McMurtry Investment Report & Model Portfolios

McMurtry Investment Report Portfolios – September 2020

Also available in PDF: MIR Portfolios September 2020

Investment Commentary September 2020

US Yield Curve

The 10 minus 2- year US Treasury yield curve widened marginally to 58 basis points from 50 last month. This level is low historically but still above zero. In January of this year it was 35 basis points and in September, 2019 it was close to zero.

US Corporate Debt Spreads

The current US investment grade spread over US Treasuries widened to 2.75% from last month’s 1.79%. This still compares favourably to the 4.5% spread during the last recession of 2007-2008 and to its recent 52 week high of 4.9%. This recent widening is not material enough to imply any serious issues with the domestic economy, but may simply indicate that the current rebound will not be a straight line up and subject to periodic periods of levelling out.

US / China Trade Issues

These issues continue to escalate and this trend is expected to continue into the US election this fall.

Covid – 19 Health Stats

Both globally and in the US, daily new cases of the virus continue to remain very high. This is a frightening trend. The gradual ending of lockdowns is resulting in the recent upsurge.

Equity Market Valuations

The forward PE of the S&P 500 index continues to hover around 21-22 times this year’s earnings. This is high historically but can be explained by the economic issues caused by the pandemic and the lockdowns.

US Corporate Profit Growth

US corporate earnings reports are coming in better than expected, but it is important to keep in mind that consensus numbers have already been taken down sharply.

US Federal Election

Historically during periods leading up to a US federal election, equity markets have frequently exhibited more price volatility from the increased political uncertainty.

Central Bank Monetary Policy

The US Federal Reserve Bank and all the global central banks remain committed to a very accommodative monetary policy where interest rates will stay low for an extended period of time. In fact, the Federal Reserve Governor recently stated that he is comfortable seeing domestic inflation rise faster than the projected 2% rate in order to combat the high unemployment rates. This differs from history when the US Central Bank was more concerned with keeping inflation low.

Asset Mix

Taking into consideration my 30% cash weights for both portfolios, I am not proposing any changes at this time. It is quite possible that equity markets are currently in a short- term correction phase that may see markets fall 10-15%. However, I do not expect this correction to be the beginning of a new bear market, but only a correction in the current bull market. Bond yields remain historically so low that there really is no advantage locking in longer term maturities at this time.

Equity Sector Weights

I am making two changes to my equity sector weights for this month. I am reducing both the Healthcare and Technology groups to market weight my North American benchmark from overweight last month. The uncertainty created by an upcoming US election with a possible Democratic sweep of the three levels of government may lead to much more price volatility in the Healthcare sector. Secondly the Technology sector is due for a correction given its high valuation.

Individual Positions

On a blog dated August 18th August, I added Perkin Elmer, the US healthcare company to my Growth portfolio. The company is a strong generator of both operating and free cash flow and is involved in diagnostic testing for infectious diseases including Covid-19. The shares are trading at a reasonable 21 times earnings given its strong projected growth rate.

On a blog dated August 26th, I added Keysight Technologies, the US technology company to the Growth portfolio. The company is involved in both electronic design and testing and is expected to benefit from the 5G rollout. The company is projected to grow its earnings per share at 13% which makes its current valuation at 20 times earnings seem reasonable. The company has a strong balance sheet and is a strong generator of free cash flow.

On a blog dated August 20th, I deleted Bank of Nova Scotia from both portfolios. The bank has not reserved enough revisions for non performing loans like many of the others have.

Based on the high current valuation and the recent strong investment performance, I am deleting Logitech from both portfolios. The shares are up almost 75% year over year and almost 49% year to date.

I am also deleting the online video gaming US ETF, ESPO from the Growth portfolio based on the same reasons as Logitech. The shares are up over 76% year over year and over 58% year to date.

In the Reit sector, I did review the consequences of the government of Ontario’s decision to propose no rent increases for 2021. I hold both Canadian Apartment and InterRent in both my Income and Growth portfolios. Based on their recent share price weakness, I have decided not to remove them from my portfolios. I already have a large underweight position in this sector. However, I am still concerned that the government assistance programs are coming to an end over the next few months. At that time there will be many permanently unemployed people unable to pay their rents. Consequently I would remain underweight this sector until the future prospects are clearer.

Lastly, I am adding Barrick Gold to both portfolios in the Materials sector. The company is a major global producer of both gold and copper and has a solid balance sheet. The company’s focus is on high- quality long life assets. The company is a solid generator of both operating and free cash flow and has just recently raised its dividend.

Peter McMurtry, B.Com, CFA
Financial Writer
Objective Investment Advice for Everyone
Monthly Investment Newsletter and Sample Portfolios
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Please see our disclaimer at Copyright ©2019 McMurtry Investment Report™. All rights reserved.

McMurtry Investment Report – Portfolios (September 2020)
  Income Growth
Cash Alterna Bank – High Interest Savings (1.40% current ) Alterna Bank – High Interest Savings (1.40% current)
  EQ Bank – Savings Plus ( 1.70% current) EQ Bank – Savings Plus ( 1.70% 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
Common Stocks Security Dividend Yield % Security Dividend Yield %
Financials Royal Bank RY 4.46 Royal Bank RY 4.46
  Intact Financial IFC 2.43 Intact Financial IFC 2.43
  Brookfield Asset MGT. BAM.A 1.44 Brookfield Asset MGT. BAM.A 1.44
  TD TD 4.98 TD TD 4.98
  Sun Life SLF 4.05 Sun Life SLF 4.05
  JP Morgan JPM US 3.48 JP Morgan JPM US 3.48
  Manulife Fin’l MFC 5.85 Manulife Fin’l MFC 5.85
  Bank of America BAC US 2.71 Bank of America BAC US 2.71
  Morgan Stanley MS US 2.66 Morgan Stanley MS US 2.66
  T. Rowe Price TROW US 2.72 T. Rowe Price TROW US 2.72
  Allstate ALL US 2.30 Allstate ALL US 2.30
Energy Suncor SU 4.15 Suncor SU 4.15
  Canadian Natural Resources CNQ 6.61 Canadian Natural Resources CNQ 6.61
  Freehold FRU 4.49 Freehold FRU 4.49
  Enbridge ENB 7.86 Enbridge ENB 7.86
  TC Energy TRP 5.24 TC Energy TRP 5.24
  Whitecap Resources WCP 6.63 Whitecap Resources WXP 6.63
      Parex Resources PXT 0.00
Materials Agnico Eagle AEM 1.03 Agnico Eagle AEM 1.03
  Barrick Gold ABX 1.10 Barrick Gold ABX 1.10
  Franco Nevada FNV 0.73 Franco Nevada FNV 0.73
  VanEck Vectors Gold ETF GDX US 0.47 VanEck Vectors Gold ETF GDX US 0.47
      SPDR Gold Bullion GLD US 0.00
  BMO Global Base Metals ETF ZMT 2.63 BMO Global Base Metals ETF ZMT 2.63
      Osisko Metals OM.V 0.00
      iShares Global Gold ETF XGD 0.13
Industrials Toromont TIH 1.69 Toromont TIH 1.69
  Air Products APD US 1.80 Air Products APD US 1.80
  WSP Global WSP 1.70 WSP Global WSP 1.70
  CNR 1.70 CNR 1.70
  Raytheon Technologies RTX US 3.11 Raytheon Technologies RTX US 3.11
  Stantec STN 1.44 Stantec STN 1.44
  Aecon Group ARE 4.48 Aecon Group ARE 4.48
  Honeywell HON US 2.16 Honeywell HON US 2.16
  TFI Int’l TFII 1.82 TFI Int’l TFII 1.82
Consumer Discretionary Home Depot HD US 2.23 Home Depot HD US 2.23
  Target TGT US 1.85 Target TGT US 1.85
  Dollarama DOL 0.36 Dollarama DOL 0.36
      Amazon AMZN US 0.00
  Lowes LOW US 1.53 Lowes LOW US 1.53
Communication Services Rogers B RCI.B 3.60 Rogers B RCI.B 3.60
  Comcast CMCSA US 2.07 Comcast CMCSA US 2.07
  Telus T 4.89 Telus T 4.89
  Shaw Commications SJR.B 4.89 Shaw Communications SJR.B 4.89
      Facebook FB US 0.00
      Alphabet GOOGL US 0.00
Consumer Staples Alimentation Couche- Tard ATD.B 0.63 Alimentation Couche Tard ATD.b 0.63
  Loblaws L 1.89 Loblaws L 1.89
  Sysco SYY US 2.99 Sysco SYY US 2.99
  Unilever PLC UL US 3.17 Unilever PLC UL US 3.17
Technology Apple AAPL US 0.68 Apple AAPL US 0.68
  Microsoft MSFT US 0.95 Microsoft MSFT US 0.95
  Open Text OTEX 1.60 Open Text OTEX 1.60
  Paychex PAYX US 3.26 Paychex PAYX US 3.26
  Qualcomm QCOM US 2.24 Qualcomm QCOM US 2.24
  SPDR S&P Semi. ETF XSD US 0.44 SPDR S&P Semi ETF XSD US 0.44
      CGI Inc. GIB.A 0.00
      ETFMG Prime Cyber Sec. HACK US 1.36
      Visa V US 0.59
      Keysight KEYS US 0.00
Utilities Algonquin Power AQN 4.59 Algonquin Power AQN 4.59
  Capital Power CPX 7.21 Capital Power CPX 7.21
  Northland Power NPI 3.34 Northland Power NPI 3.34
  NextEra Energy NEE US 2.02 NextEra Energy NEE US 2.02
  Fortis FTS 3.67 Fortis FTS 3.67
Healthcare AbbVie ABBV US 5.14 AbbVie ABBV US 5.14
  Merck MRK US 2.86 Merck MRK US 2.86
  United Healthcare UNH US 1.60 United Healthcare UNH US 1.60
  CVS Healthcare CVS US 3.32 CVS Healthcare CVS US 3.32
  Bristol Myers BMY US 3.00 Bristol Myers BMY US 3.00
      Danaher DHR US 0.37
      Thermo Fisher Scientific TMO US 0.21
      Perkin Elmer PKI US 0.24
Real Estate Cdn Apt. REIT CAR.un 3.15 Cdn. Apt. REIT CAR.un 3.15
  CT Reit CRT.un 5.76 CT Reit CRT.un 5.76
  InterRent REIT IIP.un 2.50 InterRent REIT IIP.un 2.50
  Dream Industrial DIR.un 6.42 Dream Industrial DIR.un 6.42
  Granite REIT GRT.un 3.83 Granite REIT GRT.un 3.83
  Summit REIT SMU.un 4.58 Summit REIT SMU.un 4.58
European Equity iShares MSCI Europe XEU 2.50 iShares MSCI Europe XEU 2.50
Emerging Markets BMO Emerging Markets ZEM 2.4 BMO Emerging Markets ZEM 2.4


McMurtry Investment Report – Sector Weights (September 2020)
Equity Sector Weights (%)
Sector My Weight TSX Comp S&P 500 55 % US /45% CDN
Financials 18.33 29.00 9.60 18.33
Energy 6.67 12.00 2.30 6.67
Materials 8.31 15.40 2.50 8.31
Industrials 10.20 11.90 8.00 9.76
Consumer Disc. 7.94 3.40 11.40 7.80
Comm. Services 8.45 5.20 11.10 8.45
Consumer Staples 5.64 4.10 6.90 5.64
Technology 20.42 10.30 28.70 20.42
Utilities 4.10 4.90 2.80 3.75
Real Estate 1.85 3.00 2.60 2.78
Healthcare 8.11 0.90 14.00 8.11
Totals 100.00 100.10 99.90 99.99


McMurtry Invest. Report Asset Mix September 2020)
Asset Mix – Income and Growth Portfolios
% Income Growth
Cash 30.00 30.00
Bonds – Reg. Bonds 20.00 10.00
Bonds – High Yield 0.00 0.00
Bonds – Tips 0.00 0.00
Preferreds 0.00 0.00
Equities 50.00 60.00
CDN 19.80 24.30
US 24.20 29.70
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
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
Objective Investment Advice for Everyone
Monthly Investment Newsletter and Sample Portfolios
Personalized Portfolio Reviews

Please see our disclaimer at Copyright ©2019 McMurtry Investment Report™. All rights reserved.

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

Please see our disclaimer at disclaimer ©2019 McMurtry Investment Report™. All rights reserved.