We have reduced our equity exposure and raised the cash position in the hypothetical, all-equity Odlum Brown Model Portfolio,* as we are cautious regarding the medium-term economic outlook and less enthusiastic regarding the risk and return attributes of the stocks in our investment universe. The shift in strategy reflects our view that investors should have a more conservative overall asset mix at this time.
This economic/stock market cycle is unusual in that we are having trouble finding high-quality investment opportunities at attractive prices. The biggest and best businesses are understandably popular and unfortunately pricey.
In the latter stages of the last two major cycles experienced during the Model’s 25-year history (the late 1990s and the period prior to the 2008/09 Financial Crisis) we had the opportunity to own high-quality businesses at attractive prices. In the late 1990s, high-quality Canadian businesses were out of favour and very attractively priced. In the lead-up to the Financial Crisis, high-quality blue chip American stocks were unloved and favourably priced. There isn’t an enticingly priced, high-quality alternative in this cycle.
Investors are worried about social unrest, trade wars, negative interest rates and the possibility of an economic recession, and yet the major North American stock benchmarks and the value of the Odlum Brown Model Portfolio are all near record highs. In this uncertain environment, the shares of higher-growth businesses and those with greater earnings and financial stability have been bid up in price. That has rendered the risk and reward attributes of these stocks less appealing. Unfortunately, stocks with these attributes dominate the market and our portfolio.
We also own some value-type stocks, which are unloved and cheap, and yet it is hard to be super enthusiastic about this group when we are cautious regarding the medium-term economic outlook. It normally takes a stronger economy for value stocks to outperform. While some exposure is warranted for diversification purposes, we believe it is too soon to place an increased emphasis on out-of-favour securities.
Consequently, we decided to increase our cash position from 1% to 13.5%.
We executed several trades to increase the cash position in the Model, which are explained and summarized in the table below.
We trimmed our holdings of several great businesses, and pared our weights back to moderate levels, as some stocks are close to our near-term price targets. Specifically, we reduced our weight in Amazon.com, Starbucks, Restaurant Brands International, Dollarama and Constellation Software to 2.0% each. We also reduced our Visa position to a 2.5% weight.
We reduced Howard Hughes Corporation to a 1.0% weight and used some of the proceeds to increase
Weyerhaeuser Company to a 3.0% weight, as it has an attractive dividend yield of 5.2%. We also reduced XPO Logistics to a 1.0% position and increased our weight in Colfax to 2.0%. Our conviction regarding the upside on Colfax is higher than other out-of-favour stocks.
We sold our entire positions in Air Products, Stella-Jones, Shawcor, Tri Pointe Group and CarMax. All five stocks remain BUY-rated and we intend to maintain active coverage. Stella-Jones may be the exception, as the recent change in management has caused us to consider an exit strategy.
We added to Berkshire Hathaway, Enbridge, BCE and Rogers Communications.
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*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.
Odlum Brown Limited is an independent, full-service investment firm focused on providing professional investment advice and objective research. We respect your right to be informed of relationships with the issuers or strategies referred to in this report which might reasonably be expected to indicate potential conflicts of interest with respect to the securities or any investment strategies discussed or recommended in this report. We do not act as a market maker in any securities and do not provide investment banking or advisory services to, or hold positions in, the issuers covered by our research. Analysts and their associates may, from time to time, hold securities of issuers discussed or recommended in this report because they personally have the conviction to follow their own research, but we have implemented internal policies that impose restrictions on when and how an Analyst may buy or sell securities they cover and any such interest will be disclosed in our report in accordance with regulatory policy. Our Analysts receive no direct compensation based on revenue from investment banking services. We describe our research policies in greater detail, including a description of our rating system and how we disseminate our research here.
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