McMurtry Investment Report and Model Portfolios™

McMurtry Investment Report Portfolios – March 2021

Also available in PDF:MIR Portfolio March 2021

Investment Commentary March 2021

US Yield Curve

The ten minus two- year US Treasury yield curve jumped to 1.42% as of March 5, 2021 from 0.80% at the end of December of last year. This is positive for the economy. In particular the ten- year US treasury yield has risen to 1.56 % from 0.93% at Dec 31st.

US Corporate Debt Spreads

 As of March 4th, Aaa rated US corporate bond spreads relative to 10-year US Treasuries backed up to 1.46%, from the December 31st level of 1.30%. On the other hand, the Baa rated US corporate bond yield spreads, at 2.13% as of March 4th, are lower than what they were at the year end’s level of 2.18%. High Yield spreads declined to 3.54% as of March 4th compared to 3.86% at year end.  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.

US / China Trade Issues

Joe Biden and the Democrats are expected to be more conciliatory with China, although it is too early to tell at this point. 

Covid – 19 Health Stats

The number of new cases in the US is starting to see a material decline as the percentage of the population getting a Covid-19 vaccine continues to increase.

Equity Market Valuations

The Forward PE of the S&P 500 is still inflated at 21.5 times. This compares to the long -term median of 19.6 times.                                                                                                                                                    

US Domestic Economic Growth

The US economy is expected to see a sharp rebound in the second half of this year propelled by another stimulus package and much better news on the percentage of the population being vaccinated. Employment growth for February continued to show a dramatic improvement. 4th quarter US quarterly earnings registered a V-shaped recovery with most companies delivering better numbers than consensus.

Central Bank Monetary Policy

 Governor Powell and the US Federal Reserve Bank expect a short- term acceleration in domestic inflation as the economy rebounds. He was pressured by the media to address the recent increase in nominal and real interest rates.  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

 Despite the soothing rhetoric by Governor Powell, nominal interest rates are really starting to rise across all maturities. Although real interest rates remain negative, they are becoming less negative for the 7-, 10- and 20-year maturities. At some level of nominal rates, the stock market will become more concerned and may experience a short- term correction of up to 10%. However, taking into consideration the new stimulus package and the economy’s enormous pent -up demand, equity markets are likely to take higher rates in stride. I would use any market correction as a buying opportunity.

I am reducing the Regular Investment Grade bond weight by 3% for both portfolios. At the same time, I am increasing the High Yield weight for both portfolios by 2% to 10% and increasing the cash exposure by 1% to 15% for both portfolios.

Equity Sector Weights

Propelled by higher rates, a three-month high for the US Dollar globally, a rebounding economy and a major equity sector rotation from growth into cyclical stocks, I am making several changes from last month.

I am reducing my Technology weight from market weight to underweight. I am reducing my REIT exposure from overweight to underweight. I am reducing my Utilities exposure from overweight to market weight. I remain overweight Financials and Industrials but am increasing my overweight. I remain underweight Communications, but am reducing my underweight as explained in my recent newsletter. I am increasing my overweight in Energy but decreasing my overweight in Materials. More specifically, gold is experiencing a lot of headwinds currently from the combination of a US dollar beginning to rise once again and rising nominal and real interest rates. As gold is not an industrial metal, its price is more susceptible to rising rates and a stronger US dollar. The rising real interest rates, turning less negative, are also a real headwind for gold. My advice is to reduce your exposure to gold and gold shares but to continue to hold a small position. The Materials sector includes base metals, fertilizers and industrial gases that have more upside in an improving economy than gold. As mentioned previously, silver faces less headwinds than gold as it is an industrial metal and a beneficiary of an increase in demand from renewable energy and the electrification of cars.

I am increasing my underweight in Consumer Staples and reducing my overweight in Consumer Discretionary.

I am keeping my market weight in Healthcare.

Individual Equity Changes

In a portfolio blog dated February 16th, I added Pembina Pipelines to both portfolios.  Despite the sharp increase in 4th quarter write-downs that included a suspension of the proposed petrochemical facility, the volume of business is trending higher and the company has good operating leverage to rising throughput. The company pays a dividend of 6.96% and offers a free cash flow yield of over 6%.

In a blog dated March 3rd, I added Dover Corp to both portfolios. The company is a US manufacturer of industrial and aerospace products, petroleum and engineering products and refrigeration and food equipment. The company is a strong generator of both operating and free cash flow that offers a free cash flow yield of 4.97%. It offers a dividend yield of 1.52% that is well covered.

In the healthcare sector, I am adding the US private healthcare provider, Anthem, to both portfolios. The company is more much attractively valued than United HealthCare with a Forward PE of only 13.53 times compared to over 19 times for United HealthCare. Anthem offers a dividend yield of 1.35% and a free cash flow yield of 11.13%. The company is growing its EPS nicely and offers good upside opportunities.

In the Technology sector, I am adding Oracle to both portfolios. It offers a dividend yield of 1.37% that is well covered by cash flow. It is also trading at a much lower PE multiple than many of its peers at 16 times this year’s earnings. While its EPS projected growth rates are lower than its peers, it is still expected to grow its EPS this year at over 13%. In addition, its recent success in the cloud may very well result in the company’s growth rates in EPS expanding more than is currently anticipated.

Lastly, I am adding the Mosaic Company to the Growth portfolio. It is a major US producer of both phosphate and potash fertilizers. It offers a dividend yield of 0.67% that is well covered by cash flow. The shares are currently trading at a reasonable 6.7 times EV/ Forward EBITDA. Its financial debt is under 4 times trailing twelve- month EBITDA.

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

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

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.