McMurtry Investment Report and Model Portfolios™

McMurtry Investment Report Portfolios September 2022

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

 Investment Commentary September 2022

 US Yield Curve

The 10-2-year US Treasury yield curve remains inverted as of September 1st at a minus 0.25%, but less than last month’s minus 0.41%. Two- year Treasury yields rose by 61 basis points and are now at 3.51% as of September 1st.

US Corporate Debt Spreads

As of August 4, 2022, Baa rated US corporate bond spreads relative to 10-year US Treasuries actually declined by 14 basis points to 2.18%. This does not indicate any immediate panic in the US economy.

Covid – 19 Health Stats

Covid-19 cases in China continue to rise resulting in increased lockdowns of major cities.

Equity Market Valuations

The recent market decline has caused the Forward PE of the S&P 500 to fall back down to 16.7 times compared to 17.4 times last month.

Central Bank Monetary Policy

As clearly highlighted in this month’s newsletter, US Federal Reserve policy remains very hawkish with no end in sight until domestic US inflation falls sharply from current levels.

Asset Mix

Last month the cash weight for both portfolios was 40%, while the equity exposure was 35% for the Income portfolio and 45% for the Growth portfolio.

In a blog dated August 13th, I reduced cash by 5% and increased equities by the same percentage.

However, as I explained in my newsletter, this change in weights was totally a result of US domestic inflation exhibiting clear signs of peaking.

Unfortunately, last week at Jackson Hole, Wyoming, Chairman Powell gave a short speech where he stated emphatically that the Central Bank has no intention of easing off their current interest rate policy until inflation is totally broken down. Based on this presentation, I have decided to go back to my last month’s cash and equity weights, namely 40% cash for both portfolios and 35% and 45% equity for my Income and Growth portfolios respectively.

In this current period of rising interest rates, I continue to recommend a short- term fixed income duration. However, once rates have risen over the next several months to a level that is likely to cause a hard landing, it would be appropriate to increase duration accordingly at that time.  Currently I have exposure to both domestic rate- reset preferred shares and floating rate fixed income. Once rates peak, I will be selling both rate -reset preferreds and floating rate bonds as neither will benefit from lower rates.

I am changing my North American benchmark weights to 60% Canada and 40% US, from last month’s 65% Canada and 35% US. The justification for this change is that the Canadian equity market, ex Energy, will not perform as well in a weaker economic environment.

Equity Sector Weights

Based on the weakening economy and corporate profits, I am keeping the underweight for Financials and Consumer Discretionary. I am reducing both the Materials and Industrial sectors from market weight to underweight. I am maintaining my overweight in Healthcare, Energy, Utilities and Consumer Staples. I am keeping my market weight for the Reit sector with the very cheap valuations. I am keeping the underweight for the Growth sectors, namely Technology and Communications as a result of the continuation of higher interest rates. However, I am reducing my underweight somewhat for the Technology sector with valuations becoming more attractive and the fact that Growth stocks tend to do better than cyclical ones in a weakening economy, especially a recession.

Individual Equity Changes

In the Materials sector, I am deleting Equinox Gold from the Growth portfolio. Gold bullion is having difficulty performing in this high interest rate, high US dollar environment. Furthermore, the company is not a mature gold producer at this time and is more susceptible to downside risk being a small cap company. Also, in the Materials sector I am deleting BMO Base Metals ETF, ZMT, from both portfolios. I am trying to be more stock selective by focusing on my preferred list of base metal companies.

In a blog dated August 26th, I added Open Text, the Canadian software company to both portfolios in the Technology sector. The company has a long- term track record of making accretive acquisitions. It recently made a new acquisition, the British software company, Micro Focus, for 5.1 million pounds. The acquisition was made at an attractive price relative to what Open Text is trading for and is expected to materially add to consolidated EBITDA.

Also in the technology sector, I am deleting Paychex from both portfolios. While the company should benefit from rising rates, this will be more than offset from a slowing employment market that the Federal Reserve wants to see from its hawkish monetary policy. I am also deleting Applied Materials from the Growth portfolio in the Technology sector. The US semiconductor industry is expected to experience a major oversupply situation next year and this will not help Applied Materials.

In a blog dated August 18th, I added the US transportation company, J.B. Hunt Transport to both portfolios in the Industrials sector. The company is one of the largest transportation companies in North America and is trading at a reasonable valuation relative to its peers. The company is expected to show strong growth in EBITDA over the next two years.

In a blog dated August 18th, I deleted CP from both portfolios. The stock is trading at a much higher valuation than CNR and there is no assurance that its takeover of Kansas City Southern will be a smooth one.

In a blog dated August 13th, I deleted Parex Resources from both portfolios in the Energy sector. The change in government in Columbia to a left leaning one does not bode well for Parex that operates solely in this country.

In the Financial sector, I am deleting T. Rowe Price from both portfolios. While this is a solid company, it will be hard for this investment manager to generate rising revenues from a portfolio of equities that are falling in price in a weak equity market.

Lastly, in the Communications sector, I am deleting Comcast from both portfolios. An economic slowdown plus much more competition in the streaming area will provide major headwinds for earnings next year.




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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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