McMurtry Investment Report & Model Portfolios

McMurtry Investment Report Portfolios June 2022

Also available in PDF: McMurtry Investment Report Portfolio – June 2022


 

Investment Commentary June 2022

US Yield Curve

The 10-2-year US Treasury yield curve jumped up to the May 31st level of 0.32% from last month’s 0.19%. The recent steepening of the yield curve is not entirely unexpected with the Federal Reserve’s ending of their ongoing monthly bond purchases of longer- term maturities and the commencement of their balance sheet liquidation of longer maturities.  Domestic US inflation remains high but there are some signs of a possible peaking in the year over year inflationary stats.

US Corporate Debt Spreads

As of May 27, 2022, Baa rated US corporate bond spreads relative to 10-year US Treasuries rose modestly by twenty basis points to 2.26% from last month.

Covid – 19 Health Stats

Over the last ninety days, the 7-day average number of new cases and deaths has steadily declined in China. This statistic is odd taking into account the Communist Government’s sharp increase in lockdowns, especially in Shanghai.

In the US over the last 90 days, the 7-day average amount of new cases has remained about flat while the number of deaths continues to decline.

Lastly in Canada over the last 90 days, the 7-day average number of new cases has steadily declined. The same trend is true for the number of deaths but the number of deaths has remained quite volatile.

Equity Market Valuations

The forward PE multiple of the S&P 500 is approximately the same as last month at 17.5 times.

Central Bank Monetary Policy

Faced with rising inflationary pressures, the US Federal Reserve Bank remains totally committed to controlling inflation by reducing the balance sheet and increasing interest rates.

Asset Mix

The hawkish intent of the Federal Reserve is not likely to end until the rate of inflation is controlled. Currently this is not the case. In addition, the Russia/ Ukraine war is continuing and the sanctions against Russia and Belarus are not likely to cease when the war ends. There is some good news in terms of the China lockdowns, but this could change at any time.

The jury is still out in regards to an upcoming global recession. But we do know that equity markets will remain volatile until a clearer picture emerges about the eventual peaking in inflation.

Under this scenario I am raising another 5% in cash with a corresponding reduction of the same amount in equities. Even if the world can avoid a global recession, the threat of ongoing high inflation with slowing economic growth, or stagflation, will not be great for equity markets. Commodity stocks are the exception and they can still perform well in a high inflationary environment. The recent rebound in equity prices may end up being short lived, with markets that may retest their recent lows before all this is over.

I am increasing my Emerging Market equity weight by 1% for both portfolios with valuations becoming more attractive after the recent selloff.

 

Equity Sector Weights

I am maintaining my overweight in the cyclical sectors, namely Financials, Energy, Industrials, Materials, REITS and Consumer Discretionary. I remain underweight Technology, Communications, Consumer Staples and Utilities. I am going from underweight Healthcare to market weight with the industry’s solid fundamentals.

 

Individual Equity Changes

In a blog dated May 25th, I added Cameco, the Canadian uranium producer to the Growth portfolio in the Energy sector. European nuclear power plants are seeking alternative long- term supplies of uranium outside of Russia. Cameco is expected to be a beneficiary of this. Long term contracts are much more lucrative for Cameco than one off arrangements.

 

On May 24th in a blog, I deleted both Nutrien and Mosaic from all portfolios. While fertilizer stocks have recently benefited from higher prices as a result of the Ukraine war, there is a proposal on the table by the UN Secretary to restore grain shipments from Ukraine in exchange for reviving fertilizer exports from Russia and Belarus. Should this agreement work out, fertilizer prices will most likely fall.

In a blog dated May 16th, I added Aritzia to the Growth portfolio in the Consumer Discretionary sector. This company is one of North America’s strongest specialty retailers of women’s clothing with both bricks and mortar and online stores in Canada and the US. Both EPS and EBITDA are expected to continue their strong growth trajectory.

In a blog dated May 9th, I deleted Amazon from the Growth portfolio with the proceeds directed back into Google. Amazon’s operating costs have been rising rapidly while their margins continue to contract. On the other hand., Google has kept both its costs and operating margins much more stable.

In a blog dated May 9th, I added Quebecor B to both portfolios in the Communications sector. Recently Rogers takeover of Shaw Communications was rejected by the Competition Bureau until more clarification is provided by Rogers in regards to a buyer of Shaw’s wireless operations. Quebecor is the natural fit. Rogers has put forward a US hedge fund, but the Competition Bureau is not likely to find a US company acceptable.

In a blog dated May 5th, I advised a switch out of Curaleaf into a bitcoin ETF, BTCX.U. While prices for bitcoin have been on a downwards trajectory recently, the long-term popularity of cryptocurrency is surely going to increase. On the other hand, the cannabis industry is seeing falling prices with capacity exceeding demand.

Finally in the Reit sector, I am deleting Canadian Apartment Reit from both portfolios and advising the proceeds be redirected into Inter-Rent Reit. While both are Ontario apartment Reits that will be negatively affected by any government regulatory changes, Inter-Rent is considerably cheaper than its larger competitor and is expected to grow its EBITA over the next two years at a pace more than double Canadian Apartment Reit.

 

 

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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
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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

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