McMurtry Investment Report & Model Portfolios

McMurtry Investment Report Portfolios November 2021

Also available in PDF: McMurtry Investment Report Portfolio – November 2021

Investment Commentary November 2021

US Yield Curve

The ten minus two- year US Treasury yield curve declined modestly by 11 basis points to 1.10%. As the yield curve remains positive and is still considerably above December 31st level of 0.80%, this is not something to be concerned about in regards to the domestic US economy.

US Corporate Debt Spreads

 As of November 1st, 2021, Baa rated US corporate bond spreads relative to 10-year US Treasuries actually narrowed by 16 basis points to 1.69%, compared to the same time last month. This modest decrease is clearly an indication that there is no upcoming recession.

Covid – 19 Health Stats

Covid daily new cases are definitely improving especially in North America, India and Brazil. Global daily new cases are now under 500,000, down sharply from 800,000 in April. Daily cases continue climbing in Russia and the UK, however. The Centre for Disease Control in the US has just given their approval to Pfizer’s Covid vaccine for children 5-11 years old in addition to the drug company’s new anti-viral that is showing an 89% efficacy rate regarding Covid hospitalizations and deaths. Pfizer’s announcement along with Merck’s previous one about their own anti-viral, may be the final blow in dealing with Covid-19 in North America, according to Dr. Scott Gottlieb. 

Equity Market Valuations

Taking into account the recent equity market strength, the forward PE multiple of the S&P 500 index rose to 21.2 as of the end of October, from last month’s 20.70 times. This compares to the long -term median of 19.6 times          

Central Bank Monetary Policy

The US Federal Reserve will start tapering its pace of bond purchases later this month by $15 billion out of a total of $120 billion monthly. This is the first step in the process of increasing interest rates. Domestically the Bank of Canada has ended its quantitative easing program this week. Under their new mandate the Bank of Canada will only purchase bonds to replace maturing ones.

Asset Mix 

I am making some changes to my recommended asset mix with a 5% reduction in cash for both portfolios and a corresponding increase of 1% in preferred shares, a half of 1% increase in US Tips and a 3.5% increase in common equities. In addition, I am dividing the category – Canadian Regular Bonds into Government of Canada 1–5-year bond ladder ETF’s and Canada Investment Grade 1-5 year corporate bond ladder ETF’s. Finally, I am increasing European Equities by 1% for both portfolios. Taking into account the gradual expected increase in US interest rates by the Federal Reserve, the improvement in global daily Covid cases, the two new anti-virals from Pfizer and Merck, the eventual re-opening of the global economy and the relatively strong quarterly earnings reports, equity markets may not experience a short- term correction but a Christmas rally instead. This is the main reason for increasing my equity weight at this time even after the sharp runup. As you are all very much aware, there has been lots of market volatility recently in equity sectors and individual companies that disappoint on a quarterly earnings basis. All this is a healthy sign for the markets. However, it is still important to be prudent with your overall asset mix and this is why I am keeping at least 15% in cash at this time.

Equity Sector Weights

I remain overweight my North American benchmark Financials, Energy, Materials, Industrials, Consumer Discretionary and Real Estate. I remain underweight Consumer Staples, Healthcare, Technology, Utilities and Communications.

Cyclical industries with pricing power continue to perform better in the market to ones that cannot pass on raw material cost increases to their clients in the form of price increases.


Individual Equity Changes

In a portfolio blog on November 2nd, I added Bank of Montreal to both portfolios. The bank’s current 37% dividend payout combined with a Common Equity Tier 1 ratio of 13.4% will encourage both stock buybacks and dividend increases, especially with the federal regulator, OSFI, granting the Canadian banks and insurance companies’ permission to do so.

In a portfolio blog dated October 20th, I added FedEx to both portfolios. The company continues to experience strong revenue growth and is expected to deal effectively with rising costs through the increased usage of drone deliveries and a switch from gas powered trucks to electric.

In a portfolio blog dated October 7th, I added Applied Materials to the Growth portfolio. This is one of the world’s largest suppliers of equipment to the semiconductor industry. The current shortage of semiconductor chips will surely benefit supply companies like Applied Materials with demand expected to remain strong for the next several years.

In addition to the above changes to the portfolios, I would like to review the fundamental outlook for several companies in my model portfolios that are currently experiencing some headwinds.

Let us get started with the consumer products company, Unilever. While the company is a very strong one, it continues to experience both sales problems in Emerging Markets as a result of Covid-19 as well as sharply higher operating costs. This is leading to shrinking operating margins. Based on these ongoing problems, I have decided to delete the company from both portfolios in the Consumer Staples area.

In the healthcare sector, Curaleaf has experienced a share price decline in the midst of the very strong equity markets. Curaleaf remains one of the strongest companies in the cannabis industry and is expected to benefit from the opening up of the US market. In addition, the company continues to make acquisitions and grow their revenues accordingly. It is only a matter of time before the company starts to make money on an operating cash flow basis. I recommend to continue holding this company and to buy more at current prices if you are underweight.

In the Materials sector, Osisko Metals has not kept pace with the strong equity share price performance of many base metal companies. However, it is important to point out that this is an exploration play with no production or revenues at this time. Over the last year the company has reported that there is considerable potential to expand its current orebody of lead / zinc with ongoing very positive test results. In addition, the company is effectively dealing with some water issues and this is likely to lead to materially lower operating costs once the mine is operational. My recommendation is to keep the company in my Growth portfolio.

In the Materials sector, Pan American Silver has experienced poor share price performance in the current environment. Pan American has significant leverage to silver prices that are expected to pick up with higher inflation and a peaking of the US dollar internationally. The company offers a reasonable valuation combined with a strong balance sheet. Significant growth opportunities exist with the company’s La Colorada Skarn mine in Mexico and with an exploration deposit in Escobal, Guatemala. I am leaving this silver miner in the Growth portfolio.

In the Communications sector I am switching Activision Blizzard for Electronic Arts for the Growth portfolio. While Activision Blizzard’s last quarter led to results that met expectations, Electronic Arts’ results far exceeded expectations. Electronic Arts’ revenues for the quarter were up over 58% with net bookings up a strong 104%. Activision is currently involved in allegations of sexual discrimination and harassment and announced that two recent gaming titles, Diablo 4 and Overwalk needed to be delayed until 2023. At current prices Electronic Arts is trading at a reasonable 19.74 PE based on forward EPS, taking into account its EPS growth rate for 2022 is 24%. Both year over year growth in revenues and EBITDA are expected to both be at least 24% year over year. I would also like to point out that the video gaming industry continues to register strong growth with these positive trends expected to continue in a post pandemic era with lifestyle changes becoming more permanent.

In the Consumer Discretionary sector, I am recommending that Martinrea be deleted from both portfolios with proceeds being redirected into Magna, a company I already have in both portfolios. The last quarterly report for Magna was largely in line, but Martinrea’s results sharply disappointed investors. While the two companies are in the same industry and face similar supply issues as a result of semiconductor shortages, Magna is a much larger and stronger competitor that will much better be able to weather the short- term issues that are expected to gradually ease up in the latter half of next year. Magna has a much stronger balance sheet with a debt / equity ratio of only 0.207 times compared to Martinrea’s 0.78 times. Magna is currently trading at an attractive 4.5 times Enterprise Value / Forward EBITDA.

Lastly in the Industrials sector I want to review the fundamentals for Aecon. Aecon’s last quarterly report was weaker than last year’s numbers on an EPS basis, but largely in line with consensus. Next year’s EPS are expected to rise by 24%. Aecon’s share price performance has been much weaker than WSP Global and Stantec, companies that are also in my Growth and Income portfolios. The reason the share price sharply retreated after the quarterly press release was much more to do with a statement saying that SA Energy Group, a company where Aecon has a 50/ 50 joint venture with another company, has started arbitration to resolve issues related to delays from the pandemic on the Coastal Gas Pipeline project. Aecon indicated in a press release that unless these issues are dealt with in a timely manner that there could be a meaningful negative impact on Aecon’s earnings, cash flow and financial position. This puts a level of uncertainty that was not present previously. However, it is essential to review all the relevant facts for stocks we own before making a hasty decision to liquidate one’s holdings. This past Friday there was an announcement from TC Energy that they have decided to provide up to $3.3 billion in additional, bridge financing to cover cost overruns related to the Coastal Gaslink pipeline. Coastal is owned by a group of companies including LNG Canada that have asked TC Energy to build the pipeline.  TC Energy in turn has asked Aecon to build a portion of the pipeline. The announcement from TC Energy may clearly make it a lot better for Aecon in its financial dealings with Coastal. Based on this recent development and taking into account Aecon’s cheap valuation, I have decided to keep my holding in Aecon for both portfolios until I obtain more clarification regarding TC Energy’s recent announcement and its effect on the financing of the Coastal pipeline.


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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
Bonds – Regular20.0010.00
Bonds – High Yield5.005.00
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
Consumer Disc.6.404.1010.107.40
Comm. Services8.505.8010.108.17
Consumer Staples6.253.907.305.77
Real Estate3.753.503.103.28

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
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McMurtry Investment Report – Portfolios (April 2019)
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

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