McMurtry Investment Report & Model Portfolios

McMurtry Investment Report Portfolios – June 2021

Also available in PDF: MIR Portfolio – June 2021

Investment Commentary June 2021

US Yield Curve

The ten minus two- year US Treasury yield fell modestly to 1.42% compared to 1.49% at the end of April of this year. This remains positive for the economy.

US Corporate Debt Spreads

As of June 3, 2021, Baa rated US corporate bond spreads relative to 10-year US Treasuries remained about the same as last month at 1.96%, as did High Yield spreads at 3.28%.  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.

Covid – 19 Health Stats

The vaccine rollout is going very well in the US and this is resulting in the number of daily cases levelling off. Domestically our vaccine rollout is also doing well and improving with more than 60% of the Canadian population having received at least one dose. The ongoing domestic lockdowns are definitely having a positive effect despite all the backlash from the business community.

Equity Market Valuations

The Forward PE of the S&P 500 is still 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 domestic economy remains strong with their economy opening up. However, this has resulted in a significant rise in US inflation that the Federal Reserve has tried to explain as only transitory. Mohamed Olirian, the famed economist, does not believe that the recent pickup in US inflation is temporary as it is based on continuing labour shortages, supply bottlenecks and strong commodity prices. At some point the US central Bank is going to be forced to raise interest rates to prevent inflation from rising to quickly. Once this happens equity markets will need to digest this information and will quite likely take a breather from their lofty levels. In the meantime, however, both US fiscal and monetary policies remain very accommodative. The risk is that inflation will rise much faster than anticipated and this will eventually be accompanied by higher rates.

Historically in a period of higher rates and higher inflation, cash and nominal fixed income investments tend not to perform very well. Inflation adjusted real return bonds, equities and commodities tend to perform much better.

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

 I am making several changes to the asset mix this month. Firstly, I am increasing my Canadian equity weight for the North American benchmark to 60% Canada and 40% US. This change is totally a result of improving commodity prices, a cyclical recovery in the global economy and a strong loonie relative to the US greenback. I am reducing High Yield bonds by 3% for both portfolios and adding a 3% weight in US Tips, symbol Tip US$ for both portfolios. Please keep in mind that I am only adding the US Tip Real Return bond ETF and not the Canadian XRB. This is because the US Tip ETF has a much shorter duration than the Canadian XRB and this is resulting in much better investment performance. While the current real yield on this ETF is a negative 1.4%, the total return over the last 12 months is 6.56%.

Equity Sector Weights

 I remain overweight my newly revised 60% Canada 40% US North American benchmark weight the following sectors: Financials, Industrials, Energy, Materials and Consumer Discretionary. I am increasing my overweight in both Financials and Energy.

I remain underweight Consumer Staples and Technology and have materially increased my Technology underweight. I have also gone from market weight to underweight the Healthcare sector with stronger earnings growth coming from the cyclical sectors.

I am maintaining my market weight in Communications, Utilities and Reits.

Individual Equity Changes

 In the Financial sector I added the European Financial ETF EUFN – US$ to both portfolios in a blog dated May 23rd. The fund offers a distribution yield of 1.14% and provides exposure to the European bank and insurance companies.

In a blog dated June 2, I recommended a switch out of Bank of Nova Scotia into CIBC for both portfolios. CIBC is showing strong revenue, loan and deposit growth while Scotia is not. CIBC offers a dividend yield of 4.15%.

In the Materials sector, I am deleting Hudbay Mining from the Growth portfolio. RBC estimates that their mine in Peru accounts for over 60% of the net asset value of the company. The general election in Peru is just to close to predict the final outcome, although it is very likely that Hudbay will be faced with increased royalties to the Peruvian government. Even after its recent decline Hudbay still trades at an EV/ Trailing twelve month EBITDA ratio of over 10 times, almost double what Capstone trades at. Using projected EBITDA, the ratios are more comparable between the two companies. However, the political risk does not warrant an investment in Hudbay at this time given its large exposure to Peru.

In a blog on May 17, I added Kirkland Lake Gold to both portfolios. The company has a solid balance sheet with zero long term debt and offers a dividend yield of 2.06%

In the Reit sector I am adding Tricon Residential to both portfolios. This Canadian Reit operates in the US sunbelt area and in Canada where it offers reasonable rents and solid growth prospects. It offers a dividend yield of 2.15% with a 76% cash flow payout ratio.

In addition, in the Reit sector, I wrote blogs on both Granite and Dream Industrial Reits to average down your holdings by buying more units after their recent equity issues.

In a blog dated May 26, I advised averaging down your holdings in Capital Power by buying more units after their recent equity issue.

Lastly in a blog dated June 4, I advised purchasing more shares of Osisko Metals after announcing some fundamental improvements to their water flow problems.


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.