McMurtry Investment Report Portfolios – November 2016

Here are the November 2016 Portfolios, Sector Weights and Asset Mixes.

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McMurtry Investment Report – Portfolios (November 2016)

	Income		Growth
Cash	EQ Bank – High Interest Savings (2.0% current rate)		EQ Bank – High Interest Savings (2.0% 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
Stocks	Security	Dividend Yield %	Security	Dividend Yield %
Financials	Royal Bank RY	4.05	Royal Bank RY	4.05
	TD Bank TD	3.68	TD Bank TD	3.68
	Sun Life SLF	3.66	Sun Life SLF	3.66
	Firm Capital FC	6.88	Visa V US	0.82
	JP Morgan JPM US	2.83	JP Morgan JPM US	2.83
			First Data FD US	0.00
			Citibank C US	1.33
Energy	Freehold FRU	3.97	Freehold FRU	3.97
	Whitecap WCP	2.63	Whitecap WCP	2.63
	Inter Pipeline IPL	5.87
Materials	Agnico Eagle AEM	0.77	Goldcorp G	0.53
			Roxgold ROG.V	0.00
			HudBay Minerals HBM	0.34
Industrials	WSP Global WSP	3.66	WSP Global WSP	3.66
	Stella Jones SJ	0.84	Stella Jones SJ	0.84
			ZCL Composites ZCL	2.94
Consumer Discretionary	Home Depot HD US	2.28	Home Depot HD US	2.28
	Time Warner TWX US	1.86	Time Warner TWX US	1.86
	Pepsico PEP US	2.84	Pepsico PEP US	2.84
	Gentex GNTX US	2.18	Gentex GNTX US	2.18
			Aritzia ATZ	0.00
Telecom	BCE BCE	4.61	BCE BCE	4.61
	Telus T	4.34
	Verizon VZ US	4.91
Consumer Staples	Alimentation Couche Tard ATD.b	0.47	Alimentation Couche Tard ATD.b	0.47
			Mondelez MDLZ US	1.78
Technology	Apple AAPL US	2.09	Apple AAPL US	2.09
	Cisco CSCO US	3.44	Shopify SH	0.00
	Microsoft MSFT US	2.66	Microsoft MSFT US	2.66
			CGI GIB.a	0.00
			Facebook FB US	0.00
			Alphabet GOOGL US	0.00
Utilities	Fortis FTS	3.69	Fortis FTS	3.69
	Emera EMA	4.51	Emera EMA	4.51
Healthcare	Johnson & Johnson JNJ US	2.78	Johnson & Johnson JNJ US	2.78
	Walgreen Boots WBA US	1.87	Walgreen Boots WBA US	1.87
	Zimmer Biomet ZBH US	0.93	Zimmer Biomet ZBH US	0.93
	Bristol-Myers Squibb BMY US	2.70	Bristol-Myers Squibb BMY US	2.70
			IBB Biotech ETF IBB US	0.17
Real Estate	Cdn Apt. REIT CAR.un	4.31	Cdn. Apt. REIT CAR.un	4.31
	Chartwell REIT CSH.un	3.82	Chartwell REIT CSH.un	3.82
	Pure Industrial PUR.un	5.80	Pure Industrial PUR.un	5.80

November 2016 – Explanation of Changes to the McMurtry Investment Report Portfolios

I am recommending the raising of 15% cash for both the Income and Growth portfolios to levels of 40% and 30% respectively.

The combination of lofty equity market valuations, tepid earnings growth, rising US interest rates and the uncertainty created by the Trump victory make me much more cautious.

My sector weights remain overweight financials, industrials, technology, consumer discretionary and underweight energy, materials, consumer staples, utilities and telecommunications. I am market weight Real Estate. Lastly as a result of the sharp correction in the healthcare sector combined with the increased probability of less price control regulation from the new Trump government, I am advising an increase in exposure in this sector to market weight.

The outlook for the energy sector has gyrated up and down sharply this past month with the early and mid-month crude inventories falling sharply, only to finish the month on a very sour note with dramatically higher inventories, drilling rigs and the probability of the OPEC members coming to an agreement on production cuts becoming more and more unlikely.

Financials are expected to benefit from rising interest rates, both the banks and insurance companies in particular. I added another New York City bank, Citigroup, to my Growth portfolio as it trades at a lower valuation than its peers, while its dividend growth prospects will start to improve shortly.

I also added First Data to the US Growth portfolio as it is directly involved in the fast growing electronic payments area in the US and trades at an attractive valuation. I removed Element Financial after it split into two companies as the shares have climbed up recently quite a bit and its balance sheet remains overleveraged.

In the Materials sector I have added HudBay, both a base and precious metal producer that offers strong production and cash flow growth.

In the Industrial area I added Stella Jones to both portfolios. It is a very stable earnings grower and has a strong balance sheet. Its principal business is the manufacture of telephone poles and railway ties.

In the consumer discretionary area, I added the fast growing ladies’ retailer Aritzia that only recently went public. In addition, I added Gentex, a US manufacturer of electronic car rear view mirrors. It is a very solid company with a strong balance sheet and positive earnings and cash flow growth. I am removing Magna from the list as the probability of an increase in US trade protectionist policies under Trump will hurt profitability.

In the high tech area, I added Microsoft to both portfolios. The company has transitioned well from old mature high tech to the faster growing tech companies with its large and growing cloud business.

The healthcare sector has also had a terrible year and month in terms of share price underperformance vs the overall market. However the new Trump government is not expected to be as vigilant regarding drug price controls and this combined with the current attractive valuations from the recent price declines has encouraged me to upgrade the sector to market weight. The one area to stay away from with the new government is hospital management companies with Trump’s objective to get rid of Obamacare in its present form.

I have removed CVS from my recommendations as at least one half its business comes from pharmacy benefits area that is experiencing severe pricing and margin pressure. I have added Walgreens Boots that has no exposure to the pharmacy benefits area and is in the final stages of its takeover of Rite Aid. I have also added Johnson & Johnson, a highly diversified healthcare company. The stock has declined recently as a result of health concerns from its talcum powder business. Its recent share weakness provides an attractive buying opportunity. Finally, I am adding Bristol Myers to both portfolios with its strong drug pipeline and more attractive valuation after its recent price decline.

Lastly I am adding Pure Industrial REIT to both portfolios. It is a Canadian industrial REIT with exposure to both Canada and the US. Its dividend payout is relatively low under 45% and it has strong growth prospects.

McMurtry Investment Report – Sector Weights (November 2016)

Equity Sector Weights (%)
Sector	My Weight	TSX Comp	S&P 500	50/50
Financials	25.00	33.60	13.30	23.40
Energy	11.00	20.80	7.20	14.00
Materials	7.00	12.90	2.90	7.90
Industrials	11.00	8.80	9.70	9.30
Consumer Disc.	11.35	5.10	12.50	8.80
Telecom	2.00	5.20	2.50	3.80
Consumer Staples	5.75	4.20	10.00	7.10
Technology	15.00	2.80	21.60	12.20
Utilities	1.60	3.00	3.40	3.20
Real Estate	3.00	3.10	2.90	3.00
Healthcare	7.30	0.60	14.00	7.30
Totals	100.00	100.10	100.00	100.00

McMurtry Investment Report – Asset Mix (November 2016)

Asset Mix – Income and Growth Portfolios
%	Income	Growth
Cash	40	30
Bonds	15	10
Equities	45	60
CDN	22.5	30
US	22.5	30

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
Personalized Portfolio Reviews
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 – November 2016

Investment Commentary (April 2019)

Peter McMurtry, B.Com, CFA

MCMURTRY INVESTMENT REPORT

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