Full episode: Market Call for Tuesday, April 23, 2019
Colin Stewart, CEO and portfolio manager at JC Clark Limited
Focus: North American large caps
Recent equity market strength has been driven primarily by a large change in investor sentiment: it went from universally positive early in 2018 to very negative during November and December and has now become quite positive again despite weakening fundamentals. With the recent rally, equities are no longer on sale and we believe we’re now in a stock picker’s market.
Economic activity is clearly slowing, with more signs that we’re late in this cycle. As a result, we continue to favour high-quality businesses with defensive attributes that trade at reasonable valuations.
FAIRFAX FINANCIAL (FFH.TO)
Fairfax is a leading global property and casualty insurance company. It’s had strong underwriting results in the last few years and insurance pricing is beginning to improve. The company has an excellent long-term investment track record; significant cash holdings in its investment portfolio create future upside as the company deploys it into new investments.
Fairfax is trading at close to book value for the first time in six years. Shares are up only modestly year-to-date despite a strong recent performance from portfolio investments (this should lead to an increase in book value per share in the first quarter).
A leading Canadian operator of dollar stores with approximately 1,100 locations across Canada, Dollarama has an incredible long-term track record of same-store sales and new store growth. Recent quarterly results have been impacted by more competition, fewer price increases and the soft retail environment in Canada. Valuation is far below historical averages and at reasonable level for such a high-quality business (19 times price-to-earnings, 14 times enterprise value to EBITDA). The earnings stream is relatively recession-resistant due to a low price point and a competitive product offering. Dollarama has the opportunity to expand in Latin America, with the option to purchase a large stake in the Dollar City business.
FedEx’s share price is down 25 per cent from the early 2018 high amid concerns over global growth and company-specific integration issues with the TNT acquisition. The company is very well positioned to benefit from the long-term secular trends of trade and e-commerce growth.
FedEx has consistently grown market share in the ground delivery business for the last 20 years. Challenges with the U.S. Postal Service should drive e-commerce providers to increasingly need the company. It has an attractive valuation at 7.8 times enterprise value to EBITDA and 12.6 times price-to-earnings.
PAST PICKS: JUNE 19, 2018
- Then: $66.78
- Now: $68.66
- Return: 3%
- Total return: 5%
BRICK BREWING COMPANY (BRB.TO)
- Then: $4.01
- Now: $3.99
- Return: 1%
- Total return: 1%
HAMMOND POWER SOLUTIONS (HPSa.TO)
- Then: $9.20
- Now: $7.07
- Return: -23%
- Total return: -21%
Total return average: -5%
JC Clark Focused Opportunities Fund
Performance as of: March 31, 2019
- 1 year: 0.73% fund, 4.78% index
- 3 years: 5.51% fund, 6.08% index
- 5 years: 1.45% fund, 2.36% index
Index: S&P/TSX Composite.
Returns are net of fees.