McMurtry Investment Report Portfolios – November 2017

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McMurtry Investment Report – Portfolios (November 2017)

	Income		Growth
Cash	Alterna Bank – High Interest Savings (1.9% current rate)		Alterna Bank – High Interest Savings (1.9% 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	4.15	Enbridge Pfd V Enb.pr.V US	4.15
	Horizons Active Mgt. Pfd HPR	3.89	Horizons Active Mgt. Pfd HPR	3.89
Common Stocks	Security	Dividend Yield %	Security	Dividend Yield %
Financials	Royal Bank RY	3.61	Royal Bank RY	3.61
	TD TD	3.27	TD TD	3.27
	CIBC CM	4.58	CIBC CM	4.58
	Sun Life SLF	3.46	Sun Life SLF	3.46
	JP Morgan JPM US	2.23	JP Morgan JPM US	2.23
	Bank of America BAC US	1.75	Bank of America BAC US	1.75
	Citibank C US	1.74	Citibank C US	1.74
	Manulife MFC	3.16	Manulife MFC	3.16
	T. Rowe Price TROW US	2.45	T. Rowe Price TROW US	2.45
	iUnits US Regional Banks IAT US	1.43	iUnits US Regional Banks IAT US	1.43
	Keycorp KEY US	2.08	Keycorp KEY US	2.08
	Blackrock BLK US	2.12	Blackrock BLK US	2.12
			Visa V US	0.71
Energy	Suncor SU	2.92	Suncor SU	2.92
	Freehold FRU	3.80	Freehold FRU	3.80
	Whitecap WCP	3.02	Whitecap WCP	3.02
	Torc TOG	3.53	Torc TOG	3.53
	Pembina Pipe Lines PPL	4.63	Pembina Pipe Lines PPL	4.63
	Enbridge ENB	4.92	Enbridge ENB	4.92
			Centennial Resources CDEV US	0.00
			Parex Resources PXT	0.00
			Spartan SPE	0.00
Materials	Agnico Eagle AEM	0.97	Agnico Eagle AEM	0.97
	Franco Nevada FNV	1.12	Franco Nevada FNV	1.12
			Lundin LUN	1.22
			Trevali Mining TV	0.00
			Roxgold ROXG	0.00
Industrials	New Flyer Ind NFI	2.37	New Flyer Ind NFI	2.37
	WSP Global WSP	2.59	WSP Global WSP	2.59
	Canadian Pacific CP	1.01	Canadian Pacific CP	1.01
	General Dynamics GD US	1.66	General Dynamics GD US	1.66
	SNC Lavalin SNC	1.88	SNC Lavalin SNC	1.88
	Guggenheim Eq WT IND RGI US	1.20	Guggenheim Eq Wt IND RGI US	1.20
Consumer Discretionary	Home Depot HD US	2.15	Home Depot HD US	2.15
	Sleep Canada ZZZ	1.65	Sleep Canada ZZZ	1.65
	Stanley Black and Decker SWK US	1.56	Stanley Black and Decker SWK US	1.56
	Canadian Tire CTC.A	1.64	Canadian Tire CTC.A	1.64
	Amazon AMZN US	0.00	Amazon AMZN US	0.00
	Kohl’s KSS US	5.27	Kohl’s KSS US	5.27
Telecom	Rogers B RCI.B	2.87	Rogers B RCI.B	2.87
Consumer Staples	Alimentation Couche Tard ATD.b	0.60	Alimentation Couche Tard ATD.b	0.60
	Loblaws L	1.62	Loblaws L	1.62
	Pepsico PEP US	2.92	Pepsico PEP US	2.92
	Unilever PLC UL US	2.92	Unilever PLC UL US	2.92
Technology	Apple AAPL US	1.49	Apple AAPL US	1.49
	Microsoft MSFT US	2.02	Microsoft MSFT US	2.02
	Open Text OTEX	1.44	Open Text OTEX	1.44
			Facebook FB US	0.00
			Nvidia NVDA US	0.27
			Shopify SHOP	0.00
			Alphabet GOOGL US	0.00
Utilities	Emera EMA	4.65	Emera EMA	4.65
	Fortis FTS	3.58	Fortis FTS	3.58
Healthcare	Abbott Labs ABT US	1.95	Abbott Labs ABT US	1.95
	Johnson & Johnson JNJ US	2.41	Johnson & Johnson JNJ US	2.41
	Merck MRK	3.41	Merck MRK	3.41
	US Healthcare iShares ETF IYH US	1.10	US Healthcare iShares ETF IYH US	1.10
			Celgene CELG US	0.00
			Thermo Fisher Scientific TMO US	0.31
			Aphria APH	0.00
			Knight Therapeutics GUD	0.00
			IBB Biotech ETF IBB US	0.22
Real Estate	Cdn Apt. REIT CAR.un	3.76	Cdn. Apt. REIT CAR.un	3.76
	Chartwell REIT CSH.un	3.75	Chartwell REIT CSH.un	3.75
	Pure Industrial AAR.un	4.68	Pure Industrial AAR.un	4.68
European Equity	BMO European ETF ZEQ	1.89	BMO European ETF ZEQ	1.89
Emerging Markets	iShares MSCI Emer. Mkts XEC	1.43	iShares MSCI Emer. Mkts XEC	1.43

Investment Commentary November 2017

Global economies continue to expand in unison and the threat of an impending recession remains low.

A short-term market correction is still very possible taking into consideration the current high valuations combined with ongoing factors like:

Continuing North Korea threats
Interest rates rising too quickly, although this now looks less likely with a new dovish US Fed Chair
US annual budget issues escalating
Possible US / China trade war

Thus, I am maintaining my high cash levels in both my Income and Growth portfolios. My Income Portfolio cash levels remain much higher than normal in anticipation of higher rates.

My equity sector weights are as follows:

Continue to overweight benchmark 50/50 weights in Financials, Industrials, Consumer Discretionary and Technology
Remain underweight Utilities, Real Estate, Consumer Staples, Materials and Telcos
Remain market weight Healthcare and Energy

Third quarter earnings announcements have made the equity market quite a bit more volatile than over the last year. Share prices of companies that register earnings that disappoint the consensus estimates have been hit hard. This is also true of many companies that only match consensus estimates.

In the technology sector, I added back Shopify in mid-October after its sharp 20% correction. The US short seller made a lot of false accusations about the company and it appears that his only motive was to profit from shorting the stock and buying it back cheaper. Shopify delivered very strong revenue growth in the 3^rd quarter.

The earnings announcements in the technology sector were for the most part outstanding. Companies like Apple, Facebook, Microsoft, Alphabet and Intel all easily beat consensus estimates.

I am making a switch out of Newell Brands into Unilever PLC in the Consumer Staples area.

This sector remains challenged with many industry players having difficulty raising prices and obtaining sufficient shelf space. Newell reported a dismal 3^rd quarter that took most portfolio managers off guard. Initially the problems with the company appeared to be related to obtaining adequate resin supply as a result of the closure of some facilities that were affected by the recent hurricanes. After the earnings report it is more obvious that the company is not growing at a satisfactory rate and some major changes will be necessary to get them on track.

Unilever is in a completely different position. For the last many years they have had an ongoing cost cutting program. This combined with making more strategic acquisitions in higher margin businesses and beefing up its E-Commerce presence is leading to better results. Differing from many other Consumer Staples companies, Unilever derives 43% of its revenues from Asia, particularly China and India.

In the Industrial sector, I added Guggenheim Equal Weight US Industrial ETF in mid October. The industrial sector is benefitting from a pickup in global growth and this is an opportunity to add to my holdings in this area.

I am removing Winpak from my Growth portfolio. The company’s last two quarterly earnings reports have been disappointing and consequently the consensus future earnings estimates have been coming down sharply. Even after the recent share price decline the company is still trading at a relatively high 23 times earnings.

In the financial services area, I am removing First Data from the Growth portfolio. While the company’s total return has been strong over the last year, it is recently just reported a poor 3^rd quarter earnings report with a slow profit and revenue outlook for 2018. The share price is starting to experience some material contraction.

Last month I increased my Energy Weight to market weight from underweight previously. Crude prices have risen nicely over the last several months and the industry’s chronic supply glut seems to be diminishing. However, it is still not absolutely clear if the US shale producers will ramp up production with WTI prices approaching $57-$60 US per barrel.

It should be pointed out the both Canadian and US portfolio managers remain sharply underweight energy stocks especially oil producers, with a large portion of their current weight remaining in the energy infrastructure companies like Enbridge, TransCanada and Pembina Pipelines. Should crude prices continue to climb portfolio managers will be forced to sharply increase their holdings.

In the healthcare sector, I added Abbott Labs in mid-October to both my Income and Growth portfolios.

Both Abbott and Johnson and Johnson derive a much smaller portion of their revenues and earnings from pharma compared to many of their healthcare peers. Abbott is growing its earnings, operating and free cash flow at a reasonable clip.

McMurtry Investment Report – Sector Weights (November 2017)

Equity Sector Weights (%)
Sector	My Weight	TSX Comp	S&P 500	50/50
Financials	28.00	34.90	14.70	24.80
Energy	12.80	19.70	5.90	12.80
Materials	5.50	11.40	3.00	7.20
Industrials	12.20	9.60	10.00	9.80
Consumer Disc.	10.25	5.50	11.90	8.70
Telecom	1.50	4.80	1.90	3.35
Consumer Staples	3.00	3.60	7.90	5.75
Technology	16.50	3.30	24.50	13.90
Utilities	1.40	3.80	3.20	3.50
Real Estate	1.50	2.90	2.90	2.90
Healthcare	7.35	0.60	14.10	7.35
Totals	100.00	100.10	100.00	100.05

McMurtry Investment Report Asset Mix (November 2017)

Asset Mix – Income and Growth Portfolios
%	Income	Growth
Cash	32.50	22.50
Bonds	10.00	5.00
Preferreds	10.00	10.00
Equities	47.50	62.50
CDN	20.75	28.25
US	20.75	28.25
Europe	4.00	4.00
Emerging Markets	2.00	2.00

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
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 and Model Portfolios™

McMurtry Investment Report Portfolios – November 2017

Investment Commentary (April 2019)

Peter McMurtry, B.Com, CFA

MCMURTRY INVESTMENT REPORT™

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