McMurtry Investment Report Portfolios – May 2018

Also available in PDF: MIR Portfolios May 2018

Investment Commentary (May 2018)

Security markets still face the wall of worry as follows:
• Possible Trade War between US and China
• Higher Interest Rates and higher inflation
• Possible peaking of corporate profits with rising material and labour costs
• Possible NAFTA Revocation
• Equity Market Volatility has returned to normal much higher levels than 2017

US Corporate profits rose 20% plus year over year in the first quarter of this year. US Equity Market Price/Earnings Multiple fallen from over 18 times to under 17 times. Not all of the profit improvement can be attributed to lower corporate taxes. Corporations are reporting strong revenue growth year over year in the first quarter as well.

The geopolitical risk between North Korea and the US seems to be abating. The trade war rhetoric between the US and China has eased off quite a lot but could come back at any time. This issue is clearly not resolved.

If NAFTA is not revoked but approved with minor modifications, the Canadian loonie will probably jump up by at least 5% from current levels. In addition, Canadian business confidence may begin to improve from very low levels. However, at the moment nothing is a sure thing.

Asset Mix

As a result of the market’s lower valuation combined with overall global GNP growth still expanding, I am maintaining the same asset mix as last month. There is sufficient cash to weather any short term correction.

Equity Sector Bets

• Maintain overweight in Financials, Industrials, Technology and Consumer Discretionary
• Maintain underweight Telcos, Utilities, REIT’s and Consumer Staples
• Maintain Market weight Healthcare and Materials
• Increase Energy to Overweight

The glut in crude oil is diminishing, despite continuing US shale production. Global crude oil demand is expected to continue to outpace global supply.

Total oil stocks are now close to five-year average levels after dropping steadily since May 2017. I am adding Vermilion Energy to both portfolios. The company offers an attractive dividend of over 6% that was never cut in the last crude oil downturn. Vermilion has just made an offer to acquire Spartan Energy, a light oil Canadian producer. The purchase is expected to be immediately accretive. Vermilion currently operates in Europe and Australia where it receives the much higher Brent price for crude oil.

I am also adding Step Energy to the Growth portfolio. Step is a Canadian oil service company that provides pumping and hydraulic fracturing services. It has recently made an offer for Tucker Energy, a US fracturing company operating in Oklahoma. The acquisition is expected to be immediately accretive and will give Step a major footprint into the US market.

In the Consumer Discretionary area, I am adding Carnival Cruise Lines to both portfolios. The demand for cruise travel is rising very quickly and Carnival is one of the major players in this field. The company has strong revenue and earnings growth and trades at a reasonable 14.4 times 2018 EPS.

In the Consumer Staples sector I am recommending a switch out of Pepsico into Constellation Brands for both portfolios. Pepsico is having difficulty competing against Coca Cola in the beverage area and will need to increase its advertising and marketing budget to maintain its beverage revenues.

Constellation Brands is a producer and marketer of beer, wine and spirits in Canada, US, Mexico, New Zealand and Italy. While the company is trading at a higher valuation than Pepsi, the company is exhibiting consistent and strong growth in revenues and earnings and is in a faster growing segment than carbonated beverages.

In the healthcare sector, I am adding Eli Lilly to both portfolios. The company has a strong and diversified pipeline of new drugs. Its recent acquisition of Armo BioSciences will boost its oncology presence. Lilly is exhibiting strong revenue and earnings growth and trades at a reasonable 16 times PE on 2018 earnings.

McMurtry Investment Report – Portfolios (May 2018)

	Income		Growth
Cash	Alterna Bank – High Interest Savings (2.05% current rate)		Alterna Bank – High Interest Savings (2.05% current rate)
	EQ Bank – High Interest Savings ( 2.30% current rate)		EQ Bank – High Interest Savings ( 2.30% current rate)
Bonds	iShares XSB Short Term		iShares XSB Short Term
	iShares XFR Floating Rate		iShares XFR Floating Rate
	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
Preferreds	Security	Dividend Yield %	Security	Dividend Yield %
	Enbridge Pfd V Enb.pr.V US	4.16	Enbridge Pfd V Enb.pr.V US	4.16
	Horizons Active Mgt. Pfd HPR	3.85	Horizons Active Mgt. Pfd HPR	3.85
	Industrial Alliance IAG.PR.G	3.99	Industrial Alliance IAG.PR.G	3.99
Common Stocks	Security	Dividend Yield %	Security	Dividend Yield %
Financials	Royal Bank RY	3.81	Royal Bank RY	3.81
	National Bank	3.94	National Bank	3.94
	TD TD	3.72	TD TD	3.72
	CIBC CM	4.65	CIBC CM	4.65
	Sun Life SLF	3.43	Sun Life SLF	3.43
	JP Morgan JPM US	2.06	JP Morgan JPM US	2.06
	Bank of America BAC US	1.60	Bank of America BAC US	1.60
	Citibank C US	1.87	Citibank C US	1.87
	Manulife MFC	3.63	Manulife MFC	3.63
	T. Rowe Price TROW US	2.46	T. Rowe Price TROW US	2.46
	iUnits US Regional Banks IAT US	2.31	iUnits US Regional Banks IAT US	2.31
	Keycorp KEY US	2.11	Keycorp KEY US	2.11
	Blackrock BLK US	2.21	Blackrock BLK US	2.21
	Paychex PAYX US	3.54	Paychex PAYX US	3.54
	PNC Fin’l PNC US	2.00	PNC Fin’l PNC US	2.00
			Visa V US	0.66
Energy	Suncor SU	2.93	Suncor SU	2.93
	Freehold FRU	4.84	Freehold FRU	4.84
	Whitecap WCP	3.37	Whitecap WCP	3.37
	Torc TOG	3.30	Torc TOG	3.30
	Pembina Pipe Lines PPL	5.28	Pembina Pipe Lines PPL	5.28
	Enbridge ENB	6.22	Enbridge ENB	6.22
	Vermilion Energy VET	6.26	Vermilion Energy VET	6.26
			Centennial Resources CDEV US	0.00
			Step Energy STEP	0.00
			Parex Resources PXT	0.00
Materials	Agnico Eagle AEM	1.02	Agnico Eagle AEM	1.02
	Franco Nevada FNV	1.25	Franco Nevada FNV	1.25
	BMO Global Base Metal ETF ZMT	1.34	BMO Global Base Metal ETF ZMT	1.34
			Lundin LUN	1.41
			Trevali Mining TV	0.00
			Hudbay Minerals HBM	0.22
			Roxgold ROXG	0.00
Industrials	DowDuPont DWDP US	2.41	DowDuPont DWDP US	2.41
	Applied Materials AMAT US	0.98	Applied Materials AMAT US	0.98
	Toromont TIH	1.63	Toromont TIH	1.63
	WSP Global WSP	2.37	WSP Global WSP	2.37
	Canadian Pacific CP	0.98	Canadian Pacific CP	0.98
	General Dynamics GD US	1.89	General Dynamics GD US	1.89
	SNC Lavalin SNC	2.03	SNC Lavalin SNC	2.03
	Guggenheim Eq WT IND RGI US	1.24	Guggenheim Eq Wt IND RGI US	1.24
	Honeywell HON US	2.06	Honeywell HON US	2.06
			Fedex FDX US	0.82
Consumer Discretionary	Home Depot HD US	2.23	Home Depot HD US	2.23
	Sleep Canada ZZZ	2.27	Sleep Canada ZZZ	2.27
	Stanley Black and Decker SWK US	1.79	Stanley Black and Decker SWK US	1.79
	Canadian Tire CTC.A	2.05	Canadian Tire CTC.A	2.05
	Amazon AMZN US	0.00	Amazon AMZN US	0.00
	Kohl’s KSS US	3.94	Kohl’s KSS US	3.94
	Magna MG	2.24	Magna MG	2.24
	Lowes LOW US	1.98	Lowes LOW US	1.98
	Carnival Cruise CCL US	3.12	Carnival Cruise CCL US	3.12
			Dollarama DOL	0.33
			Alibaba BABA US	0.00
			JD.com JD US	0.00
Telecom	Rogers B RCI.B	3.16	Rogers B RCI.B	3.16
Consumer Staples	Alimentation Couche Tard ATD.b	0.65	Alimentation Couche Tard ATD.b	0.65
	Loblaws L	1.65	Loblaws L	1.65
	Constellation Brands STZ US	1.34	Constellation Brands STZ US	1.34
	Unilever PLC UL US	3.46	Unilever PLC UL US	3.46
Technology	Apple AAPL US	1.55	Apple AAPL US	1.55
	Microsoft MSFT US	1.77	Microsoft MSFT US	1.77
	Open Text OTEX	1.77	Open Text OTEX	1.77
			Facebook FB US	0.00
			Nvidia NVDA US	0.26
			ETFMG Prime Cyber Sec. HACK US	0.01
			Alphabet GOOGL US	0.00
Utilities	Emera EMA	5.59	Emera EMA	5.59
	Fortis FTS	3.95	Fortis FTS	3.95
Healthcare	Abbott Labs ABT US	1.90	Abbott Labs ABT US	1.90
	Bristol Myers BMY US	3.04	Bristol Myers BMY US	3.04
	Johnson & Johnson JNJ US	2.86	Johnson & Johnson JNJ US	2.86
	Merck MRK US	3.31	Merck MRK US	3.31
	US Healthcare iShares ETF IYH US	1.27	US Healthcare iShares ETF IYH US	1.46
	United Healthcare UNH US	1.40	United Healthcare UNH US	1.27
	Eli Lilly LLY US	2.73	Eli Lilly LLY US	2.73
			Thermo Fisher Scientific TMO US	0.32
			IBB Biotech ETF IBB US	0.43
Real Estate	Cdn Apt. REIT CAR.un	3.29	Cdn. Apt. REIT CAR.un	3.29
	InterRent REIT IIP.un	2.65	InterRent REIT IIP.un	2.65
	Sienna Senior Living SIA	5.13	Sienna Senior Living	5.13
	Chartwell REIT CSH.un	3.99	Chartwell REIT CSH.un	3.99
European Equity	iShares MSCI Europe XEU	2.21	iShares MSCI Europe XEU	2.21
Emerging Markets	iShares MSCI Emer. Mkts XEC	2.10	iShares MSCI Emer. Mkts XEC	2.10

McMurtry Investment Report – Sector Weights (May 2018)

Equity Sector Weights (%)
Sector	My Weight	TSX Comp	S&P 500	60 % US / 40 % CDN
Financials	27.75	34.30	14.70	22.54
Energy	12.50	19.50	6.20	11.52
Materials	6.30	11.40	2.90	6.30
Industrials	10.89	9.90	9.90	9.90
Consumer Disc.	10.50	5.50	13.00	10.00
Telecom	0.75	4.50	1.90	2.94
Consumer Staples	2.75	3.50	7.30	5.78
Technology	17.50	3.80	24.80	16.40
Utilities	1.15	3.60	2.90	3.18
Real Estate	1.15	2.90	2.80	2.84
Healthcare	8.76	1.20	13.80	8.76
Totals	100.00	100.10	100.20	100.16

McMurtry Investment Report Asset Mix (May 2018)

Asset Mix – Income and Growth Portfolios
%	Income	Growth
Cash	24.50	19.50
Bonds	10.00	5.00
Preferreds	15.00	10.00
Equities	50.50	65.50
CDN	16.00	22.00
US	24.00	33.00
Europe	5.25	5.25
Emerging Markets	5.25	5.25

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
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

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 (%)
Sector	My Weight	TSX Comp	S&P 500	55 % US /45% CDN
Financials	21.25	31.70	12.70	21.25
Energy	11.07	18.00	5.40	11.07
Materials	5.66	11.20	2.60	6.47
Industrials	10.40	10.90	9.50	10.13
Consumer Disc.	6.40	4.10	10.10	7.40
Comm. Services	8.50	5.80	10.10	8.17
Consumer Staples	6.25	3.90	7.30	5.77
Technology	14.00	4.50	21.20	13.69
Utilities	3.71	4.20	3.30	3.71
Real Estate	3.75	3.50	3.10	3.28
Healthcare	9.02	2.20	14.60	9.02
Totals	100.00	100.00	99.90	99.95

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
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https://mcmurtryinvestmentreport.ca

McMurtry Investment Report – Portfolios (April 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	4.05	Royal Bank RY	4.05
	Bank of Montreal BMO	4.00	Bank of Montreal BMO	4.00
	Bank of Nova Scotia BNS	4.89	Bank of Nova Scotia BNS	4.89
	Intact Financial IFC	2.69	Intact Financial IFC	2.69
	TD TD	4.08	TD TD	4.08
	Sun Life SLF	3.90	Sun Life SLF	3.90
	JP Morgan JPM US	3.16	JP Morgan JPM US	3.16
	Bank of America BAC US	2.17	Bank of America BAC US	2.17
	Citibank C US	2.89	Citibank C US	2.89
	Morgan Stanley MS US	2.84	Morgan Stanley MS US	2.84
	T. Rowe Price TROW US	3.04	T. Rowe Price TROW US	3.04
	Keycorp KEY US	4.32	Keycorp KEY US	4.32
	PNC Fin’l PNC US	3.10	PNC Fin’l PNC US	3.10
Energy	Suncor SU	3.85	Suncor SU	3.85
	Freehold FRU	7.43	Freehold FRU	7.43
	Torc TOG	5.62	Torc TOG	5.62
	Pembina Pipe Lines PPL	4.55	Pembina Pipe Lines PPL	4.55
	Enbridge ENB	6.04	Enbridge ENB	6.04
	Trans Canada TRP	4.91	Trans Canada TRP	4.91
			Parex Resources PXT	0.00
Materials	Agnico Eagle AEM	1.15	Agnico Eagle AEM	1.15
	Franco Nevada FNV	1.29	Franco Nevada FNV	1.29
			Osisko Metals OM.V	0.00
			iShares Global Gold ETF XGD	0.20
Industrials	Toromont TIH	1.55	Toromont TIH	1.55
	Air Products APD US	2.44	Air Products APD US	2.44
	WSP Global WSP	2.06	WSP Global WSP	2.06
	Canadian Pacific CP	0.94	Canadian Pacific CP	0.94
	CNR	1.79	CNR	1.79
	Raytheon RTN US	2.03	Raytheon RTN US	2.03
	Aecon Group ARE	3.33	Aecon Group ARE	3.33
	Guggenheim Eq WT IND RGI US	1.35	Guggenheim Eq Wt IND RGI US	1.35
	Honeywell HON US	2.07	Honeywell HON US	2.07
	TFI Int’l TFII	2.45	TFI Int’l TFII	2.45
Consumer Discretionary	Home Depot HD US	2.80	Home Depot HD US	2.80
	Sleep Canada ZZZ	3.77	Sleep Canada ZZZ	3.77
	Canadian Tire CTC.A	2.88	Canadian Tire CTC.A	2.88
	Amazon AMZN US	0.00	Amazon AMZN US	0.00
	Lowes LOW US	1.75	Lowes LOW US	1.75
Communication Services	Rogers B RCI.B	2.78	Rogers B RCI.B	2.78
			Facebook FB US	0.00
			Alphabet GOOGL US	0.00
Consumer Staples	Alimentation Couche- Tard ATD.B	0.64	Alimentation Couche Tard ATD.b	0.64
	Loblaws L	1.79	Loblaws L	1.79
	Constellation Brands STZ US	1.69	Constellation Brands STZ US	1.69
	Unilever PLC UL US	3.06	Unilever PLC UL US	3.06
Technology	Apple AAPL US	1.54	Apple AAPL US	1.54
	Microsoft MSFT US	1.56	Microsoft MSFT US	1.56
	Open Text OTEX	1.58	Open Text OTEX	1.58
	Paychex PAYX US	2.79	Paychex PAYX US	2.79
	Cisco CSCO US	2.59	Cisco CSCO US	2.59
			Kinaxis KXS	0.00
			ETFMG Prime Cyber Sec. HACK US	0.15
			Visa V US	0.64
Utilities	Algonquin Power AQN	4.58	Algonquin Power AQN	4.58
	Northland Power NPI	5.12	Northland Power NPI	5.12
	Fortis FTS	3.64	Fortis FTS	3.64
Healthcare	Abbott Labs ABT US	1.60	Abbott Labs ABT US	1.60
	Becton Dickinson BDX US	1.23	Becton Dickinson BDX US	1.23
	Merck MRK US	2.65	Merck MRK US	2.65
	US Healthcare iShares ETF IYH US	1.84	US Healthcare iShares ETF IYH US	1.84
	United Healthcare UNH US	1.46	United Healthcare UNH US	1.46
			Danaher DHR US	0.52
			Thermo Fisher Scientific TMO US	0.28
			Straumann ADR SAUHY US *	0.63
			IBB Biotech ETF IBB US	0.28
Real Estate	Cdn Apt. REIT CAR.un	2.76	Cdn. Apt. REIT CAR.un	2.76
	InterRent REIT IIP.un	2.03	InterRent REIT IIP.un	2.03
	Dream Industrial DIR.un	5.83	Dream Industrial DIR.un	5.83
	Summit REIT SMU.un	4.35	Summit REIT SMU.un	4.35
European Equity	iShares MSCI Europe XEU	2.96	iShares MSCI Europe XEU	2.96

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

McMurtry Investment Report & Model Portfolios

McMurtry Investment Report Portfolios – May 2018

Investment Commentary (May 2018)

McMurtry Investment Report – Portfolios (May 2018)

McMurtry Investment Report – Sector Weights (May 2018)

McMurtry Investment Report Asset Mix (May 2018)

Investment Commentary (April 2019)

Peter McMurtry, B.Com, CFA

MCMURTRY INVESTMENT REPORT

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