McMurtry Investment Report & Model Portfolios

McMurtry Investment Report Portfolios – June 2019

Also available in PDF: MIR Portfolios June 2019


Investment Commentary June 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.

Corporate earnings growth rates continue to ratchet down to 3-4% from double digits last year. Market valuations on 2020 earnings are at 15-16 times, marginally lower than the 16-17 long term average multiple.

Global economic growth remains challenged with both Germany and Japan having negative interest rates.

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 an interest rate decline in the US this year has gone up dramatically.

Probability of an Impending US Recession

The US yield curve has inverted once again and this has created more market uncertainty. Although historically this has frequently been a signal of an impending recession, this might not be the case this time. Taking into consideration the low to negative interest rates globally, the US bond market offers the best yields. This has caused massive global and domestic demand for US Treasuries resulting in longer yields falling below short Treasury Bill yields.

However, the prospect of lower rates implies the economy is more vulnerable than we think to the threat of an escalation in the trade wars.

Many economists believe that an all out trade war would depress global GDP by at least 0.5%.

While still historically low, corporate bond spreads over US Treasuries are rising once again which is not a good sign.

This month the probability of an impending recession is still low, but a little higher than last month with the threat of more tariffs by both countries.

China and its Ongoing Trade War with the US

Both the US and Chinese Presidents do not want to appear to be giving in to the demands of the other country. However, both have a lot to lose without any definite compromise on the trade front.

Personally, I am sick and tired of Trump’s antics and so is the rest of the world. The global economy is not a poker game and should not be viewed as such.

Prospects of lower rates

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.

Equity Sectors

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

I remain market weight Financials, Energy, and Healthcare.

Energy remains a very difficult sector but should improve with the upcoming OPEC meeting where they are expected to cut production once again. The US Refineries are also coming back on stream from being temporarily shutdown and this will help to improve demand for crude oil.

I am reducing my exposure in Communications Services from overweight to market weight as a result of increased potential regulation on both Facebook and Google.

I remain underweight Materials, and Consumer Discretionary.

Common Equity Changes

In the Industrial sector I added New Flyer Group on May 30 to both portfolios with their recent acquisition of Alexander Dennis, the British double decker bus manufacturer.

In the Financial sector I am deleting both Bank of Nova Scotia and Keycorp Bank. Scotiabank had disappointing quarterly earnings for the last four quarters and is underperforming its more US exposed peers like TD, RBC and Bank of Montreal. Keycorp, the US bank is having difficulty competing with larger regionals and NY City banks that are more diversified in their product mix.

In the REIT’s sector I am adding the USSPDR XLRE Real Estate ETF to both portfolios. This ETF offers exposure to all types of US real estate including the fast growing data centres and cell towers.

In the Energy sector, I am adding Canadian Natural Resources, the high quality domestic producer that recently made an accretive acquisition of the Canadian assets of Devon Energy.

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

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

McMurtry Investment Report – Portfolios (June 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 3.95 Royal Bank RY 3.95
  Bank of Montreal BMO 4.16 Bank of Montreal BMO 4.16
  Intact Financial IFC 2.56 Intact Financial IFC 2.56
  TD TD 3.93 TD TD 3.93
  Sun Life SLF 3.90 Sun Life SLF 3.90
  JP Morgan JPM US 2.93 JP Morgan JPM US 2.93
  Bank of America BAC US 2.18 Bank of America BAC US 2.18
  Citibank C US 2.74 Citibank C US 2.74
  Morgan Stanley MS US 2.81 Morgan Stanley MS US 2.81
  T. Rowe Price TROW US 2.88 T. Rowe Price TROW US 2.88
  PNC Fin’l PNC US 2.86 PNC Fin’l PNC US 2.86
Energy Suncor SU 4.15 Suncor SU 4.15
  Canadian Natural Resources CNQ 4.23 Canadian Natural Resources CNQ 4.23
  Freehold FRU 7.79 Freehold FRU 7.69
  Torc TOG 7.18 Torc TOG 7.18
  Pembina Pipe Lines PPL 4.96 Pembina Pipe Lines PPL 4.96
  Enbridge ENB 6.26 Enbridge ENB 6.26
  Trans Canada TRP 4.50 Trans Canada TRP 4.50
      Parex Resources PXT 0.00
Materials Agnico Eagle AEM 1.10 Agnico Eagle AEM 1.10
  Franco Nevada FNV 1.31 Franco Nevada FNV 1.31
      Osisko Metals OM.V 0.00
      iShares Global Gold ETF XGD 0.20
Industrials Toromont TIH 1.81 Toromont TIH 1.81
  NFI Group NFI 4.30 NFI Group[ NFI 4.30
  Air Products APD US 2.08 Air Products APD US 2.08
  WSP Global WSP 2.11 WSP Global WSP 2.11
  Canadian Pacific CP 1.07 Canadian Pacific CP 1.07
  CNR 1.77 CNR 1.77
  Raytheon RTN US 2.03 Raytheon RTN US 2.03
  Aecon Group ARE 3.23 Aecon Group ARE 3.23
  Guggenheim Eq WT IND RGI US 1.36 Guggenheim Eq Wt IND RGI US 1.36
  Honeywell HON US 1.90 Honeywell HON US 1.90
  TFI Int’l TFII 2.36 TFI Int’l TFII 2.36
Consumer Discretionary Home Depot HD US 2.76 Home Depot HD US 2.76
      Amazon AMZN US 0.00
  Canadian Tire CTC.A 3.06 Canadian Tire CTC.A 3.06
  Lowes LOW US 2.27 Lowes LOW US 2.27
Communication Services Rogers B RCI.B 2.82 Rogers B RCI.B 2.82
      Facebook FB US 0.00
      Alphabet GOOGL US 0.00
Consumer Staples Alimentation Couche- Tard ATD.B 0.59 Alimentation Couche Tard ATD.b 0.59
  Loblaws L 1.78 Loblaws L 1.78
  Constellation Brands STZ US 1.47 Constellation Brands STZ US 1.47
  Unilever PLC UL US 2.83 Unilever PLC UL US 2.83
Technology Apple AAPL US 1.62 Apple AAPL US 1.62
  Microsoft MSFT US 1.40- Microsoft MSFT US 1.40
  Open Text OTEX 1.73 Open Text OTEX 1.73
  Paychex PAYX US 2.83 Paychex PAYX US 2.83
  Cisco CSCO US 2.50 Cisco CSCO US 2.50
      Kinaxis KXS 0.00
      ETFMG Prime Cyber Sec. HACK US 0.16
      Visa V US 0.59
Utilities Algonquin Power AQN 4.67 Algonquin Power AQN 4.67
  Northland Power NPI 4.78 Northland Power NPI 4.78
  Fortis FTS 3.47 Fortis FTS 3.47
Healthcare Abbott Labs ABT US 1.59 Abbott Labs ABT US 1.59
  Becton Dickinson BDX US 1.29 Becton Dickinson BDX US 1.29
  Merck MRK US 2.67 Merck MRK US 2.67
  US Healthcare iShares ETF IYH US 1.86 US Healthcare iShares ETF IYH US 1.86
  United Healthcare UNH US 1.75 United Healthcare UNH US 1.75
      Danaher DHR US 0.49
      Thermo Fisher Scientific TMO US 0.27
      Straumann ADR SAUHY US * 0.61
      IBB Biotech ETF IBB US 0.30
Real Estate Cdn Apt. REIT CAR.un 2.79 Cdn. Apt. REIT CAR.un 2.79
  US Real Estate SPDR XLRE US 3.20 US Real Estate SPDR XLRE US 3.20
  InterRent REIT IIP.un 2.02 InterRent REIT IIP.un 2.02
  Dream Industrial DIR.un 5.93 Dream Industrial DIR.un 5.93
  Summit REIT SMU.un 4.12 Summit REIT SMU.un 4.12
European Equity iShares MSCI Europe XEU 2.98 iShares MSCI Europe XEU 2.98

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

McMurtry Investment Report – Sector Weights (June 2019)
         
Equity Sector Weights (%)
Sector My Weight TSX Comp S&P 500 55 % US /45% CDN
Financials 21.62 31.90 13.20 21.62
Energy 10.75 17.90 4.90 10.75
Materials 5.10 10.00 2.60 5.93
Industrials 10.45 11.40 9.30 10.25
Consumer Disc. 7.10 4.00 10.20 7.41
Comm. Services 8.38 5.90 10.40 8.38
Consumer Staples 6.10 4.10 7.40 5.92
Technology 14.10 5.00 21.10 13.86
Utilities 4.00 4.40 3.40 3.85
Real Estate 3.70 3.50 3.20 3.34
Healthcare 8.71 2.00 14.20 8.71
Totals 100.00 100.10 99.90 99.99
McMurtry Investment Report Asset Mix (June 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
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.