**July 17th Issue of The JMRD Market Observer**
In This Week’s JMRD Market Observer
- JMRD All-Cap Growth Basket (ACB) Q2 Update
- JMRD Diversified Income & Growth Basket (DIG) Q2 Update
- BoC Policy Monitor- BoC lowers its target rate to 0.50%
- JMRD Basket Corner
- Retirement Corner
- Week at a Glance
- Reads of the week
- Economic Calendar
- Earnings Reports
JMRD’s Canadian Baskets
Last week’s ‘Market Observer’ provided a timely update on the US Growth Basket and our Maximum Growth ETF Basket. This week, the focus turns to Canada and below you will fund updates on both of our Canadian Baskets.
As most of you know, the Diversified Income & Growth Basket (DIG) focuses on higher yielding names with income being a top priority. The All-Cap Basket (ACB) on the other hand focuses on growth with less emphasis on income. The DIG Basket has a much longer track record as the ACB is a relatively new Basket for JMRD.
Before getting into the specifics of each Basket, it is worth looking at what the Canadian markets have done during the first half of the year with a drill down on the sectors that have performed well and those that have lagged. As you can see from the chart the winners this year on the TSX have been health care and consumer staples. Keep in mind though that there are only three stocks in the Canadian Healthcare index, one being Valeant Pharmaceuticals, which is up 83% year to date. Alimentation Couche Trade has been a big gainer in the TSX Consumer Staples Index this year, up 19% – this is one of our key holdings in the All Cap Basket. After being up 6% in April, the energy sector has fallen due to the NDP winning the Alberta election in May and with the recent price action in oil, which has fallen from $60 to $50 in three weeks’ time, mostly on the strengthening US dollar, excess supply concerns and the Greece and China issues.
Canadian dividend paying-stocks have lagged in 2015 and this can best be illustrated by looking at the year to date performance of some widely held Canadian blue-chip stocks in the chart below. For the first half of 2015 the total returns of the following names are:
In what has become a standard feature in these updates, included below is the chart that shows the returns for a number of indices up to the second quarter of 2015:
JMRD ALL-CAP GROWTH BASKET (ACB) Update: Posts 7.97% gain in the first quarter
JMRD Wealth Management Team is pleased to provide the ACB Basket first half 2015 return of 7.97%. The All-Cap outperformed the TSX Composite Total Return Index that has returned 0.9% to start the year. Since we launched the ACB Basket at the start of October 2013, it has returned 16.99% annualized, to the end of Q2 2015. The TSX Composite Total Return Index has an annualized return of 10.82% for the same period.
In the first half of this year, the basket received double digit or better than average returns from Alimentation Couche-Tard, Boyd Group, CCL Industries, Colliers International, FirstService, Magna, Parkland, Restaurant Brands, Stella-Jones and Exco Technologies. Positions that under performed the TSX were Enercare, Spartan Energy and Badger Daylighting. New positions added in the quarter were CGI Group, Exco, Element Financial and New Look Vision Group. Positions that were sold and no longer owned in the basket include Stantec, Canadian Energy Services and Inter Pipeline. You can see the current holdings below.
ACB and the impact of a stronger US dollar:
Many of the ACB names have US operations with significant revenue sources south of the border, which is a bit of a bonus for clients looking for this type of exposure. The names include: Boyd Group, CGI Group, Colliers International, FirstService, Element Financial, Stella Jones, Alimentation Couche Tarde, Restaurant Brands and Sun Life. With the Bank of Canada cutting its overnight rate to 0.5% this week, we expect the Canadian dollar to stay near recent low levels for the near future. This should continue to support those companies with U.S. operations. In addition, this could be supportive of merger and acquisition activity in the 2nd half of this year as U.S. companies look north of the border to bulk up their businesses. A strong US dollar makes Canadian companies ‘cheaper’ to buy for U.S. companies. For more commentary on the Bank of Canada, we have attached a note on this week’s move to lower rates.
- For clients interested in the Basket, we will need to get your Basket form up-dated for coding purposes / please request if you have not already signed up and wish to do so.
- The minimum purchase for the new Basket is 4 Baskets or $55,200, with subsequent purchases of 1.5 Baskets, or $20,700 at current prices.
- We are working with NBF to lower the minimum purchase amount.
JMRD Diversified Income & Growth (DIG) Basket: Q2 Update
As you would expect from the comments above, the DIG Basket has under-performed the ACB. Why? Again, because high dividend paying stocks have lagged. Falling interest rates, like we’ve seen in Canada in the first half of 2015, usually help dividend-paying stocks but this year has been a bit of an aberration. The cause of the weakness could be the fact that the Federal Reserve in the US is actually expected to increase rates this year (usually a negative for dividend-payers) or perhaps it could be that some US investors are shorting Canadian Banks stocks (a strategy to profit from a drop in the share price) because of their beliefs that our housing market and consumer debt load is over-extended.
The DIG Basket was off to a strong start in 2015 with a gain of 2.9% for the first quarter. The trouble began in the second quarter as the DIG Basket gave back most of those gains. The basket finished off the first half of the year with a return of 0.91%.
Below is a snapshot of the current holdings. The current annual cash flow is $455 for a yield of 2.87%.
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 $15,850 making the minimum initial position approximately $31,700, which is two Baskets. This amount will continuously change as the prices of the DIG Basket components do fluctuate. Subsequent purchases can be made in one Basket increments.
New positions added to the DIG Basket in Q2 were Metro Inc, Agrium, Magna International and WSP Global. We sold Bank of Nova Scotia, Artis REIT, Crescent Point Energy and Open-Text. The best performers in the Basket were Dollarama, DH Corp and Canadian Tire. Under performers this year have been Gibson Energy, Canadian Pacific Rail, TD Bank and Pembina Pipeline.
The bottom line is that clients should have a good mix of investments that are diversified by asset class, geography and currency. Diversify, diversify, diversify.
BoC Policy Monitor- BoC lowers its target rate to 0.50%
The Bank of Canada cut its overnight rate to 0.50% at its meeting on Wednesday. The BoC supported its decision to offer more stimuli by presenting a much downgraded outlook for Canada’s economy: “Real GDP is now projected to have contracted modestly in the first half of the year, resulting in higher excess capacity and additional downward pressure on inflation.” The central bank lowered its growth forecast for 2015 to just 1.1% (from 1.9%), and even lowered next year’s forecast to 2.3% (from 2.5%). There was, however, an upgrade to 2017 to 2.6% (from 2.0%).
The Bank of Canada’s decision to cut interest rates shouldn’t be surprising considering the massive downgrade to its growth forecasts and weaker outlook for oil prices. The weaker-than-expected first half of the year had extended the timeline for the anticipated closure of the output gap and the central bank felt if had to do something. The decision to cut rates was a bold move considering core inflation remains above target and the economy is set to benefit from federal fiscal stimulus (tax cuts and infrastructure spending) as early as the current quarter. The growth projections suggest the Bank intends to keep monetary policy highly accommodative for quite some time.
(Full report attached)
JMRD Basket Corner
Magna (MG) – Auto-parts maker Magna announced on Thursday a EUR1.75B deal for European transmission maker Getrag as it looks at the potential of dual-clutch transmission. It calls Getrag a leader in that space, “which is expected to be one of the highest-growth segments globally over the next decade.” The company has JV’s with Ford (F) and 2 Chinese auto makers while customers include BMW and Daimler (DAI.XE). MGA CEO Don Walker says amid portfolio reviews it “identified the expansion of our power train business as a strategic priority.”
All Cap Basket
Alimentation Couche-Tard (ATD’b) – Alimentation Couche-Tard reported Q4/F15 adjusted EPS of $0.25, in line with NBF and slightly lower than consensus at $0.26; last year was $0.22. NBF’s positive view on ATD is based on our expectation that the company will drive growth over several years through optimizing its European network, implementing its fresh food strategy, capturing acquisition synergies, capitalizing on further acquisitions, and accelerating new store growth. The shares traded to a new year-high, up 7.5% following the results on Tuesday ATD
CCL Industries (CCL.b) – “CCL Industries’ growth prospects label it a buy”
Restaurant Brands International (QRS) – “Analysts showing appetite for Restaurant Brands International”
U.S. Growth Basket
Celgene (CELG) – Celgene’s (CELG) planned $7.2B purchase of Receptos (RCPT) was well received this week with the shares moving higher by 9% after the announcement. RBC noted that the acquisition “diversifies [CELG] away from Revlimid and continues to add more growth,”, adding the drug maker doesn’t appear to be overpaying. The blood-cancer treatment made up 65% of CELG’s 1Q revenue, and RCPT’s key drug candidate is an MS treatment which is akin to Novartis’ (NVS) Gilenya, whose annual sales have topped $2B and are still growing. But RBC notes MS isn’t what CELG is looking at for the product–instead, a treatment for colon inflammation and ulcers. “This is a potential $1-2B opportunity” considering successful study data thus far and other treatments being administered through IVs or subcutaneously as opposed to orally as RCPT’s product would.
- “Four key facts about Old Age Security” (Globe and Mail)
Week at a Glance
(See attached Week at a Glance report)
Reads of the Week
- “A Visual History of Market Crash Predictions” When wading through the predictions of financial doom and gloom ahead, keep in mind one key component of human nature.
Monday July 20th – Canadian Wholesale Trade Sales
Tuesday July 21st – None
Wednesday July 22nd – U.S. Existing Home Sales
Thursday July 23rd – Canadian Retail Sales , U.S. Initial Jobless Claims, U.S. Leading Index
Friday July 24th – U.S. New Home Sales
Monday July 20th – Canadian National Railway, IBM, Morgan Stanley
Tuesday July 21st – Canadian Pacific Railway. Apple, Lockheed Martin, Microsoft, Verizon Communications
Wednesday July 22nd – American Express
Thursday July 23rd – Loblaw Cos, Rogers Communications, Valeant Pharmaceuticals, Amazon.com, Caterpillar, Visa Inc
Friday July 24th – Encana Corp
Have a good weekend!