JMRD Market Observer for January 12, 2018 – JMRD U.S. Growth Basket 2017 Update – up 36% in 2017!

In This Week’s JMRD Market Observer

 

 

  • JMRD U.S. Growth Basket 2017 Update – up 36% in 2017!

  • Canadian Banks – 2018 Outlook: Fundamentals are mostly positive. But a better buying opportunity may be ahead.

  • Retirement Corner

  • Reads of the week

  • Economic Calendar

  • Earnings Reports

 

 

JMRD U.S. Growth Basket Q4 Update:

 

Last week we discussed an array of topics to start the New Year and this week we will kick off the 2017 JMRD Basket updates. In this edition of the JMRD Market Observer, we will review the JMRD US Growth Basket, which returned 36% in 2017 versus 21.8% for the S&P 500 Total Return index.  Since inception which is Jan 1, 2014, the JMRD US Growth Basket has returned 15% per year versus the benchmark at 10.5%.

 

Before we get into a summary of the holdings that contributed most to the 36% return, we would like to provide you with a perspective on how the various global indices and commodities performed in the last quarter of 2017 and for the entire year.

 

Market Performance (as of Dec. 31, 2017)

 

As a refresher, most investors who hold this Basket do so in a US dollar account because this Basket invests in US Companies trading in USD.  That said, there are some investors who hold the Basket in a Canadian dollar account as well.  In this case, at the time of purchase, Canadian dollars are converted to US dollars to buy the US denominated stocks and then the totals are converted back again to reflect the value of the stocks in CAD.  Because the USD depreciated 6.4% versus the CAD in 2017, investors’ US denominated investments were worth less when converted back to Canadian dollars.  Taking the JMRD US Growth Basket as an example, the 2107 return, when converted back to CAD, was closer to 30%.  During times of a rising USD relative to the CAD, the opposite happens and USD investments held in CAD get a lift in value, which was the case in 2015 and 2016.

 

How do we decide on which companies to buy in the JMRD US Growth Basket?

 

  • We use relative strength/technical analysis research that helps to identify the stronger sectors to invest in.

 

  • Relative Strength calculates which investments are the strongest performers by comparing each asset class or holding against the other available choices within a peer group.  Our friends at SIA Charts (siacharts.com) whose screening software we use to make investments decisions for the US Basket, provided the below analogy of relative strength:
    • Relative Strength is used all the time in everyday life, maybe without you even knowing it. You use relative strength at the supermarket when you are trying to find the best looking apples out of the many choices or whether it is fans voting for the relatively strongest hockey players to the All-Star team. The rotten apples may be a little harder to identify in the investment world, but relative strength quickly identifies holdings that we should stay away from just like you would when picking apples.

 

  • From there, we look to buy the strongest stocks in the best sectors. Stocks can be trading well but if they are in a strong sector, they can still be underperforming.

 

  • Conversely, we look to avoid weak sectors as weak sectors and companies within those sectors can often stay weak for an extended period of time.

 

  • Instead of trying to ‘guess’ when a stock might bottom, we look to identify the strongest companies that are performing well compared to their peers.

 

  • For the U.S. Model we select among the top companies in the S&P 100 combined with Credit Suisse’s top picks.

 

  • There are no energy companies held in the U.S. basket to avoid overlap with our Canadian baskets

 

Which companies are currently held in the Basket?

 

  • We continue to include company updates on the holdings in our Market Observers so you can become more familiar with the individual positions.
  • You will find below a full snapshot of all holdings. The current annual cash flow is $350 for a yield of 0.98%.

 

 

There were a number of key contributors to the exceptional performance of the JMRD US Growth Basket in 2017.  The equity rally in the US was broad-based across most sectors but in the end it was the year of TECHNOLOGY.  The tech–heavy NASDAQ exchange led all major US markets with a return of 28% versus the broader S&P 500 Total Return Index of 21.8%.  The fourth quarter was especially impressive for the US Growth Basket, posting a return of 9.3% versus a return of 6.6% for the S&P 500.

 

The leading contributor to the 36% performance in 2017 was Arista Networks (ANET).  The supplier of cloud networking solutions for internet companies, cloud service providers and data centres, a direct competitor to Cisco systems, posted a return of 143% in 2017 and is already up 10% in 2018.  XPO Logistics (XPO), a supply chain logistics company, was next in line with a return of 112%.  With the global economy in synchronized growth mode, it’s easy to see how a logistics company would stand to benefit as consumer spending is a key contributor to GDP growth.  Another catalyst for the stock at the end of 2017 was a rumour that Home Depot was looking to acquire its own shipping company.  Nothing has officially been announced but the company continues to hold its gains and just yesterday hit a new 52-week high.  Other tech names in the US Growth Basket that put in a solid year were Applied Materials (AMAT) up 60%, Facebook (FB), up 53% and Broadcom (AVGO) up 48%.

 

As mentioned above, gains were widespread across most sectors in 2017 and apart from XPO’s impressive move, other non-tech names worth mentioning were: MSCI Inc (MSCI) which is a financial analytics and index company, up 62%, United Health was up 39.8% and Lockheed Martin (LMT) was up 32% as Trump looks to increase defense spending.

 

There really wasn’t much activity in the Basket for the final quarter of the year.  We did take partial profits in Arista Networks as we felt taking some money off the table after its impressive run was prudent at the time.  It remains a 6% weighting in the Basket.  We also added to our position in Norfolk Southern on a dip in October, which proved to be fortuitous timing as it’s up almost 20% since.

 

One last note to mention is that we were able to achieve the 36% return despite holding 10% cash in the Basket for most of the year.  We felt that having some cash on hand would allow us to capitalize on opportunities if the markets were to dip.  It has been a while since the US market has experienced a 5% drop.

 

What are the parameters in terms of buying the new Basket?

 

  • The current value of the JMRD U.S. Growth Basket is approximately $36,000 (all figures in US dollars).

 

  • The initial minimum position is 2 Baskets, or approximately $72,000.

 

  • Subsequent purchases can be made in increments of a half Basket, or about $18,000.

 

  • The minimum and subsequent purchase amounts are mandated by National Bank Financial’s Baskets department, not by JMRD.

 

  • The US Basket can be bought in increments via the ‘MODEL’ approach, but only through a discretionary account.

 

  • We believe that we can add value over the long term with this strategy and continue to rate it as a buy for US equity exposure. 

 

 

Canadian Banks – 2018 Outlook: Fundamentals are mostly positive. But a better buying opportunity may be ahead.

 

  • Several positive fundamental trends supporting Canadian bank stocks in 2018.

(1) Efficiency improvement. Bank stocks have delivered back-to-back years of material efficiency (NIX ratio) improvement, a trend “with legs” as they have not sacrificed internal investment along the way.

(2) Rising rates. Banks have started to reverse a multi-year trend of depressed margins, representing a sustainable EPS growth driver.

(3) Credit quality. The outlook remains supportive, despite ongoing concerns about household indebtedness. Moreover, street PCL forecasts appear very conservative (even after factoring in IFRS 9).

(4) Regulatory capital. We believe that upward pressure on CET 1 ratios has finally abated. The sector average CET 1 ratio of 11% was flat for the full year, the first time it didn’t move upwards since Basel III was introduced. The trend bodes well for sector ROE and capital deployment. At the very least, we do not believe investors need to be overly concerned about longer term capital issues (e.g., Basel 4) in 2018.

 

  • However, there is one factor that we believe could weigh on performance in the first few months: housing. This issue comes into focus every year, usually with a negative bent. 2018’s iteration of the “housing overhang” revolves around how revised B20 regulation could sharply reduce new mortgage volumes and, potentially, activity in an economic sector that contributes ~20% to Canada’s GDP. There are several indicators that validate these concerns. We see evidence of mortgage demand “pulled forward” in 2017 (report), added downside sensitivity caused by weaker housing price appreciation and a plausible scenario of flat mortgage growth in Canada if originations volumes contract at the low end of the 5-10% guidance range. To be clear, we are not housing bears. However, we would be foolish to ignore a recurring pattern of housing-related concerns that frequently weigh on sector valuation.

 

  • In short, we are calling for cautious sentiment to outweigh positive sector fundamentals in the near term. And if this scenario does materialize, with bank valuations re-tracing from currently elevated levels, we believe investors will be presented with a better buying opportunity. Separately, we are raising estimates and targets for a few banks (BMO, RY) to reflect updated U.S. tax rate guidance. Our top picks for the year are unchanged, with CM (upside EPS revision potential, share buyback catalyst possible by H2/18, relative valuation), TD (improving Canadian P&C growth, U.S. rate sensitivity, capital upside from relaxing Basel 1 floor) and BNS (efficiency improvement program, ROE upside from capital deployment, relative valuation).

 

See the full article

 

 

Retirement Corner

 

 

 

Reads of the Week

 

 

 

 

 

 

 

 

 

 

Economic Reports

 

Monday January 15th – US Markets Closed for Martin Luther King Day

Tuesday January 16th – Empire State Index (US)

Wednesday January 17th – BoC Rate Announcement (CAD)

Thursday January 18th – Housing Starts (US)

Friday January 19th – Consumer Sentiment (US)

 

 

Earnings Reports

 

Monday January 15th – US Markets Closed for Martin Luther King Day

Tuesday January 16th – CitiGroup Inc, UnitedHealth Group,

Wednesday January 17th – Bank of America, Goldman Sachs Group, Kinder Morgan

Thursday January 18th – Canadian Pacific Railway, American Express, Morgan Stanley

Friday January 19th – None

 

 

Have a good weekend!

By | 2018-01-19T22:07:04+00:00 January 12th, 2018|JMRD Updates|0 Comments

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