JMRD Market Observer for July 8th, 2016 – JMRD All Cap and DIG Basket Q2 Updates

July 8, 2016

**July 8th Issue of The JMRD Market Observer**

 

In This Week’s JMRD Market Observer

  • JMRD Diversified Income & Growth Basket & JMRD All-Cap Growth Basket Q2 Updates
  • NBF Economics and Strategy Special Event: Webinar – July 14th @ 1:30pm ET
  • Retirement Corner
  • Week at a Glance
  • Reads of the Week
  • Economic Calendar
  • Earnings Reports

 

 

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

 

Although Q2 was dominated by the Brexit vote in the latter part of June, the overall market returns were decent for the quarter.  The markets bottomed in mid-February and continued to climb until the end of June.  June was volatile leading up to the UK referendum with markets gyrating daily around whatever the latest poll results indicated.  Once the final tally was in, investors were quick to unwind positions they took in the days leading up to the vote causing volatility to spike.  Once investors gathered themselves and realized that a vote by the UK to leave the EU may not be as bad as originally feared, the markets rallied in the final week of June to end the quarter on a high note.

Before we get into Basket specifics, we always like to provide you with perspective on how the various global indices and commodities performed in the quarter.  The Q2 data are provided in the table below.

Q2 Data Table

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

 

JMRD Diversified Income & Growth (DIG) Basket: 2015 Update

The DIG Basket followed up Q1’s 2.6% return with a 4.37% in Q2.  The TSX Total Return’s performance, our benchmark, was 5.07% for the similar period.  The TSX Total Return has more gold exposure than our Basket and its >60% return for the year has really helped the TSX’s index in 2016.  The five year compounded rate of return for the DIG Basket is 5.39% versus the benchmark return of 4.21%.

One main event during Q2, save for the Brexit outcome, was the interest rate decision of the US Federal Reserve (FED) on June 15th.  The FED left the overnight rate unchanged and cited the slowing employment data and the potential risk of the Brexit vote as key reasons why it held the rate steady.  At the start of the year there was talk that the FED may raise rates three to four times in 2016 but that appears to be off the table for the time being, for essentially the same reasons as mentioned above.  We address this because the expectation of lower rates for longer usually leads to investors searching for higher yielding investments, typically in the form of telecom stocks, utility stocks and real estate investments (REITS).  The DIG Basket holds a number of these investments, which led to some stellar performers in Q2.

The most notable performer in the quarter was Whitecap Energy (WCP).  The price of oil, as you can see in the chart above, rose 26% in Q2 and Whitecap benefited, rising 31% itself.  We didn’t want to give up on this name as we always felt that it would be a leader when the price of oil turned and it certainly did recover nicely.  Honourable mention goes to TransCanada Pipeline (TRP), up 17.8% in the quarter.  TransCanada is a utility-type name with some oil exposure and it too moved high on the back of higher oil prices and lower interest rates.  A laggard in the quarter was Brookfield Asset Management, down 8%, because of its real estate exposure in the UK.  Most other holdings were steady throughout Q2.

During the quarter we sold our positions in Agrium (AGU) and Gildan Activewear (GIL).  As replacements, we added more energy exposure in the form of Canadian Natural Resources (CNQ) to take advantage of rising oil prices.  CNQ is up 7% since we bought.  We initiated a position in Franco Nevada (FNV), a gold royalties company, at an average price of $84.50.  It’s currently trading around $100 per share.  We also increased our exposure to interest sensitive names, buying shares of utility company Northland Power (NPI) at $21.27 and adding to our position in Hydro One (H) at $23.42 when the government sold more shares to the public.  NPI is up 5% since we added it and H is up 12%.  Lastly, we bought a position in the Canadian Real Estate Trust Index ETF (XRE) on the premise that rates would stay lower for longer.  Its dividend yield is close to 5% and the price has risen close to 6% since we acquired the position in early June.

Below is a snapshot of the current holdings.  The current annual cash flow is $428 for a yield of 2.75%.

Current Holdings

 

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 $15,500 making the minimum initial position approximately $31,000, 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 GROWTH BASKET (ACB):  

If you recall, 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 an impressive 16% return in 2016, the All Cap Basket returned -2.18% in first quarter of 2016.  The second quarter saw a return of 1.35% for the ACB.  As with the DIG Basket, the ACB has no exposure to gold and precious metals companies but instead has more exposure to companies whose business operations are predominantly in US or international markets.  The rising USD was a tailwind for most of these names since 2015 as evidenced by the ACB’s return.  This year has been a different story as the CAD has appreciated versus the USD, as well as against other currencies.  Since we launched this basket in October 2013, it has an annual compounded rate return of 13.2% versus the TSX Total Return of 6.7%

The best performer in Q2 was New Flyer Industries (NFI).  As US cities update and expand their transit fleets, New Flyer has benefited, signing many new contracts in the quarter as well as reporting better than expected earnings.  The stock was up 20% in Q2. Another notable performer was Uni-Select (UNS), a distributor of automotive refinish and paints and auto parts.  The company sees opportunity to increase earnings through acquisitions going forward.  The company split its stock 2 for 1 during the quarter and on a split-adjusted basis, the return was 16%.  Honourable mention goes to Enercare (ECI), the water heater rental company, up 11% and Milestone Apartment REIT (MST.UN) up 11 as well.

The main laggard was Exco Technologies (XTC).  This is a smaller company that designs, develops and manufactures dies, molds, components and assemblies for the auto industry.  Insider ownership is high and actually increased in the quarter after the CEO bought more shares.  That said, the position is under review as it has lagged more than we thought it would.  CGI Group (GIB.A), a Canadian IT consulting company, was adversely affected by the Brexit vote because of its exposure to the Euro/UK region.  We sold half the position at $61.85 in April, with the view that the shares were ‘fully valued’ at that time and could pull-back into the summer months.

Apart from the CGI Group sell, we also took partial profits on First Service (FSV), a North American property management company and we also took partial profits on Alimentation Couche Tarde (ATD.B), the owner/operator of gas stations and convenience stores.   Additions to the basket this quarter were numerous.  We initiated a position in Premium Brands (PBH), a food distributor, and we are looking at increasing our stake in the company at the time of writing.  We also bought shares of Torc Oil and Gas (TOG) based on the same theme of higher/stable energy prices.  We added to our position in Uni-Select (UNS) and lastly we initiated a position is Savaria Corporation (SIS).  Savaria is a Canadian-based company offering a range of stair lifts, platform lifts, and residential and commercial elevators.  Demographically speaking, this may be a high growth sector for some time.  We may look to add to this holding over time.

Below are the current All Cap Basket holdings.

All-Cap

 

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 $56,000, with subsequent purchases of 1.5 Baskets, or about $21,000 at current prices. And again, this amount will continuously change as the prices of it constituents change on a daily basis.

 

 

NBF Economics and Strategy Special Event: Webinar – July 14th @ 1:30pm ET

 

Please take note of the following Special Event Webinar on July 14th:

Brexit: What comes next? A presentation that will allow you to better position your organization to deal with the potential economic impacts of the recent referendum in the United Kingdom

Presented by Stéfane Marion, Economist and Chief Strategist, National Bank of Canada

Hosted by Alexandre Lemieux, Managing Director, Foreign Exchange and Derivatives

When:

Thursday July 14th, 2016 from 1:30pm to 2:15pm (ET)

How to register:

https://www.nbc.ca/en/business/programs/international/webinar.html

 

 

Retirement Corner

 

 

 

Week at a Glance

 

(Full report attached)

Week at a Glance

 

 

Reads of the Week

 

 

 

 

 

 

 

 

Economic Reports

 

Monday July 11th – Employment Trends, House Starts, Annualized (CAD)

Tuesday July 12th – Federal Budget

Wednesday July 13th – BoC Rate Decision (CAD)

Thursday July 14th

Friday July 15th

 

 

Earnings Reports

 

Monday July 11th

Tuesday July 12th – Alimentation Couche-Tard Inc.

Wednesday July 13th

Thursday July 14th – JPMorgan Chase & Co

Friday July 15th – Citigroup Inc, Wells Fargo & Co

 

Have a good weekend!

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