McMurtry Investment Report & Model Portfolios

McMurtry Investment Report Portfolios – May 2019

Also available in PDF: MIR Portfolios May 2019


Investment Commentary May 2019

Asset Mix Changes

I am not making any asset mix changes this month. Equity markets have rebounded sharply year to date, far outpacing the muted earnings growth. This has resulted in the US market multiple rising to 17.5 times, considerably higher than the long-term average of 15-16 times. At current levels the US equity market is technically overbought and a short-term correction is possible.

My current recommended cash levels of 35% and 30% for the Income and Growth portfolios respectively provide a sufficient cushion from any market volatility. For those of you with limited cash, it is not too late to take some profits.

While the majority of US companies have beaten consensus earnings estimates, it is important to point out that estimates have already been ratcheted down sharply as a result of the weak global economy.

Year over year comparisons are also challenging with the major benefit of last year’s tax cuts incorporated in last year’s numbers with very little incremental improvement this year.

Ed Yardeni, a US economist and strategist, anticipates a drop in the US operating earnings growth rate from 22.7% in 2018 to only 3.1% this year. The growth rate in 2017 was still a respectable 11.8%.

Probability of an Impending US Recession

The domestic US economy grew last quarter at a solid 3.2% annual rate with employment growth remaining strong.

The US yield curve turned positive once again indicating that the likelihood of a recession in the near term is unlikely in the US. However, the curve is still relatively flat.

Both investment grade and high yield corporate bond spreads relative to US Treasuries have come down and remain at levels that do not indicate any probability of a recession.

The Governor of the Federal Reserve indicated that the current low level of US inflation is most likely temporary. The Central Bank decided not to reduce interest rates despite pressure from Trump and the Republican administration. This can be viewed as a sign that they are not worried about a domestic recession in the immediate future. Unless inflation rises sharply it is not likely the Central Bank will increase rates any time soon.

China and its Ongoing Trade War with the US

The Chinese economy is responding favourably to its recent stimulus program. Excluding this week there had been positive rhetoric about some type of agreement being signed as early as this Friday.

However, Trump’s recent tweets, indicating that the current level and amount of US tariffs will go up sharply unless a trade deal is signed, have taken everyone by surprise, including all global equity markets and the Chinese officials. Trump has always been highly unpredictable. These tweets may only be a ploy to force China to the negotiating table faster. However, if no trade deal is signed and the higher tariffs go into place, the negative effect on the Chinese domestic economy will be devastating. As we all know a weaker China economy does not bode well for all global equity markets.

While it is difficult to determine the final outcome of these trade wars, Trump and the Republicans do want a signed trade deal before the next election in 2020. Furthermore, import tariffs would increase US domestic inflation more than warranted and would negatively affect Trump’s electoral support base.

Equity Sectors

I remain overweight: Technology, Industrials, Communication Services, Reits and Consumer Staples

I remain market weight Financials, Energy, Utilities and Healthcare

I remain underweight Materials and Consumer Discretionary

Please note that I have materially reduced my underweight for the Consumer Discretionary sector as a result of the strong US economy with its solid employment growth.

Common Equity Changes

The only stock change is the deletion of Sleep Country from both portfolios in the Consumer Discretionary sector. Proceeds can be redirected back into the other recommendations in this group including Amazon, Home Depot and Canadian Tire. Sleep Country’s same store sales have declined for four quarters in a row and the company is facing stiff competition.

Dividend Increases

Please note that there have been several dividend increases in my recommended stock list as follows:

Raytheon raised quarterly dividend by 8.6%
Air Products raised its quarterly dividend by 5.5%
Paychex raised its quarterly dividend by 10.7%
Straumann raised its annual dividend by 6%
Pembina Pipe raised its monthly dividend by 5.3%
Alimentation Couche-Tard raised its quarterly dividend by 25%
RBC raised its quarterly dividend by 4.1%
TD raised its quarterly dividend by 10.4%

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

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

McMurtry Investment Report – Portfolios (May 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 3.82 Royal Bank RY 3.82
  Bank of Montreal BMO 3.78 Bank of Montreal BMO 3.78
  Bank of Nova Scotia BNS 4.72 Bank of Nova Scotia BNS 4.72
  Intact Financial IFC 2.78 Intact Financial IFC 2.78
  TD TD 3.87 TD TD 3.87
  Sun Life SLF 3.61 Sun Life SLF 3.61
  JP Morgan JPM US 2.78 JP Morgan JPM US 2.78
  Bank of America BAC US 1.97 Bank of America BAC US 1.97
  Citibank C US 2.56 Citibank C US 2.56
  Morgan Stanley MS US 2.52 Morgan Stanley MS US 2.52
  T. Rowe Price TROW US 2.87 T. Rowe Price TROW US 2.87
  Keycorp KEY US 3.85 Keycorp KEY US 3.85
  PNC Fin’l PNC US 2.79 PNC Fin’l PNC US 2.79
Energy Suncor SU 3.90 Suncor SU 3.90
  Freehold FRU 7.22 Freehold FRU 7.22
  Torc TOG 5.67 Torc TOG 5.67
  Pembina Pipe Lines PPL 5.05 Pembina Pipe Lines PPL 5.05
  Enbridge ENB 5.98 Enbridge ENB 5.98
  Trans Canada TRP 4.76 Trans Canada TRP 4.76
      Parex Resources PXT 0.00
Materials Agnico Eagle AEM 1.23 Agnico Eagle AEM 1.23
  Franco Nevada FNV 1.35 Franco Nevada FNV 1.35
      Osisko Metals OM.V 0.00
      iShares Global Gold ETF XGD 0.21
Industrials Toromont TIH 1.68 Toromont TIH 1.68
  Air Products APD US 2.25 Air Products APD US 2.25
  WSP Global WSP 2.11 WSP Global WSP 2.11
  Canadian Pacific CP 0.87 Canadian Pacific CP 0.87
  CNR 1.72 CNR 1.72
  Raytheon RTN US 2.09 Raytheon RTN US 2.09
  Aecon Group ARE 3.17 Aecon Group ARE 3.17
  Guggenheim Eq WT IND RGI US 1.36 Guggenheim Eq Wt IND RGI US 1.36
  Honeywell HON US 1.90 Honeywell HON US 1.90
  TFI Int’l TFII 2.19 TFI Int’l TFII 2.19
Consumer Discretionary Home Depot HD US 2.73 Home Depot HD US 2.73
  Canadian Tire CTC.A 2.72 Canadian Tire CTC.A 2.72
  Amazon AMZN US 0.00 Amazon AMZN US 0.00
  Lowes LOW US 1.72 Lowes LOW US 1.72
Communication Services Rogers B RCI.B 2.92 Rogers B RCI.B 2.92
      Facebook FB US 0.00
      Alphabet GOOGL US 0.00
Consumer Staples Alimentation Couche- Tard ATD.B 0.63 Alimentation Couche Tard ATD.b 0.63
  Loblaws L 1.91 Loblaws L 1.91
  Constellation Brands STZ US 1.27 Constellation Brands STZ US 1.27
  Unilever PLC UL US 2.93 Unilever PLC UL US 2.93
Technology Apple AAPL US 1.48 Apple AAPL US 1.48
  Microsoft MSFT US 1.44 Microsoft MSFT US 1.44
  Open Text OTEX 1.73 Open Text OTEX 1.73
  Paychex PAYX US 2.93 Paychex PAYX US 2.93
  Cisco CSCO US 2.56 Cisco CSCO US 2.56
      Kinaxis KXS 0.00
      ETFMG Prime Cyber Sec. HACK US 0.15
      Visa V US 0.64
Utilities Algonquin Power AQN 4.50 Algonquin Power AQN 4.50
  Northland Power NPI 5.04 Northland Power NPI 5.04
  Fortis FTS 3.63 Fortis FTS 3.63
Healthcare Abbott Labs ABT US 1.62 Abbott Labs ABT US 1.62
  Becton Dickinson BDX US 1.29 Becton Dickinson BDX US 1.29
  Merck MRK US 2.77 Merck MRK US 2.77
  US Healthcare iShares ETF IYH US 1.90 US Healthcare iShares ETF IYH US 1.90
  United Healthcare UNH US 1.50 United Healthcare UNH US 1.50
      Danaher DHR US 0.51
      Thermo Fisher Scientific TMO US 0.27
      Straumann ADR SAUHY US * 0.65
      IBB Biotech ETF IBB US 0.30
Real Estate Cdn Apt. REIT CAR.un 2.83 Cdn. Apt. REIT CAR.un 2.83
  InterRent REIT IIP.un 2.13 InterRent REIT IIP.un 2.13
  Dream Industrial DIR.un 6.04 Dream Industrial DIR.un 6.04
  Summit REIT SMU.un 4.28 Summit REIT SMU.un 4.28
European Equity iShares MSCI Europe XEU 2.98 iShares MSCI Europe XEU 2.98

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

McMurtry Investment Report – Sector Weights (May 2019)
         
Equity Sector Weights (%)
Sector My Weight TSX Comp S&P 500 55 % US /45% CDN
Financials 21.94 32.50 13.30 21.94
Energy 11.05 18.20 5.20 11.05
Materials 5.00 10.20 2.70 6.08
Industrials 10.39 11.10 9.50 10.22
Consumer Disc. 7.00 4.30 10.30 7.60
Comm. Services 8.50 5.60 10.30 8.19
Consumer Staples 5.85 3.80 7.20 5.67
Technology 14.70 4.60 21.70 14.01
Utilities 3.61 4.10 3.20 3.61
Real Estate 3.50 3.30 3.00 3.14
Healthcare 8.47 2.20 13.60 8.47
Totals 100.00 99.90 100.00 99.96
McMurtry Investment Report Asset Mix (May 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

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
Objective Investment Advice for Everyone
Monthly Investment Newsletter and Sample Portfolios
Personalized Portfolio Reviews
https://mcmurtryinvestmentreport.ca

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

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

Please see our disclaimer at mcmurtryinvestmentreport.mydev.ca. disclaimer ©2019 McMurtry Investment Report™. All rights reserved.