Jason Del Vicario's Top Picks
FOCUS: North American growth stocks
The market dynamics have shifted these last few weeks. The days of meme stocks and stocks with no earnings or insane P/E ratios being bid to the moon seem to be behind us.
The value of an asset is the present value of its discounted future cash flows. We aren’t in the business of valuing ideas or stories; we value cash flow streams. It would seem the reason risk assets are selling off is due to withdrawal of stimulus spending (and quantitative easing) and interest rates rising a bit.
When rates are as low as they are, small changes in interest rates affect present value calculations; higher the rate, lower the valuations and vice versa.
Our best guess is this is a head fake much like 2018 and 2015 where the market can’t handle rising rates and withdrawal of cheap money and so the cycle will begin anew with central banks ramming rates back down to 0 per cent (or maybe even negative this time around) and firing up the printing presses.
Short-term market observers and investors may not like this environment but it excites us as long-term capital allocators. When equities sell off the baby is often thrown out with the bath water - meaning that high-quality stocks will be dragged down; we have cash on hand and are patiently awaiting opportunities to deploy at lower prices.
We have been speaking with a number of Canadians of late who are managing their own finances, not because they want to, but because they feel they have few suitable alternatives. Many are uneasy, especially those nearing retirement as they don’t have a long runway to recover from an ‘oopsy.’
We find many don’t really understand what they own certainly not in the context of valuation. Now is as good as a time as any to re-visit one’s near and long term financial objectives and ensure their portfolio matches.
Integrated Diagnostics (IDHC LON)
This is the ‘Life Labs’ equivalent of Egypt with operations also in Jordan, Nigeria, Sudan and soon (via an acquisition) Pakistan. The company sports high margins, little debt and is founder run/owned. The business is easy to understand, and predictable by way of many small transactions. The company sports a P/E below 10 with a healthy dividend yield of 7 per cent. We believe the company will be able to compound shareholder capital for a long time. It is a low-medium conviction position for us; jurisdictional risk prevents us from assigning a higher conviction and suggest sizing the position accordingly. We initiated a position at $1 early 2021 and since added Q4 2021 in the $1.20 range.
HeadHunter Group PLC (HHR NASD)
HHR is the largest online jobs classifieds portal in Russia. Classifieds tend to be a ‘winner take all’ space and HHR dominates their space. The shares have sold off heavily of late. They were too expensive and Russia-Ukraine conflict is dragging down stocks in the region. The company is very profitable and has a long runway to growth. We note that the company is not founder run/owned and that Russia can be an unpredictable market; much like IDHC these reasons render HHR a low conviction position for us. We initiated a position in the low $20s August 2020.
Constellation Software (CSU TSX)
We have owned CSU since inception in 2014. It is our largest position and our only high conviction position at this time. The CSU management group is compounding capital at a record setting pace. We were pleased to receive shares in Topicus (TOI) and expect more spinouts in the future as they continue to grow. The stock has sold off a bit; while not cheap, it certainly is nowhere near as expensive as many lower quality technology companies and we feel this would be a good time to initiate a position for those who have been waiting for a pullback.
PAST PICKS: January 26, 2021
Alimentation Couche-Tard (ATD TSX)
- Then: $39.62
- Now: $50.13
- Return: 27%
- Total Return: 27%
Pushpay Holdings (PPH ASX) – Australian Exchange
- Then: 1.51 AUD
- Now: 1.12 AUD
- Return: -26%
- Total Return: -26%
Kirkland Lake Gold (KL TSX)
- Then: $50.66
- Now: $51.68
- Return: 2%
- Total Return: 4%
Total Return Average: 2%