McMurtry Investment Report & Model Portfolios

McMurtry Investment Report Portfolios March 2022

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

Investment Commentary March 2022

US Yield Curve

The ten minus two-year US Treasury yield curve narrowed very sharply by 38 basis points to 0.24%. This flattening of the curve is of concern as all previous recessions have been led by a negative yield curve where short rates exceeded longer maturities. However, this recent narrowing has transpired with the Russian invasion of Ukraine leading to a flight to US Treasuries. This factor combined with ongoing Federal Reserve purchasing of 10 year US Treasuries, has kept 10 year Treasury prices elevated and corresponding yields low. Despite this narrowing of the yield curve, I still feel that these afore-mentioned circumstances appear to make the probability of an upcoming recession seem greater than it really is. Once the Federal Reserve finally ends their Quantitative Easing Program shortly, yields on 10 -year US Treasuries will stop going down and will begin to rise again.

US Corporate Debt Spreads

As of March 3, 2022, Baa rated US corporate bond spreads relative to 10-year US Treasuries actually rose modestly by 32 basis points to the current level of 2.24%. This minor rise in the corporate spread is nothing to worry about at this time when one takes into account where spreads normally rise to just before a recession.

Covid – 19 Health Stats

It seems that the spread of Covid-19 appears to be peaking in the western world with some exceptions like South Africa. The combination of lockdowns, widespread vaccinations, and herd immunity are getting this terrible pandemic in control.

Equity Market Valuations

The forward PE multiple of the S&P 500 is 19.20 as of March 4th. This compares to the long -term median of 19.6 times.

Central Bank Monetary Policy

Faced with rising inflationary pressures, the US Federal Reserve Bank remains vigilant in fighting inflation by reducing the balance sheet and increasing interest rates.

Asset Mix

As a result of a hawkish Federal Reserve Bank, much less stimulative fiscal policy, very high inflationary pressures and rising geopolitical risk, I am increasing the cash weight to 25% for both portfolios. In a portfolio blog dated February 10th, I increased the cash weight by 2.5% to 22.5% for both portfolios and now I am increasing it by an additional 2.5%.

In my February 10th blog, I reduced the US Tip weight by 3.5% to 2%. In addition, I increased the Canadian preferred weight by 1% to 6% for both portfolios.

I am adding a 3% weight in Canadian 1 year GIC’s of EQ Bank online. The rate is 2.10%. I am reducing the 1-5 year corporate bond ladder ETFs by 3.00% and 3.5% for the Income and Growth portfolios respectively. In a rising interest rate environment, GIC prices will perform much better than regular bonds.

I am reducing my equity exposure by 2% for both portfolios to a level of 50% and 60% respectively. Furthermore, I am reducing my European and Emerging Market weight by 1% for both portfolios. Both Europe and Emerging Markets face a high level of uncertainty from the consequences of the Russian invasion.

All these above changes are recommended to reduce overall risk, but also to provide some cash should markets continue to decline. Having some cash in a short- term market correction can be advantageous when opportunities present themselves.

Equity Sector Weights

I remain overweight my North American benchmark Financials, Energy, Materials, Industrials, Consumer Discretionary and Real Estate. I remain underweight Consumer Staples, Healthcare, Technology, Utilities and Communications. The change in my North American benchmark domestic equity exposure to 70% Canada and 30% US will result in an additional overweight to the cyclical sectors of the market.

Individual Equity Changes

In a blog dated February 20th, I added AstraZeneca to both portfolios in the Healthcare sector. This drug producer offers a well diversified drug offering with its top selling drug only representing 13% of total revenues. The company has 12 blockbuster drugs with sales totalling $10 billion. Company management expect EPS to grow this year at a rate of 20% plus.

In a blog dated February 17th, I recommended a switch from TC Energy into Keyera for both portfolios. The company is trading at a much lower valuation while its EBITDA is expected to grow at the same rate as TC Energy.

In a blog dated March 3rd, I recommended a switch out of Citigroup into Bank of America for both portfolios in the Financials sector. Citi has a sizeable loan portfolio in Russia of $10 billion that may have to be partially written off. Bank of America offers a more solid and consistent earnings growth trajectory and is a major beneficiary of rising interest rates.
In the Energy sector I recommend a switch out of Suncor into Cenovus. The latter company offers considerably more upside than Suncor with its very strong cash flow leading to additional stock buybacks and dividend increases.

I am recommending the addition of Baytex Energy to the Growth portfolio in the Energy sector. Baytex is currently trading at a very attractive Enterprise Value to Forward EBITDA of 4.6 times and has a very healthy balance sheet with Financial Debt at only 0.71 times Trailing 12 months EBITDA. The company is currently trading at a free cash flow yield of 11.76%. Baytex is both a light and heavy oil producer and is expected to generate free cash flow this year of $550 million. In 2022 the company plans to allocate 25% of their free cash flow to their stock buyback program and the remaining 75% to paying down their debt levels.

Lastly in the Industrial sector, I am deleting Aecon from both portfolios and recommend the funds be redirected into both WSP Global and Stantec. Aecon’s projected growth rate continues to be hampered by Covid related issues in regards to the Bermuda Airport concession. Both Stantec and WSP offer better and more consistent growth prospects.


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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
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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

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