Apr 12, 2018

Jason Del Vicario's Top Picks: April 12, 2018

BNN Bloomberg

Jason Del Vicario , BNN

Jason Del Vicario, portfolio manager with Hillside Wealth at HollisWealth, a division of Industrial Alliance Securities Inc.
Focus: North American growth stocks

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MARKET OUTLOOK

The North American equity markets got off to a rip-roaring start to the first quarter, but since Jan. 26 we’ve experienced a fair amount of volatility. Our basked of high return on equity/growth stocks have held up better than most. In particular, we see dividend stocks under significant pressure. Not only were they trading at historically high valuations, but they're now swimming up river with rates rising. This will impact the majority of Canadian investors who've been chasing yield by piling into high dividend-paying stocks. We generally prefer companies that reinvest their excess cash flow back into the business in order to achieve higher returns on invested capital.

We’ve been keeping a keen eye on the yield curve as it's historically been the best predictor of an impending recession. While the curve is flattening, (short-end rising while long-end not rising as much) we're two to three rate rises away from inversion. An inverted yield curve generally leads an actual recession by around 12 months. We follow a number of recession-leading indicators and none of them are flashing warning signs at this time; a few are actually pointing to a pickup in economic activity from already robust levels.

We feel the Fed, the BoC and the ECB are playing catchup. They didn’t normalize rates when they should have in 2013-2014 and are now behind the curve. They claim to be data-dependent, but both inflation and GDP growth figures aren’t exceptional and they still seem committed to raising rates. Something like 11 of the last 13 recessions occurred during this type of rate environment, so we continue to monitor this closely.

We employ a strict downside protection system with our holdings. We have two prices for every security that we hold; if the first is breached, we sell 50 per cent of the position and if the second level is breached, we sell completely. It’s interesting to note that, for the first time since January 2016, we've had a few of our stops triggered. For example, we were partially stopped out of Facebook and fully stopped out of BYD Company. We continue to be vigilant with respect to our approach and feel we are prepared for no matter what the markets throw our way.

TOP PICKS

DATA COMMUNICATIONS MANAGEMENT (DCM.TO)

I realize I’m probably sounding like a broken record with this one, but I’m going to keep Data Communications Management as a top pick simply because the valuation doesn’t add up. To be clear, this is a smaller company and investors should size their position accordingly in their portfolio, but it's in the midst of a turnaround and trading very inexpensively. The turnaround hasn’t been smooth and has taken longer than management (and us) would like, but they're getting there. After overpromising guidance through 2017, we feel they're now likely underpromising. They've guided to earnings before interest taxes depreciation and amortization (EBITDA) of $22 to $25 million for 2018, which would be a nice jump from the $16 million they posted in 2017. With an enterprise value (EV) of $95 million, they're trading at a forward EV/EBITDA multiple of 4, which we feel is very low. Clearly, the market is in "show me" mode with this company. We continue to hold and look for the stock to advance sharply through 2018, if they can continue to execute the turnaround.

ALIMENTATION COUCHE-TARD (ATDb.TO)

Alimentation Couche-Tard is a core holding of ours. The stock has been stuck in neutral for the better part of two years and we feel the current stock level warrants it being a top pick for this Market Call. The story is well established: They're a Canadian success story and now amongst the top handful of convenience store operators in the world. They've achieved this through strategic acquisitions and superior management. This hasn’t changed, but the current market perception of their business has.

Some have suggested they’ll struggle when electric cars begin to dominate. We see this as a long ways off and the company is already testing electric car charging stations in Norway. Some have suggested Amazon may eat their lunch. Perhaps, however Couche-Tard has 22,000 locations: the essence of convenience is presence. They're well-run and out of favour. We recently added to our position at $57 at the end of March.

DOLLARAMA (DOL.TO)

Dollarama is hands-down the best retailer in Canada and, according to our analysis, Dollarama and Constellation Software are the top two most profitable Canadian companies. If you look at the long-term charts for both, it should come as no surprise they're two of the best performing stocks on the TSX over the past 10 years.

Dollarama is extremely well run, very profitable and still have a long runway of growth. The company is at about 1,100 stores in Canada and see 1,700 as the magic store count domestically. They typically add 60 to 75 stores per year, so they can keep growing in the country for at least the next decade. They've been quiet about their activities in Central and South America, but they now have a partnership boasting over 100 stores.

The company has the option to acquire a majority ownership in Dollar City in February 2019. We’d be very surprised if they don’t do this. They announced the deal in 2013; they are cautious about everything they do and test extensively whether it be product placement, credit card acceptance or foreign market expansion.

Despite all the success, it amazes us that analysts and investors continue to underappreciate Dollarama. Most analysts I read focus on how expensive the stock is. Yes, they trade at 30 times earnings and that’s pricey, but their return on assets is nearly 30 per cent and has been rising. I know people are going to think I’m crazy, but I think they are cheap at $150 per share. They're a top holding of ours and we recently added to our position in the high $150s late March.

DISCLOSURE	PERSONAL	FAMILY	PORTFOLIO/FUND
DCM	Y	Y	Y
ATDb	Y	Y	Y
DOL	Y	Y	Y

PAST PICKS: MARCH 29, 2017

DATA COMMUNICATIONS MANAGEMENT (DCM.TO)

We own and still like the company and are pleased to see the turnaround gaining traction. The stock price hasn’t caught up to levels where we think it should be, but we continue to hold.

Then: $2.03
Now: $1.48
Return: -27%
Total return: -27%

BIOSYENT (RX.TO)

This has been a core holding of ours since inception in 2014. We like the company a lot and continue to hold. We feel that 2018 and 2019 will see their earnings per share (EPS) and EBIDTA increase substantially, which should translate into heady stock gains. We note that they have two large cardiology products expected to be distributable in 2019. We also note they have no debt and are sitting on just shy of $20 million in cash. We're quite excited about the company’s ability to deploy this cash. This company is conservatively run and we feel they will be efficient allocators of capital just as they’ve been efficient operators.

Then: $7.50
Now: $10.00
Return: 33%
Total return: 33%

BOYD GROUP INCOME FUND (BYD_u.TO)

I hope readers of these ‘Top Picks’ and ‘Past Picks’ segments will see a pattern. Namely, we generally like to find great companies and hold them until they give us reason not to. Boyd is no exception. We like the company a lot. The stock price has one of the most beautiful charts we’ve ever seen. They’ve had a bumpy ride of late with hurricane-related issues down south and such, but the fundamentals of their business and growth model remain intact. They're consolidators in the highly fragmented auto collision repair industry. They have an excellent track record of creating shareholder value. We continue to hold.

Then: $83.97
Now: $108.73
Return: 29%
Total return: 30%

Total Return Average: 12%