McMurtry Investment Report and Model Portfolios™

McMurtry Investment Report Portfolios November 2022

Also available in PDF: McMurtry Investment Report Portfolio – November 2022

Investment Commentary November 2022

US Yield Curve

The 10-2-year US Treasury yield curve remains inverted as of November 2nd with an increase in its inversion from minus 39 basis points in September to the current level of minus 51 basis points.

US Corporate Debt Spreads

As of November 2, 2022, Baa rated US corporate bond spreads relative to 10-year US Treasury yields actually declined by 28 basis points to 1.99%.

Covid – 19 Health Stats

Although Covid lockdowns in China continue, these will gradually ease off in 2023.

Equity Market Valuations

The forward PE of the S& P 500 is currently at just over 16 times as of November 2nd.

Central Bank Monetary Policy

US Federal Reserve policy remains very hawkish with no end in sight until domestic US inflation falls sharply from current levels. However, there have been a lot of rumours about a Fed pivot. This week the Fed Funds rate rose again by 75 basis points with an additional 50 expected in December. Wages and rents remain the sticking factors in the inflationary outlook. As I have mentioned several times in the past, these factors are not leading indicators like money supply growth is. US money supply aggregates continue to collapse and this is resulting in a very sharp decline in overall mortgage demand. House prices are falling as well as most commodities except crude oil. Most leading indicators point to an upcoming economic slowdown that will result in US domestic inflation easing off. It is just a matter of time before it does. This week the monthly employment data showed a stronger increase in employment than anticipated. Average hourly earnings in the US rose 0.4% in October and 4.7% on a year-over-year basis. Although employment rose more than expected, a rise in the unemployment rate to 3.7% indicated some relief in the employment demand/supply conditions. Nonfarm employment has gone down from October 2021’s level of 677,000 to the October 2022 level of 261,000. The number was 315,000 in September.

Asset Mix

In a blog dated October 25th, I increased equity exposure by 10% to 35% and 45% for the Income and Growth portfolios respectively. Cash has now gone down by the same amount to 40% for both portfolios. Even though the probability of a recession next year has sharply increased, timing the market’s ultimate bottom will be impossible to predict accurately. Consequently, I have chosen equity exposure at the low end of an acceptable range for each portfolio. It is still possible that we may end up testing the recent lows, but I do not think so. Equity markets normally start going up six months before the middle to end of a recession. Equity market breadth continues improving with the percentage of stocks above their 200 -day moving average climbing back sharply from recent lows. The same trend is evident for both the S&P 500 and 100 Indices.

As a result of a total lack of flexibility for their clients. I have removed Alterna Bank High Interest Savings accounts for both portfolios. I would replace it with a combo of your discount brokerage’s high-interest savings accounts or ETF’s and EQ Bank which offers both savings and GIC’s for both registered and non-registered accounts. Please keep in mind that your discount brokerage high-interest savings accounts are probably not covered by CDIC insurance, while EQ Bank savings accounts and GIC’s are totally insured up to the maximum ceilings of $100,000 per financial institution.


Equity Sector Weights

I remain overweight my North American benchmark Energy, Healthcare, Consumer Staples, and Utilities.

I remain underweight Technology, Financials, Materials, Industrials, and Consumer Discretionary.

I remain market weight Reits.

The only major change I am making this month is to increase the Communications weight from underweight last month to market weight this month. While this sector is getting hurt similar to the Technology sector, there are companies I particularly like at this time. The Canadian telcos – Telus and Quebecor offer solid dividends and some growth in this current period of economic weakness. I also like Disney for its unique growth opportunities. Alphabet also offers solid long-term prospects despite its current short-term issues. Lastly, Electronic Arts continues to trade at a low valuation on an Enterprise Vale to Forward EBITDA basis.


Individual Equity Changes 

In the financial services sector, I added PayPal to the Growth portfolio in a blog dated October 27th.

The share price has been unfairly punished with its share price off over 67% from its 52 -week high. While there is more competition in the payment field, both Visa and Mastercard have not indicated any interest in competing for small online merchants which are PayPal’s bread and butter. Revenues, EBITDA, and EPS are expected to rise nicely in 2023 even in the midst of this difficult economic period. The shares trade at a forward PE of 18.39 times, at the low end of its five-year range.

In a blog dated October 24th, I added Lululemon to the Growth portfolio in the Consumer Discretionary sector. The company has solid growth prospects, yet its share price has fallen almost 32% from its 52 -week high. The company has no long-term debt and does not own any manufacturing facilities. Differing from its competitors, the company has maintained stable operating margins in this period of high inflation. The stock’s forward PE is trading at almost 33 times which is at the low end of its 5 -year range. EPS and Revenues are expected to continue to grow strongly next year.

Also in the Consumer Discretionary sector, I am deleting Gentex from both portfolios. The shares are trading at a much higher valuation than either Ford, GM or the auto parts companies. While both EPS and EBITDA are expected to rebound next year, EPS revisions continue to decline into 2023. This is not a good sign and indicates to me that the bottom-up analysts are too optimistic and only beginning to adjust their projections down in this period of weak economic growth.

Also in the Consumer Discretionary sector, I am removing Home Depot from both portfolios. The shares continue to trade at a much higher valuation than Lowes, yet its dividend payout is much higher as well.

Lastly in the Consumers Discretionary sector, I am deleting Sleep Country from both portfolios, While the stock’s valuation has remained much lower than its peers, the bottom-up analysts covering the stock appear to be slow on the mark lowering consensus EPS estimates. The most recent quarter saw revenues and EBITDA fall year over year by 8.3% and 10.9% respectively. Same-store sales went down by 11.1%.

In the Industrial sector, I am deleting TFII from both portfolios. The company is just starting to experience weakening fundamentals and these are expected to continue throughout 2023. EPS revisions are falling sharply for both the current upcoming quarter and into the following year.

In the Utilities sector, I am adding both Boralex and Brookfield Infrastructure to both portfolios. In a portfolio blog dated October 18th I added Boralex, a Canadian company with its entire focus on renewable energy in the forms of wind, solar, hydro, and thermal. Currently, the company is the largest independent producer of onshore wind power in France. The company offers solid growth prospects in wind. solar and storage projects. Also in this same sector, I added Brookfield Infrastructure to both portfolios. The company offers exposure to global long life infrastructure projects with stable cash flows. Approximately 85% of its current business benefits from rising inflation.

In the Reit sector, I am making several changes to the current list of holdings. In a blog dated October 19th, I added the US logistics Reit, Prologis, to both portfolios. The company is a global leader in industrial warehouse rentals and has recently just completed a major acquisition of Duke Realty. This acquisition will provide Prologis with additional growth prospects. Prologis has a strong balance sheet with its average interest rate on its debt at 1.9%.

In regards to Canadian Reits, I am deleting Canadian Apartment Reit, European Residential, and lastly CT Reit from both portfolios. European Residential is unfortunately having to operate in the current very challenging European market. Canadian Apartment Reit is currently trading at a much higher valuation than InterRent, yet its growth rate is comparable. Lastly, CT Reit has outperformed other Canadian Reits over the last year. However, its projected growth rate is lower than the others and yet its valuation is considerably higher with the exception of Canadian Apartment Reit.

In the Technology sector, I added Adobe to the Growth portfolio in a portfolio blog dated October 17th. Adobe’s recent acquisition of Figma was not received well by the market. The acquisition is expected to be dilutive to EPS in 2023 and only start to be accretive by 2025. However, the purchase of Figma is considered very strategic as the company is much more flexible and adaptable to its clients than Adobe is. Adobe is currently trading at just under 21 times forward EPS, at the lower end of its 5- year range. This is an opportunity to acquire a high-quality tech company at a very reasonable valuation given its long-term projected growth rate.

I am deleting Qualcomm from both portfolios in the Technology sector. The company’s third quarter was very disappointing indicating a complete collapse in the outlook for smartphone chips as a result of the continuing oversupply.

In the Healthcare sector, I am deleting Medtronic from both portfolios. Despite the economy opening up after all the Covid lockdowns, medical procedures to install devices have remained relatively weak for the industry as a whole. The same trend is evident with Stryker. EPS revisions for next year continue declining for Medtronic.

I am also deleting Danaher from the Growth portfolio in the Healthcare sector. The company is experiencing poor EPS visibility with not a lot of mergers and acquisitions happening in the healthcare field.


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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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