JMRD Market Observer for January 13th, 2017 – JMRD Diversified Income & Growth Basket & JMRD All-Cap Basket Q4 Updates

January 13, 2017

In This Week’s JMRD Market Observer

 

 

  • JMRD Diversified Income & Growth Basket & JMRD All-Cap Basket Q3 Updates

  • Technology (Thematic Research): Opportunities Abound – A Look at the Year Ahead 2017

  • Retirement Corner

  • Week at a Glance

  • Reads of the Week

  • Economic Calendar

  • Earnings Reports

 

 

JMRD Diversified Income & Growth Basket & JMRD All-Cap Basket Q2 Update

 

There was no shortage of news in the final quarter of 2016, the most noteworthy item being, of course, the US Election.  Contrary to what most polls indicated heading into election night, Donald Trump prevailed and became the 45th President of the United States.  Market pundits anticipated a market selloff with a Trump victory but once again the opposite happened and markets, after a flattish open the morning after, moved higher for what seemed to be the remainder of the year.  We feel that the market gains can be attributed to the fact that investors were just waiting for the election uncertainty to be over.  Once the investing public had some closure, money that was on the sidelines moved into the market.  Trump’s pro-growth and economically stimulative platform was another reason for the move upward in equities.  Early in 2017, the market appears to be taking a wait and see approach to the new president-elect, who will officially take office on January 20th.  The first month or two of his term will be closely scrutinized by all.

 

Taking a back seat to the election in the quarter was the US Federal Reserve’s decision to increase its short term interest rate by 25 basis points, or 0.25%.  This was all but expected and didn’t have much impact on the markets. An interesting side note to the FED meeting was that its board members collectively expect interest rates to go up three times this year.  Last year at this time the FED officials were expecting to increase interest rates four times in 2016 but only one rate hike materialized.  This just further lends credence to the notion that even sometimes the experts can be off a little.

 

Lastly, OPEC held its annual meeting in Vienna at the end of November and with the groundwork laid earlier in the year, the oil cartel, plus Russia (a non-OPEC member) announced a production cut of over 1M barrels per day, starting in 2017.  The price of oil rose from the mid to high $40s once the news was disseminated and was at $55 per barrel by mid-December.  Since that time, oil has traded in a range between $55 and $51.  Investors are still leery of the agreement due to past transgressions of OPEC members not sticking to their promises and until investors see hard evidence that supply is falling, oil could be range bound.

 

On that note, before we get into Basket specifics, we always like to provide you with a perspective on how the various global indices and commodities performed in the quarter.  The Q4 and 2016 data are provided in the table below.

 

 

Today we will discuss the two Canadian mandates which the Team manages; The JMRD Diversified Income and Growth Basket (DIG) and the JMRD All Cap Basket (ACB).

 

JMRD Diversified Income & Growth (DIG) Basket: Q4 2016 Update

 

The DIG Basket returned 0.46% in Q4. For the year, the DIG Basket’s return was 12.0%.  Admittedly, Q4 was a somewhat disappointing result for the basket but the annual return was generally as expected.  After the election, investors’ focus shifted to sectors that stood to benefit more from a rapidly expanding economy, potentially resulting from Trump’s stimulus promises. When economic growth is projected to be higher, expectations of higher inflation take hold and longer term interest rates start to rise.  This is what happened after the election.  Specific sectors that benefit from these conditions, are financial stocks, industrial/infrastructure stocks and materials/mining stocks.  The DIG Basket holds TD Bank, which was the largest gainer in the quarter, posting a return of 13.6%.  WSP Global is a global engineering and infrastructure services company and it too posted a sold quarter returning 8%.  Whitecap Energy also performed well and posted a 10% return in Q4. 

 

On the flip side, there were sectors that don’t fare well in the aforementioned economic conditions and those are high dividend paying telecom, utility and real estate sectors plus consumer staple stocks.  Stocks like Hydro One, Emera, BCE, Brookfield Asset Management and Metro detracted from the portfolio.  These are more conservative companies and they tend to under perform higher growth companies when investors are looking for more returns with added risk.  

 

It was a pretty active quarter for transactions as we re-positioned the portfolio for what we believe will be a very interesting 2017.  We took profits in Metro and replaced it with Saputo, at the time taking advantage of some near term weakness in Saputo’s share price.  We replaced Franco Nevada with Vermillion Energy and also bought insurer Industrial Alliance.  Insurers tend to benefit from rising interest rates.  We also added to our infrastructure theme, initiating a position in SNC Lavalin, but not before taking partial profits in WSP Global.  We felt that it was prudent to add diversification with a second infrastructure name and to lower the exposure to WSP, which was becoming a higher weighting due to price appreciation.  We initiated a position in Capital Power, a power producer.  This company announced an agreement with the Alberta government that will see it receive over $700 million in compensation over 14 years for the phasing out of its coal power plants to meet more stringent environmental standards.  This stock has a 7% dividend yield and is expected to increase its dividend by 7% per year for the foreseeable future. Lastly, we initiated a position in Veresen, an energy infrastructure company, we took profits in Thomson Reuters and also trimmed our stake in Whitecap Energy.

 

Below is a snapshot of the current holdings.  The current annual cash flow is $528 for a yield of 3.28%.   

 

 

We consider the DIG Basket a top pick for clients seeking income and growth and feel it is very appropriate for a portion of a client’s equity weighting.  The current value of one DIG Basket is approximately $16,100 making the minimum initial position approximately $32,200, which is two Baskets.  This amount will continuously change as the prices of the DIG Basket components fluctuate on a daily basis.  Subsequent purchases can be made in one Basket increments.

 

JMRD All Cap Basket (ACB):  Q4 2016 Update

 

The All Cap Basket (ACB) is meant to be a complementary holding to the DIG Basket above.  The ACB invests in a number of smaller, growth-oriented companies that may, or may not, pay a dividend.  After posting a return of 7.77% in Q3, the ACB realized a return of 0.38% in the fourth quarter and 7.25% for 2016.  Since we launched this basket in October 2013, it has an annual compounded rate return of 13.78% versus the TSX Total Return of 8.83%.

 

Further to our comments above, Sunlife Financial, because of interest rates moving higher in the quarter, had the best performance in the quarter, gaining 19%.  Premium Brands continued its growth by acquisition strategy, acquiring four different food companies and as a result the stock bounced by 13%.  CCL Industries also performed admirably posting a return of 7% after acquiring Innovia for $1.13 billion.  Innovia, headquartered in the U.K., is a leading global producer of specialty, high performance, multi-layer, surface engineered BOPP films for label, packaging and security applications.

 

During the quarter, we sold our positions in Exco Tech and Uni-Select, both exposed to the auto sector, which has slowed in recent months.  We also sold our position in Torc Oil and Gas and added the proceeds to Spartan Energy which we already held and felt provided more upside potential.  We initiated positions in Seven Generations Energy, which is another oil and gas producer, Cargojet, an overnight air cargo service provider, metals and mining company Teck Resources and Shopify, the company that provides a cloud-based, multi-channel platform for retail businesses.  Shopify hit a new high this week after announcing a partnership with Amazon.

 

Below are the current All Cap Basket holdings.

 

 

As mentioned above, The All Cap Basket is more of a growth oriented investment to complement the DIG Basket.  The minimum purchase for the All Cap Basket is 4 Baskets or $60,800 at current prices, with subsequent purchases of 1.5 Baskets, or about $22,800. And again, this amount will continuously change as the prices of it constituents change on a daily basis. 

 

 

Technology (Thematic Research): Opportunities Abound – A Look at the Year Ahead 2017

 

Event:

Year ahead outlook for Canadian Tech.

 

Key Takeaways:

When it comes to the Canadian tech sector, even though the group fared reasonably well with the largest 25 names by market cap rising by +6% in 2016, tech continued to be a small contributor to the S&P/TSX, representing just 2.6% of the index. That said, the sector has outperformed over the years. Looking ahead, we think that’s likely to continue as a new generation of public names come to market over the 12 – 24 months. With respect to the current slate of public tech names in Canada, we think investors should tread lightly as valuations have reached lofty levels. That said, while stock selection will be as important as ever amidst robust valuations – it is not to say investors should entirely avoid the pricey names as those tend to be the ones that outperform. Our year ahead provides you with some lessons learned from 2016 and our take on how we can apply that to 2017. We boil that down into our best picks for the year. All the best for a great 2017.

 

From a stock selection standpoint, our best bets at the time of writing for 2017 are noted below. We cover each of these names in more depth at the end of this report.

  • Altus Group (Outperform; Target: $34, Potential ROR (incl. div): 12%)
  • CGI Group (Outperform; Target: $76, Potential ROR: 18%)
  • Kinaxis (Outperform; Target: $75, Potential ROR: 21%)
  • Mitel Networks (Outperform; Target: US$10, Potential ROR: 40%)
  • OpenText (Outperform; Target: US$90, Potential ROR (incl. div): 44%)

 

See the full article.

 

Retirement Corner

 

 

 

Reads of the Week

 

 

 

 

  • Economic News – Canada: House prices up 0.3% in December National house price inflation has shed some momentum in recent months as Vancouver continues to deflate. Canada’s priciest city experienced its third consecutive monthly decline, and more is in store. The price drop so far was mostly concentrated in dwellings other than condos. This is consistent with house sales decline (since their February peak) mostly concentrated in detached dwellings (top chart). In contrast, according to Toronto Real Estate Board, existing home sales reached another record in 2016, while the market faced a very tight supply (middle chart). We have yet to see it, but sooner or later, low affordability and the new ruling regarding the qualification for an insured mortgage will take some steam out of demand and prices. In the meantime, Toronto, Hamilton and Victoria are the three metropolitan regions pulling up the Composite index growth month after month. Apart from Vancouver and these three regions, house prices have been flat over the last six months 

 

 

 

 

 

 

Economic Reports

 

Monday January 16th – None; Martin Luther King Day – US Markets Closed

Tuesday January 17th – US Empire State Index

Wednesday January 18th – Bank of Canada Interest Rate Decision; US Inflation, US Industrial Production, US Beige Book of Economic Activity

Thursday January 19th – Canada Manufacturing Sales; US Housing Starts, US Initial Jobless Claims

Friday January 20th – Canada Inflation, Canada Retail Sales

 

 

Earnings Reports

 

Monday January 16th – None; Martin Luther King Day – US Markets Closed

Tuesday January 17th – Morgan Stanley

Wednesday January 18th – Citigroup, Goldman Sachs, Netflix

Thursday January 19th – American Express, KeyCorp

Friday January 20th – GE

 

 

Have a good weekend!

 

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