JMRD Market Observer for April 28th, 2017 – JMRD Diversified Income & Growth Basket & JMRD All-Cap Basket Q1 Updates

In This Week’s JMRD Market Observer



  • JMRD Diversified Income & Growth Basket & JMRD All-Cap Basket Q1 Updates

  • Long-term investment expectations: Coping with rising yields and higher valuation

  • Canadian Banks – HCG woes: an inconvenient (isolated) imbroglio

  • Retirement Corner

  • Week at a Glance

  • Reads of the Week

  • Economic Calendar

  • Earnings Reports



JMRD Diversified Income & Growth Basket & JMRD All-Cap Basket Q1 Update


Two weeks ago, we provided a Q1 update on the JMRD US Growth Basket.  This week will feature the Canadian Baskets – the JMRD Diversified Income and Growth (DIG) Basket and the JMRD All Cap Basket (ACB).  Before we get into Basket specifics, we want to again provide the handy table below showing how the various global indices and commodities performed during the quarter.  The Q1 2017 data are provided in the table below.



JMRD Diversified Income & Growth (DIG) Basket: Q1 2017 Update


The DIG Basket returned 2.19% in Q1. Stocks that fared well in Q1 were: Capital Power (CPX) up 13.8% and Veresen (VSN) up 13.4%.  Late in Q4, Capital Power was awarded compensation from the Alberta Government for the phasing out of its coal-fired plants.  With this uncertainty now behind the company, it was able to focus on its existing operations and investors came back to stock.  Veresen, an energy infrastructure company, was buoyed by solid earnings in the latest quarter, and the fact that relative to its peers, it trades at a discount as a result of the sale of its power division which will re-focus the company as a pure midstream entity.  Dollarama (DOL) continued to perform very well as it delivered another strong earnings report and increased its forecasted store growth outlook for Canada.  The stock just recently hit another new high and was up 12% in the first quarter.


On the flip side, the energy sector was the main detractor in the DIG basket.  Energy producers such as Whitecap (WCP) and Vermillion (VET) were down 14% and 10% respectively in Q1. A bright spot in the sector was Canadian Natural Resources (CNQ) which was up 2% in the quarter after announcing an $8.5B acquisition of Shell’s Oil Sands business. In addition, Shell and Canadian Natural announced they would jointly buy and equally-own Marathon Oil Canada Corporation–which holds a 20% interest in the Athabasca oil sands project–from Marathon Oil Corp. for $1.25 billion each in cash. The energy sector has been weak in 2017 after a strong recovery in 2016.  The main issue within the sector is growing US oil inventories and production, which investors fear will offset the production cuts from OPEC.  US oil inventories will most likely drop in the coming quarter as refineries need more oil to meet the peak summer driving season.  OPEC will reconvene at the end of May to discuss extending the current production cuts.  The final decision will be watched closely.


It was a pretty quiet quarter for transactions in the DIG Basket.  We added to our positions in Industrial Alliance (IAG) (insurance company) and Veresen.  We also sold our position in Brookfield Asset Management (BAM.A) and replaced it with Royal Bank (RY).  


Below is a snapshot of the current holdings.  The current annual cash flow is $506 for a yield of 3.03%.   



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 $16,700 making the minimum initial position approximately $33,400, 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):  Q1 2017 Update


The All Cap Basket (ACB) is meant to be a complementary holding to the DIG Basket.  The ACB invests in both large and small-cap companies, with a focus on growth-oriented businesses that may, or may not, pay a dividend.  After posting a respectable return of 7.25 in 2016 and 16% in 2015, the ACB realized a return of 6.43% in the first quarter of 2016, besting the benchmark TSX Total Return of 2.4%.  Since we launched this basket in October 2013, it has an annual compounded rate return of 14.78% versus the TSX Total Return of 8.92%.


The best performer by far in Q1 was Shopify, a home-grown, Canadian e-commerce company.  Shopify (SHOP) helps small and medium-sized retail companies do more business online by providing a multi-channel commerce platform.  They also inked a deal to work more closely with Amazon in the recent quarter, which helped propel the stock to new highs.  Shopify was up 57% in Q1.  Savaria (SIS), the maker of chair lifts and smaller scale elevators for the elderly, exceeded earnings expectations and also announced a small contract win in China, which could perhaps lead to additional business in the world’s most populous country.  The stock is in a very good spot demographically speaking and we continue to like its prospects. The stock was up 29% in Q1. Premium Brands (PBH), a food distributor, gained 24% in the quarter on further success with its M&A strategy and building out its food brand offerings.  New Flyer Industries (NFI) posted a 20% return in the quarter after positive earnings reaffirmed an increased commitment by U.S. and Canadian transit systems to upgrade their bus fleets.  The company’s backlog continued to grow.  Enercare (ECI), the provider of household rental water heaters and smart meters, received a lift on news that its Canadian peer, Home Reliance, was bought for a premium multiple to what Enercare was trading for at the time.  The stock was up 18% in the first quarter.


As was the case in the DIG Basket, the energy names lagged in the quarter.  It didn’t really matter which stock one looked at, virtually all energy shares were under pressure in the quarter.  Seven Generations Energy (VII), a natural gas developer and Spartan Energy were both down about 20% in Q1. 


During the quarter, we exited our positions in Stella Jones (SJ) after its growth prospects came into question within its rail tie unit and Uni-Select (UNS), of which we sold half the initial position in December 2016.  We also sold our position in Teck Resources (TECK.B) after the momentum in the sector slowed, as well as Milestone Apartment REIT after it was announced that it was being taken private by Starwood Capital.  Milestone appreciated by 33% (not including dividends) since we initially bought it last year, at the end of March.  With the proceeds from the sales we added to our position in Cargojet (CJT), the almost monopolistic air freight company in Canada. We also initiated positions in North American Energy Partners (NOA), which provides a range of heavy construction services to the resource sector in Western Canada, and Kinaxis (KXS), a cloud-based supply chain/logistics software company. 


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 ~$66,000 at current prices, with subsequent purchases of 1.5 Baskets, or about $24,750. And again, this amount will continuously change as the prices of its constituents change on a daily basis. 



Long-term investment expectations: Coping with rising yields and higher valuation




  • In this review we present our long-term return expectations for major asset classes such as bonds, equities, and some alternatives.
  • With U.S. economic growth and inflation firming up, higher short-term interest rates are to be expected over the next five years as the Federal Reserve continues to normalize its monetary policy.
  • We find that the path of least resistance for longer-term bond yields will be up over the next five years. Because duration risk is at historical levels, such an event would likely entail negative nominal returns in the first few years, before stabilizing around coupon rates, leaving the annualized rate of return well below its long-term historical average.
  • In that environment, shorter-duration higher-coupon corporate bonds would seem a better investment, on an absolute, relative and risk-adjusted basis.
  • After eight years of exceptional returns during the financial crisis recovery, we find that equity markets are not a bargain anymore and we expect an annualized total return of 6% for U.S. large cap equities over the next five years. This is lower than the long-term historical growth rate.
  • All in all, as traditional portfolio returns will be lower than in the past, it is time to think outside the box. As such, strategies aiming at higher absolute returns or less volatility should be contemplated at this point.
  • We continue to advocate the inclusion of non-traditional fixed-income funds, such as those linked to interest rate spread strategies, unconstrained global bond funds, or structured products. To limit volatility and downside, idiosyncratic risk should be diversified with smart beta strategies.
  • Finally, we feel that private investments – whether linked to real estate, infrastructure, farmland or timberland – will offer higher returns with much less volatility than traditional assets.


See the full article.



Canadian Banks – HCG woes: an inconvenient (isolated) imbroglio


Home Capital is in a difficult situation, but contagion concerns are overblown. Challenges faced by HCG (misconduct allegations by the OSC, funding issues) are intensifying market concerns related to Canada’s housing market. The market’s reaction clearly suggests that HCG’s issues could spread across the sector. For perspective, HCG has a sub-$20 billion mortgage book, which translates to minnow status relative to the $1.1 trillion of residential real estate credit on Big-6 balance sheets. And since the market is more focused on the funding of these loans rather than on their credit quality, it is important to differentiate the diversified funding structures of Big-6 banks relative to HCG’s (and others) that rely in large part on a single source: broker deposits. Although we are dismissive of Big-6 related concerns, those associated with the smaller regional banks, CWB and LB, warrant a separate discussion.


See the full article.



Retirement Corner


1)     Allowances don’t teach kids about money – you do


2)     How to prepare for retirement during every decade of your life



Reads of the Week


  • NBFM Geopolitical Briefing: NAFTA bluff?: Reports that the Trump administration is considering an executive order allowing the United States to formally withdraw from NAFTA have sent a shudder through the markets. This order would give the United States the option to exit the trade agreement should attempts at renegotiation fail.  See the full article.


  • ROB Magazine: The Power 50: Who has the influence, the connections and the cash to get their way in the world of business? We pull back the curtain on the financiers, scions, politicians and CEOs—plus a few bureaucrats and even one hip-hop star—who wield true power in Canada.  See the full article.


  • Ontario 2017 Budget: Balanced budget: Mission Accomplished! Now What? Ontario last balanced its budget a decade ago. Really, it might be fair to say that budget surpluses have been the exception more than the rule for the better part of a couple generations in Ontario. But making good on a long-standing commitment, the province is moving back into the black this fiscal year (2017-18) and aims to stay there. Indeed, the symbolism in the style and format of the main budget documents is plain as day: gone is the long-standing red cover, replaced with a new bold beautiful black!   See the full article.








Economic Reports


Monday May 1st – Canada Markit Manufacturing PMI; US ISM Manufacturing, US Vehicle Sales

Tuesday May 2nd – US Trade Balance and Factory Orders

Wednesday May 3rd – US ISM Non-manufacturing ISM, FOMC Minutes

Thursday May 4th – US Initial Jobless Claims

Friday May 5th – Canada And US Employment Change and Unemployment Rate



Earnings Reports


Monday May 1st – Agrium, Capital Power Corp., Labrador Iron Ore Royalty Corp., Martinrea

Tuesday May 2nd – Apple, Baytex Energy, Cineplex, Cardinal Energy, Dream Industrial REIT, Encana, Fortis, Intact Financial, Kinross, Mastercard, Altria Corp., Mosaic Company, North American Energy Partners, Pfizer, Parkland Fuel, Shopify, Westjet, Wajax

Wednesday May 3rd – Allied Properties, Brookfield Renewable, Anheuser Busch, Denison Mines, Facebook, CGI Group, Kinaxis, Loblaw Cos., Linamar, Orvana Minerals, Tourmaline Oil Corp., Tesla, XPO Logistics, ZCL Composites

Thursday May 4th – Brookfield Infra Partners, CCL Industries, Canadian Natural Resources, Chartwell Retirement, Freshii, Kellogg, MSCI Inc., Pembina Pipeline, Ritchie Bros.

Friday May 5th – Berkshire Hathaway, Enerplus, Hydro One, OneREIT, Norbord, Transalta, Transcanada



Have a good weekend!

By | 2017-05-01T15:25:14+00:00 April 28th, 2017|JMRD Updates|0 Comments

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