McMurtry Investment Report & Model Portfolios

McMurtry Investment Report Portfolios – July 2021

Also available in PDF: McMurtry Investment Report Portfolio – July 2021


Investment Commentary July 2021

US Yield Curve

The ten minus two- year US Treasury yield curve fell modestly to 1.23% compared to 1.46% at the end of May of this year. The recent flattening of the yield curve can be explained by the rise in 2- year yields combined with a decline in the 10- year maturities. As the yield curve remains positive, this is not something to be concerned about in regards to the domestic US economy.

US Corporate Debt Spreads

As of July 1st, 2021, Baa rated US corporate bond spreads relative to 10-year US Treasuries actually narrowed by ten basis points to 1.86%. The High Yield spreads also exhibited the same trend by shrinking by 26 basis points to 3.02%. This is positive for the US economy and indicates that the probability of the US dipping into another recession at this point is low.

Covid – 19 Health Stats

The vaccine rollouts in both Canada and the US are going remarkably well. The rest of the world is seeing a more gradual improvement than North America, but nevertheless an improvement. It is anticipated that any variants will be well controlled in North America and only result in a limited amount of new outbreaks of Covid-19 in specific locations.

Equity Market Valuations

The Forward PE of the S&P 500 remains inflated at 21.3 times. This compares to the long -term median of 19.6 times. The principal reason this valuation measure has not risen as the equity markets have is solely due to the very strong earnings growth.

US Domestic Economic Growth

The US added a better than expected 850,000 jobs in June. US domestic inflation remains quite inflated with strong year over year growth in air fares, hotels, new and used cars and food and energy. A material chunk of this recent price rise can be explained by the reopening of the economy and businesses charging higher prices for cars, air fares and hotels. These items may end up being transitory, but the strength in wages may not be so short term in nature. We all know there is a labour shortage currently with employees having the upper hand for the first time in many years. It will be very important to see what the trend in wages will be after the government handouts stop.

Central Bank Monetary Policy

Governor Powell and the US Federal Reserve Bank expect a short- term acceleration in domestic inflation as the economy rebounds. However, the Federal Reserve do not want to alter their current accommodative monetary policy just yet and expect to continue with their government bond tapering program.

Asset Mix

In a portfolio blog dated June 16th, I reduced equities by 8% with a corresponding increase of the same amount in cash to 23%. Now I am reducing the cash weight for both portfolios back down to 20% with a new 2% weight in Canadian preferreds and a 1% increase in European equities. European equities offer good relative value while rate reset preferreds will perform well in a period of rising interest rates. You all know by now my dislike of rate reset preferreds as they are very illiquid and perform very poorly when rates go down. However, the immediate outlook for interest rates is to see them begin to climb back up once again from current levels. I recommend the Horizons actively managed preferred ETF, HPR.

Equity Sector Weights

I remain overweight my 60% Canada 40% US North American benchmark weight the following sectors: Financials, Industrials, Energy, Materials and Consumer Discretionary. I remain underweight Consumer Staples, Healthcare and Technology but have reduced my Technology underweight somewhat from last month.I am maintaining my market weight in Communications and Utilities. Lastly, I am increasing my Reit sector exposure to overweight from market weight last month. This sector is experiencing a sharp rebound and the outlook for industrial and apartment Reits remains favourable.

Individual Equity Changes

In the Healthcare sector, I added Medtronic to both portfolios in a portfolio blog on June 16th . This medical device company offers a reasonable valuation, a dividend yield close to 2%, a strong balance sheet and projected long term EPS growth of at least 9-10% annually. More specifically in the diabetes monitoring area, the company is now offering a complete glucose monitoring system in Europe and has applied for approval in the US.

In a portfolio blog dated June 21st, I added Premium Brands to both portfolios in the Consumer Staples area. The company offers a dividend yield of over 2% that is well covered by operating cash flow. The company is expected to see strong EPS growth over the next several years and has already experienced 6-8% average annual organic sales growth.

Lastly in a portfolio blog dated June 29 th I added Sleep Country to both portfolios in the Consumer Discretionary sector. The company offers a dividend yield of 2.62% that is very well covered by operating cash flow. In addition, the company has a strong balance sheet that has enabled it to increase its warehouse capacity by 65%. The company is expected to register solid EPS growth this year and next.

 

Peter McMurtry, B.Com, CFA
Financial Writer, Objective Investment Advice for Everyone, Monthly Investment Newsletter and Sample Portfolios, Personalized Portfolio Reviews
https://mcmurtryinvestmentreport.ca

 

Please see our disclaimer at mcmurtryinvestmentreport.ca. Copyright © 2021 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
Cash35.0030.00
Bonds – Regular20.0010.00
Bonds – High Yield5.005.00
Preferreds0.000.00
Equities40.0055.00
CDN15.7522.50
US19.2527.50
Europe5.005.00
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
Financials21.2531.7012.7021.25
Energy11.0718.005.4011.07
Materials5.6611.202.606.47
Industrials10.4010.909.5010.13
Consumer Disc.6.404.1010.107.40
Comm. Services8.505.8010.108.17
Consumer Staples6.253.907.305.77
Technology14.004.5021.2013.69
Utilities3.714.203.303.71
Real Estate3.753.503.103.28
Healthcare9.022.2014.609.02
Totals100.00100.0099.9099.95

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.

Peter McMurtry, B.Com, CFA
Financial Writer
Objective Investment Advice for Everyone
Monthly Investment Newsletter and Sample Portfolios
Personalized Portfolio Reviews
https://mcmurtryinvestmentreport.ca

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

McMurtry Investment Report – Portfolios (April 2019)
     
 IncomeGrowth
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 mcmurtryinvestmentreport.mydev.ca. disclaimer ©2019 McMurtry Investment Report™. All rights reserved.