2.08	WSP Global WSP	2.08
	Canadian Pacific CP	1.08	Canadian Pacific CP	1.08
	CNR	1.77	CNR	1.77
	Raytheon RTN US	2.17	Raytheon RTN US	2.17
	Aecon Group ARE	3.03	Aecon Group ARE	3.03
	Guggenheim Eq WT IND RGI US	1.38	Guggenheim Eq Wt IND RGI US	1.38
	Honeywell HON US	1.88	Honeywell HON US	1.88
	TFI Int’l TFII	2.42	TFI Int’l TFII	2.42
Consumer Discretionary	Home Depot HD US	2.62	Home Depot HD US	2.62
			Amazon AMZN US	0.00
	Canadian Tire CTC.A	2.91	Canadian Tire CTC.A	2.91
	Lowes LOW US	2.18	Lowes LOW US	2.18
Communication Services	Rogers B RCI.B	2.85	Rogers B RCI.B	2.85
			Facebook FB US	0.00
			Alphabet GOOGL US	0.00
Consumer Staples	Alimentation Couche- Tard ATD.B	0.61	Alimentation Couche Tard ATD.b	0.61
	Loblaws L	1.88	Loblaws L	1.88
	Constellation Brands STZ US	1.52	Constellation Brands STZ US	1.52
	Sysco SYY US	2.17	Sysco SYY US	2.17
	Unilever PLC UL US	2.85	Unilever PLC UL US	2.85
Technology	Apple AAPL US	1.56	Apple AAPL US	1.56
	Microsoft MSFT US	1.37	Microsoft MSFT US	1.37
	Open Text OTEX	1.70	Open Text OTEX	1.70
	Paychex PAYX US	3.01	Paychex PAYX US	3.01
	Cisco CSCO US	2.56	Cisco CSCO US	2.56
	Logitech Int’l LOGI US ADR	1.75	Logitech Int’l LOGI US ADR	1.75
			Kinaxis KXS	0.00
			ETFMG Prime Cyber Sec. HACK US	0.21
			Visa V US	0.58
Utilities	Algonquin Power AQN	4.61	Algonquin Power AQN	4.61
	Northland Power NPI	4.62	Northland Power NPI	4.62
	Fortis FTS	3.45	Fortis FTS	3.45
Healthcare	Abbott Labs ABT US	1.49	Abbott Labs ABT US	1.49
	Becton Dickinson BDX US	1.21	Becton Dickinson BDX US	1.21
	Merck MRK US	2.53	Merck MRK US	2.53
	US Healthcare iShares ETF IYH US	1.79	US Healthcare iShares ETF IYH US	1.79
	United Healthcare UNH US	1.76	United Healthcare UNH US	1.76
			Danaher DHR US	0.47
			Thermo Fisher Scientific TMO US	0.25
			Straumann ADR SAUHY US *	0.58
			IBB Biotech ETF IBB US	0.10
Real Estate	Cdn Apt. REIT CAR.un	2.77	Cdn. Apt. REIT CAR.un	2.77
	US Real Estate SPDR XLRE US	3.23	US Real Estate SPDR XLRE US	3.23
	InterRent REIT IIP.un	2.05	InterRent REIT IIP.un	2.05
	Dream Industrial DIR.un	5.80	Dream Industrial DIR.un	5.80
	Summit REIT SMU.un	4.09	Summit REIT SMU.un	4.09
European Equity	iShares MSCI Europe XEU	3.42	iShares MSCI Europe XEU	3.42

* Be careful purchasing and selling Straumann ADR’s as it is very illiquid. Always use a limit order.

McMurtry Investment Report – Sector Weights (July 2019)

Equity Sector Weights (%)
Sector	My Weight	TSX Comp	S&P 500	55 % US /45% CDN
Financials	21.61	32.00	13.10	21.61
Energy	10.45	17.10	5.00	10.45
Materials	5.75	11.00	2.80	6.49
Industrials	10.60	11.40	9.40	10.30
Consumer Disc.	6.50	4.20	10.20	7.50
Comm. Services	8.13	5.60	10.20	8.13
Consumer Staples	6.21	3.90	7.30	5.77
Technology	14.35	5.10	21.50	14.12
Utilities	4.10	4.30	3.30	3.75
Real Estate	3.60	3.40	3.10	3.24
Healthcare	8.71	2.00	14.20	8.71
Totals	100.00	100.00	100.10	100.06

McMurtry Investment Report Asset Mix (July 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

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 – July 2019

Investment Commentary July 2019

Investment Commentary (April 2019)

Peter McMurtry, B.Com, CFA

MCMURTRY INVESTMENT REPORT

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