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

Focus: North American Growth Stocks

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MARKET OUTLOOK:

The markets were clearly surprised by the Brexit vote. We see continued ascent of ‘risk off’ assets such as Government Bonds, Gold and Utilities. Frankly we became more conservative and adjusted our asset mix in August 2015 when the Chinese surprised the markets by devaluing the yuan and then again January 2016 when the markets wobbled over growth concerns. This took our asset mix from 70/30 stocks/bonds to 60/40 in August and then to 50/50 in January. Our investment process doesn’t allow much for opinion but we are skeptical as to how much more upside is available to investors as this expansion cycle from the lows of 2008 is getting long in the tooth. We continue to favour companies that are consistent ROE generators and have demonstrated a track record of growing both top and bottom lines.

If we step back from the day to day or even month to month gyrations of the markets, we are very cautious with respect to the financial engineering being employed by the world’s central bankers. While their actions were most likely justified through the financial crisis of 2008, we believe that ultra-loose monetary policy can’t help but have unintended consequences. It is these unknowns that we fear the most. So when this is all said and done, what will the fallout be of keeping rates low for such a long time, and rounds of quantitative easing? The last two times rates were kept artificially low we saw major equity drawdowns in 2001 and again in 2008. This time, however, rates have been lower for longer. I simply cannot fathom how we get through this without another major equity market drawdown…worse though is what tools do the central bankers have left to deal with the next crisis? They haven’t cured the business cycle, so it’s inevitable we experience a recession and probably sooner rather than later. The fallout from this normal progression of the business cycle could be very interesting and lead to the resumption of the secular bear market that began 16 years ago.

Top Picks:

Biosyent (RX.V)

We most recently added RX to our mandates in May 2015 at $7.56. This is a small pharmaceutical distribution company. They have no debt and sport a high ROE of +30 per cent. While they aren’t cheap, they are growing their earnings at +20 per cent/year and have recently announced a game changing deal whereby they will be in licensing two cardiology products that at peak revenue penetration increase their sales by 60 per cent. They are very well run and not flashy nor do they rely on questionable business practices witnessed at Valeant. The stock has traded in the $7 range for over a year and has recently broken this trend. I would expect it to trade up to its previous highs of $12 over the next 12-to-24 months.

Ceapro (CZO.V)

I recently added to my position in the 80 cent range in April 2016. This company is too small for my mandates as the market cap is less than $100m. This company has a patented process that separates natural extracts from oats for use in animal and human health products. We like the fact their process is patented and they have a well-established partnership with Symrise; a large European firm. They have very high profit margins and ROE and I believe the upside for this company is huge. The stock had a huge move in April/May of this year and is now consolidating. I expect the stock to move higher past $1.35 in next few months; likely on the heels of their next earnings report.

Dollarama (DOL.TO) 

We most recently added to our position in June 2015 at $75. This is hands down the best retailer in Canada and one of the best in North America. Their ROE metrics are off the charts and they are doing an excellent job of increasing same store sales by adding higher priced/margin products to their shelves. We estimate they will reach market saturation in Canada at around 1400 stores (presently at 1038 stores). So this provides 40 per cent upside based solely on the store count. In 2013 they signed a deal to consult on a dollar store chain in Central America and we believe this is where they will focus beyond Canada. They have more or less traded around the $90 range since September 2015 and I expect the stock will resume its upward trajectory.

Fund Profile

JDV Moderate Growth & Income

Performance as of May 31, 2016

I month: Fund -0.72%, Index* -0.42%

1 year: Fund +0.11%, Index* -3.12%

Since inception (Sept. 2, 2014): Fund +15.7%, Index* -8.19%

* Index: S&P/TSX Composite Index: 30%

S&P/TSX Small Cap Index: 15%

S&P TSX Preferred Share: 20%

FTSE TMX Universe Bond Index: 35%

* Returns Net Fees & dividends

Top Holdings

1. Constellation Software Debenture – 9.38%
2. RP Debt Opportunities Fund – 9.22%
3. iShares 7-10 Year Treasury Bond ETF – 8.18%
4. Fairfax Financial – 6.2%
5. Alimentation Couche-Tard – 5.55%

Twitter: @jasondelvicario

Website: www.holliswealth.ca