McMurtry Investment Report Portfolios – November 2020

Also available in PDF: MIR Portfolios November 2020

Investment Commentary November 2020

US Yield Curve

The ten year minus 2-year US Treasury yield curve jumped sharply this month from under 60 basis points to the current 80 basis points. This level is relatively significant taking intro account how low interest rates have been this year. This is a positive development for financial stocks.

US Corporate Debt Spreads

The spread has narrowed from 274 basis points to the current 200%. This is a positive sign of economic recovery.

US / China Trade Issues

Despite Trump’s ongoing resistance to the election results and a possible divided Government, it is expected that Joe Biden has defeated Trump in the presidential race. Mr. Biden is a much more diplomatic type and the ongoing trade war with China should ease off somewhat. This also applies to Europe, India and Canada.

Covid – 19 Health Stats

The colder weather combined with a return to school is causing the global daily number of cases to spike once again, especially in Europe and Canada. The US stats have continued to remain high.

Equity Market Valuations

Taking into account the sharp rebound in the equity market since the US election, the Forward PE multiple of the S&P 500 remains historically high at well over 21 times.

US Domestic Economic Growth

The recent rebound in economic growth from the lows recorded during the height of the lockdowns is now levelling out somewhat. This is principally a result of the recent spike of new daily cases of the virus both in the US and globally.

US Federal Election

Hopefully the US has finally got rid of Trump as President, but his refusal to concede to Biden is creating some discomfort. However, despite Trump’s refusal to quit, there is clearly no evidence of voter tampering in any way. The equity markets have responded very positively for two principal reasons. Biden is expected to be much less confrontational in the trade wars with China and other countries throughout the world. Secondly the possibility of a divided government makes the extreme policies of Bernie Saunders and Elizabeth Warren much less likely to pass both houses. However, the current stalemate in the Senate could possibly change in the Democrats favour in two runoff bi-elections in January. If this comes to pass equity markets may not respond as favourably as they have recently.

Central Bank Monetary Policy

Global central bank policies continue to be very accommodating.

Asset Mix

I am reducing my cash weight by 5% for both portfolios with the monies redirected back into equities. These changes will increase the equity weight to 55% and 65% for the Income and Growth portfolios respectively.

Equity Sector Weights

I am making three equity sector changes from last month. I am increasing the Financial sector to overweight from market weight as a result of interest rates gradually creeping up and the possibility of a vaccine next year that will improve the economic outlook in the latter part of next year. Secondly, I am reducing the Consumer Staples sector from market weight to underweight as a result of an expected cyclical pickup in the economy next year that will benefit economically sensitive sectors more than the defensive consumer staples area. Lastly, I am increasing the REIT sector to overweight from market weight. As I highlighted in last month’s newsletter, this sector has been decimated by the pandemic and any improvement in the economy next year will surely help this sector even though a small increase in rates will create some headwinds.

I remain overweight Industrials, Consumer Discretionary and Utilities from last month. I continue my underweight exposure in Energy, while I remain at the same market weight position as last month for Healthcare, Communications, Materials and Technology.

Individual Equity Changes

In a portfolio blog on October 16th, I added Martinrea International, the Canadian auto parts producer to both portfolios. The company is trading at a very reasonable valuation and is expected to benefit from the projected cyclical pickup in auto demand for both the remainder of this year and into next year.

In another blog dated October 28th, I added 3M Co, the US industrial to both portfolios. This stock is also expected to benefit from a stronger economy next year. The company showed strong organic revenue growth in three of its four divisions during the 3rd quarter.

Lastly, I am adding Activision Blizzard, the US online gaming company, to both portfolios. While the company reported a strong third quarter, its share price has dropped over 13% from its recent highs. The shares trade at a forward PE of a little over 22 times, reasonable given the company’s strong projected EPS growth rates over the next several years. In addition, the company has a solid balance sheet as well.

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 (November 2020)

	Income		Growth
Cash	Alterna Bank – High Interest Savings (1.20% current )		Alterna Bank – High Interest Savings (1.20% current)
	EQ Bank – Savings Plus ( 1.50% current)		EQ Bank – Savings Plus ( 1.50% current)
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	iShares XHY.TO US High Yield Cdn. $		iShares XHY.To US High Yield Cdn $
Common Stocks	Security	Dividend Yield %	Security	Dividend Yield %
Financials	Royal Bank RY	4.47	Royal Bank RY	4.47
	Intact Financial IFC	2.29	Intact Financial IFC	2.29
	Brookfield Asset MGT. BAM.A	1.49	Brookfield Asset MGT. BAM.A	1.49
	TD TD	5.31	TD TD	5.31
	Sun Life SLF	3.90	Sun Life SLF	3.90
	JP Morgan JPM US	3.50	JP Morgan JPM US	3.50
	Manulife Fin’l MFC	5.95	Manulife Fin’l MFC	5.95
	Bank of America BAC US	2.96	Bank of America BAC US	2.96
	Morgan Stanley MS US	2.71	Morgan Stanley MS US	2.71
	T. Rowe Price TROW US	2.69	T. Rowe Price TROW US	2.69
	Allstate ALL US	2.37	Allstate ALL US	2.37
Energy	Suncor SU	5.50	Suncor SU	5.50
	Canadian Natural Resources CNQ	7.96	Canadian Natural Resources CNQ	7.96
	Freehold FRU	4.71	Freehold FRU	4.71
	Enbridge ENB	9.05	Enbridge ENB	9.05
	TC Energy TRP	6.40	TC Energy TRP	6.40
	Whitecap Resources WCP	6.87	Whitecap Resources WXP	6.87
			Parex Resources PXT	0.00
Materials	Agnico Eagle AEM	1.71	Agnico Eagle AEM	1.71
	Barrick Gold ABX	1.26	Barrick Gold ABX	1.26
	Franco Nevada FNV	0.69	Franco Nevada FNV	0.69
	VanEck Vectors Gold ETF GDX US	0.49	VanEck Vectors Gold ETF GDX US	0.49
			SPDR Gold Bullion GLD US	0.00
	BMO Global Base Metals ETF ZMT	2.50	BMO Global Base Metals ETF ZMT	2.50
			Osisko Metals OM.V	0.00
			iShares Global Gold ETF XGD	0.17
Industrials	Toromont TIH	1.41	Toromont TIH	1.41
	3M Co MMM US	3.61	3M Co MMM US	3.61
	Air Products APD US	1.75	Air Products APD US	1.75
	WSP Global WSP	1.70	WSP Global WSP	1.70
	CNR	1.68	CNR	1.68
	Canadian Pacific CP	0.91	Canadian Pacific CP	0.91
	Raytheon Technologies RTX US	3.24	Raytheon Technologies RTX US	3.24
	Stantec STN	1.64	Stantec STN	1.64
	Aecon Group ARE	4.31	Aecon Group ARE	4.31
	Honeywell HON US	2.02	Honeywell HON US	2.02
	TFI Int’l TFII	1.68	TFI Int’l TFII	1.68
Consumer Discretionary	Home Depot HD US	2.11	Home Depot HD US	2.11
	Martinrea International MRE	1.87	Martinrea International MRE	1.87
	Target TGT US	1.68	Target TGT US	1.68
	Dollarama DOL	0.36	Dollarama DOL	0.36
			Amazon AMZN US	0.00
	Lowes LOW US	1.42	Lowes LOW US	1.42
Communication Services	Rogers B RCI.B	3.61	Rogers B RCI.B	3.61
	Activision Blizzard ATVI US	0.52	Activision Blizzard ATVI US	0.52
	Comcast CMCSA US	2.01	Comcast CMCSA US	2.01
	Telus T	5.34	Telus T	5.34
	Shaw Commications SJR.B	5.27	Shaw Communications SJR.B	5.27
			Facebook FB US	0.00
			Alphabet GOOGL US	0.00
Consumer Staples	Alimentation Couche- Tard ATD.B	0.62	Alimentation Couche Tard ATD.b	0.62
	Loblaws L	1.89	Loblaws L	1.89
	Sysco SYY US	2.96	Sysco SYY US	2.96
	General Mills GIS US	3.34	General Mills GIS US	3.34
	Unilever PLC UL US	3.15	Unilever PLC UL US	3.15
Technology	Apple AAPL US	0.69	Apple AAPL US	0.69
	Microsoft MSFT US	1.00	Microsoft MSFT US	1.00
	Open Text OTEX	1.95	Open Text OTEX	1.95
	Paychex PAYX US	2.82	Paychex PAYX US	2.82
	Qualcomm QCOM US	1.79	Qualcomm QCOM US	1.79
	SPDR S&P Semi. ETF XSD US	0.34	SPDR S&P Semi ETF XSD US	0.34
			CGI Inc. GIB.A	0.00
			ETFMG Prime Cyber Sec. HACK US	1.33
			Visa V US	0.64
			Keysight KEYS US	0.00
Utilities	Algonquin Power AQN	3.91	Algonquin Power AQN	3.91
	Capital Power CPX	6.58	Capital Power CPX	6.58
	Northland Power NPI	2.68	Northland Power NPI	2.68
	NextEra Energy NEE US	1.85	NextEra Energy NEE US	1.85
	Fortis FTS	3.71	Fortis FTS	3.71
Healthcare	AbbVie ABBV US	5.60	AbbVie ABBV US	5.60
	Merck MRK US	3.04	Merck MRK US	3.04
	United Healthcare UNH US	1.44	United Healthcare UNH US	1.44
	CVS Healthcare CVS US	3.08	CVS Healthcare CVS US	3.08
	Bristol Myers BMY US	2.82	Bristol Myers BMY US	2.82
			Danaher DHR US	0.29
			Thermo Fisher Scientific TMO US	0.22
			Perkin Elmer PKI US	0.20


Real Estate	Cdn Apt. REIT CAR.un	3.10	Cdn. Apt. REIT CAR.un	3.10
	CT Reit CRT.un	5.65	CT Reit CRT.un	5.65
	Minto Apartment Reit MI.un	2.70	Minto Apartment Reit MI.un	2.70
	Dream Industrial DIR.un	5.68	Dream Industrial DIR.un	5.68
	Granite REIT GRT.un	3.74	Granite REIT GRT.un	3.74
	Summit Industrial REIT SMU.un	3.85	Summit Industrial REIT SMU.un	3.85
European Equity	iShares MSCI Europe XEU	2.40	iShares MSCI Europe XEU	2.40
Emerging Markets	BMO Emerging Markets ZEM	2.21	BMO Emerging Markets ZEM	2.21

McMurtry Investment Report – Sector Weights (November 2020)

Equity Sector Weights (%)
Sector	My Weight	TSX Comp	S&P 500	55 % US /45% CDN
Financials	19.00	28.70	9.90	18.36
Energy	5.28	10.60	2.00	5.87
Materials	8.55	15.70	2.70	8.55
Industrials	10.35	12.50	8.40	10.25
Consumer Disc.	8.25	3.60	11.60	8.00
Comm. Services	8.50	5.20	11.20	8.50
Consumer Staples	5.18	4.20	7.00	5.74
Technology	19.44	9.70	27.40	19.44
Utilities	4.30	5.40	3.20	4.19
Real Estate	2.95	3.20	2.60	2.87
Healthcare	8.21	1.00	14.10	8.21
Totals	100.00	99.80	100.10	99.97

McMurtry Invest. Report Asset Mix November 2020)

Asset Mix – Income and Growth Portfolios
%	Income	Growth
Cash	20.00	20.00
Bonds – Reg. Bonds	20.00	10.00
Bonds – High Yield	5.00	5.00
Bonds – Tips	0.00	0.00
Preferreds	0.00	0.00
Equities	55.00	65.00
CDN	22.05	26.55
US	26.95	32.45
Europe	3.00	3.00
Emerging Markets	3.00	3.00

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.

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 2020

Investment Commentary November 2020

Investment Commentary (April 2019)

Peter McMurtry, B.Com, CFA

MCMURTRY INVESTMENT REPORT™

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