OB Report
October 2019
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OB Model Portfolio – Raising Cash

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

OBMP 092019

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.

OBMP Trades

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. 

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