OB Report
February 2019
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Odlum Brown Model Portfolio Update – Adding Cyclical Exposure

Murray Leith By Murray Leith CFA, Executive Vice President & Director, Investment Research

We recently took advantage of extreme negative sentiment towards cyclical areas of the market. Specifically, we doubled the size of our holding in Weyerhaeuser Company (WY), increased our positions in Canadian Natural Resources Ltd. (CNQ) and Tourmaline Oil Corporation (TOU) by 50% and bought almost 40% more shares of Cenovus Energy Inc. (CVE).

The transactions were financed with cash and the sale of one-quarter of our position in Visa Inc. (V). Visa has performed very well and had become our largest holding. The sale reduces Visa to a 3.5% weight, which leaves it as one of our top-three positions.

Shares of Weyerhaeuser have fallen nearly 40% from their June high, due to fears of another U.S. housing meltdown. While investor anxiety towards housing-related companies is understandable given the disastrous performance of housing during the Financial Crisis a decade ago, we do not believe that it is consistent with industry fundamentals. The recent increase in mortgage rates has had a moderating influence on home sales. Still, affordability remains reasonable and U.S. consumers are in good shape, having accumulated equity and reduced leverage in recent years. In our view, there remains plenty of pent-up housing demand given rising household formations and a decade of subdued home building. Weyerhaeuser shares have dropped in sympathy with falling lumber prices, yet its fortunes are tied to timber prices, which are traditionally more stable. Not only do trees grow while we wait for industry conditions and sentiment to improve, we will collect an annualized dividend yield of 5.8% in the interim.

With Canadian oil and natural gas prices extremely depressed, sentiment towards Canadian Energy companies is exceptionally negative. Commodity prices are low, in large part due to a lack of pipeline capacity to get product to higher-priced foreign markets. While it will take time to build new capacity, investors seem to be forgetting that commodity cycles are driven by changes in both demand and supply. In fact, it is often the supply side of the equation that has the greatest cyclical influence on prices. Because new pipeline capacity is years away, most believe Canadian Energy stocks will not perform well for a long time. With few enthusiastic buyers in the market today, the stocks are very attractively priced. In our view, there are good odds that price-driven changes in demand and supply will fuel higher commodity prices and better stock performance.

Please read our Odlum Brown Limited Disclaimer and Disclosure - It is important!

The Odlum Brown Model Portfolio is an all-equity portfolio that was established by the Odlum Brown Equity Research Department on December 15, 1994, with a hypothetical investment of $250,000. It showcases how we believe individual security recommendations may be used within the context of a client portfolio. The Model also provides a basis with which to measure the quality of our advice and the effectiveness of our disciplined investment strategy. Trades are made using the closing price on the day a change is announced. Performance figures do not include any allowance for fees. Past performance is not indicative of future performance.