Jan 21, 2019

Jason Del Vicario's Top Picks: Jan. 21, 2019

BNN Bloomberg

Jason Del Vicario , BNN Bloomberg

Jason Del Vicario, portfolio manager at HollisWealth
Focus: North American growth stocks

MARKET OUTLOOK

Much has changed in the past few months. We feel that the equity markets are signaling at the very least a marked slowdown in economic activity. Given we are 10 years removed from the last recession and that recessions generally have happened on the backs of central banks raising rates, we’re concerned that economies across the world are already in recession (especially in Europe) or likely to experience recessionary times in the near future. The yield curve continues to flatten and has in fact inverted across certain maturity dates. Rate-sensitive sectors like autos and home builders have rolled over and these tend to lead economic activity. While the latest U.S. jobs report was strong, we note that this is a lagging indicator and jobs reports are often strong prior to a recession. In short, we take our cues from price/volume action and are as conservatively positioned as we’ve been in the past five years.

If we follow the bouncing ball, we agree with the likes of Ray Dalio in that the course of action for central banks during the next recession will be as follows:

Lower rates to 0 per cent (like in 2008).
Print money (also like in 2008).
If the first two policies aren’t enough to jump-start GDP, they will engage in “helicopter money,” putting funds directly into consumer hands.

While this time is likely not the same as 2008, we feel there are enough similarities worthy of careful examination. For example, 2008 saw a simultaneous popping of a housing bubble and sub-prime debt (both were related, of course). This time, we feel that the marked increase in covenant light corporate debt is where we will likely see problems and contagion. We’re carefully monitoring junk debt spreads for signs of cracks.

Putting this all together, we have taken opportunity to raise cash and divert allocations to non-correlated assets such as those noted above. We do however continue to own many of the companies that meet our strict selection criteria with a focus on those that we feel can do well during periods of economic weakness. Companies such as Ross Stores, Couche-Tard and Boyd Group were strong through the recession and we expect they will do well during the next one as well. This may well be a “normal” correction, but from where we sit this feels anything but normal.

We remain data-dependent, but at this time we’re more concerned with protection rather than growth of capital for our clients.

TOP PICKS

DOLLARAMA (DOL.TO)

Dollarama has historically been one of our largest holdings. We were lucky to be able to trim our position in the high $50s and then more recently we scaled it back in the high $30s as one of our stop-loss levels was triggered. It is now a much smaller weight. Dollarama has commanded a premium valuation due to their exceptional growth trajectory and capital allocation track record. Recently, this growth has slowed and the stock has been punished. We feel that there remains ample growth opportunities in Canada and are particularly excited about their prospects in Central and South America. The company has been cagey with their disclosure on the Dollar City operations, but we feel there’s a strong chance they will exercise their majority ownership option in 2020. The runway for growth in those markets is orders of magnitude greater than in Canada. We’re waiting to rebuild our position at lower prices.

KIRKLAND LAKE GOLD (KL.TO)

A gold stock may seem like an odd pick for a “growth” manager, but Kirkland Lake was the no. 1 performing stock on the TSX last year. Despite significant outperformance in 2018, we feel they can continue to increase shareholder wealth going forward. Generally we stay very far away from resource-based companies, but the company’s return on equity (ROE) is just shy of 20 per cent and they keep increasing their production numbers. Since we feel that central banks are going to have to re-engage in quantitative easing during the next recession, we feel that gold could again move as it did from 2008 to 2011. In combination with Kirkland’s rising production, this could lead to significant returns.

ISHARES 20 YEAR PLUS TREASURY BOND ETF (TLT.OQ)

I last featured TLT in 2016 when the economy appeared to be rolling over. We didn’t slip into recession and in retrospect I was early with this call. If we go into recession and rates are headed much lower, having assets that can zig while the markets zag may be advisable. One need only look to Japan or Europe to see what prolonged periods of weak economic growth do to yields. While we’re mindful of the exploding debt problem of the U.S. Treasury, we feel that much like in 2008, TLT will provide Canadian investors with a double whammy of “bad economic times” returns/protection. Not only will prices rise if rates drop, but we’d also expect the U.S. dollar to rise against the loonie, further enhancing TLT holder returns.

DISCLOSURE	PERSONAL	FAMILY	PORTFOLIO/FUND
DOL	Y	Y	Y
KL	Y	Y	Y
TLT	Y	Y	Y

PAST PICKS: JAN. 22, 2018

CCL INDUSTRIES (CCLb.TO)

We were recently stopped out of CCL. We note the asset turnover has steadily dropped, which has led to a drop in their return on assets, a key metric we use to value companies. The company is relatively inexpensive, but if we are on the cusp or in the middle of an economic slowdown, they will feel the pinch. We would like to own it again, ideally at lower prices.

Then: $59.33
Now: $54.97
Return: -7%
Total return: -7%

VANECK VECTORS MORNINGSTAR INTERNATIONAL MOAT ETF (MOTI.N)

We no longer own MOTI, but will note that both the VanEck “moat” ETFs (MOAT and MOTI) are excellent solutions for the investor who wishes to buy quality with little effort. Both ETFs have outperformed their respective benchmarks and we would have no problems owning either MOTI or MOAT in the future.

Then: $36.23
Now: $30.45
Return: -16%
Total return: -13%

SANGOMA TECHNOLOGIES (STC.V)

This is an organic growth and growth-through-acquisition story in the voiceover IP space. We feel the company is well positioned to continue to execute their growth strategy, but note that this is a small company and investors should do their own due diligence and size their positions accordingly.

Then: $1.12
Now: $1.28
Return: 14%
Total return: 14%

Total return average: -2%