Aug 19, 2016

Jason Del Vicario's Top Picks: August 19, 2016

BNN Bloomberg

Jason Del Vicario , BNN

Jason Del Vicario, portfolio manager, Hillside Wealth Management of HollisWealth

Focus: North American Growth Stocks

_______________________________________________________________

MARKET OUTLOOK:

The equity markets have staged an impressive rally post Brexit vote of late June. We took this as a cue to increase our equity weights across all three of our models. We added Telus (T.TO) and Boyd (BYD_u.TO) in our Income and Moderate models. We took advantage of a drop in Ceapro (CZO.V) to initiate the position to our Small Cap model. Frankly the current environment feels a lot like a game we used to play as kids at school and birthday parties: musical chairs. Everyone knows the music (central bank led manipulation of risk price assets) will stop at some point and we are all circling the chairs with baited breath.

It is very difficult to manage money in this environment as nearly all risk asset prices are artificially inflated under the mantra of central banks trying to engineer the ‘wealth effect’ to stimulate spending and growth. This hasn’t worked and instead of reversing course they are plowing ahead with more stimulus. We feel strongly that the next recession will see the Fed go negative with interest rates as this bizarro world gets… well, more bizarre!

The only question is WHEN this will happen; given rates are so low, one is being forced to take on risk to generate returns. We favour companies that have a proven track record of generating consistently strong returns on equity and growth rates. We note that most of our companies have declared excellent Q2 results and their stock prices have responded favourably. Our models produced excellent returns through July and we are cautiously optimistic as the end of 2016 approaches.

Top Picks:

Ceapro (CZO.V)

Ceapro was first highlighted in our inaugural BNN appearance July 4, 2016. The stock has since made a strong move higher peaking at $2.50. We note that Peter Imhof of AGF also featured Ceapro as a top pick and we are pleased to have others following and owning the stock. The stock is once again being featured as our top pick as the price has come off of late to the high $1 range and we view this as an attractive entry point. We are eagerly awaiting their Q2 results. We recently added to the position in early August at an average price of $1.96.

Data Communications Management (DCM.TO)

This is perhaps the biggest ‘no brainer’ I’ve come across in my career. The stock is trading at under 4 times trailing earnings with a cash ROE in excess of 100 per cent. The company has undergone important restructuring initiatives and importantly Michael Sifton has not only agreed to stay on as CEO but has also made a significant personal investment in the company. We note the uncertainly surrounding the Postal strike provides some negative overhang while the recent Q2 results ignited the stock price. I know the following might sound outlandish but I truly believe that this company is worth at least $7/share just to get to a sane valuation and $10+ if they can continue to streamline their operations and pay down debt. These targets do not include any growth in earnings; management has indicated they are working on growth strategies. We recently initiated a position in this security at $3.02.

Alimentation Couche-Tard (ATD’b.TO)

Next to Fairfax, this is our largest equity position. They have a very consistent history of increasing their earnings and producing excellent ROE metrics. They have a nice combination of organic and acquisition growth and we note they appear to be the leading candidate to purchase CST Brands. The stock has been trading sideways since July 2015 and appears poised to break out. We believe the catalyst for new highs would be a successful bid for CST Brands or another large acquisition. We last added to the position late March 2015 at $50.89.