Jason Del Vicario's Top Picks: July 6, 2020

Jason Del Vicario, portfolio manager at HollisWealth
Focus: North American growth stocks

MARKET OUTLOOK

We have seen a strong rally in risk assets through the second quarter. We are not sure if this is due to market participants believing we will have a V-shaped recovery or whether investors are reducing their model discount rates and arriving at much higher present values for cash flow streams. It is also possible that investors believe the central banks of the world have their backs and will prevent any sustained drop in risk assets. Will we get inflation or deflation? What happens to the value of the U.S. dollar? Will we get a second wave of the virus? Regardless, we feel there is enough uncertainty on all fronts warranting a diversified and nimble approach at this time. The only thing we have a high degree of certainty about is that companies with strong balance sheets and competitive positioning/advantages will do well no matter the economic backdrop. These “moat-y” companies therefore comprise the bulk of our holdings (presently 50 per cent in our balanced portfolio) with the rest split between government bonds (20 per cent), cash (20 per cent) and gold (10 per cent). 

These are the signals we are paying particular attention to:

•  Velocity of money: inflation won’t be an issue until this picks up. Inflation affects interest rates which in turn affect risk asset values (as noted above). This is probably the least discussed but most important metric an investor can follow.
• Treasury yields: after yields plunged (prices spiked) in March, they have formed a very flat base. A renewed plunge in rates will not be good for risk assets in the short term as it means the market is suggesting lower growth and deflation going forward.
•  Gold prices: gold on June 30 broke through $1,800, which is significant and paves the way for it to challenge its 2011 highs of $1,920. 

TOP PICKS

iShares 20+ Year Treasury Bond ETF (TLT NASD)

Long-dated U.S. Treasuries remain the best non-derivative hedge for Canadian investors that we are aware of. Now there will be a time when we won’t want to touch US Treasuries with a 10 foot pole but for now, Treasuries and the U.S. dollar are still seen as safe haven assets and should provide us protection if/when stocks falter.

Kirkland Lake (KL TSX)

Not much is predicable in the current environment but for human behaviour. I believe that politicians will continue to spend beyond their means and central banks will be mired in QE forever. The easiest way out of this mess is to monetize the debt which will no doubt lead to a debasement of fiat currency. Gold cannot be printed and Kirkland Lake is hands down the best gold stock according to our metrics. We also own bullion through IAU and PHYS.

Constellation Software (CSU TSX)

I realize all of these picks have been picks of ours in the past but that’s part of the point I’m trying to make. Generally, good companies stay good and get better and the opposite can be said for weak companies. CSU continues to execute their software company acquisition strategy and the management team, in our view, remain some of the best capital allocators in Canada and the world. 

PAST PICKS: SEP. 23, 2019

Ulta Beauty (ULTA NASD)

We were stopped out of Ulta during the March plunge. We still like the company and follow them. We would have no qualms buying them back.

• Then: $237.21
• Now: $205.85
• Return: -13%
• Total return: -13%

Tucows (TCX NASD)

We still own them. We do worry about their ability to grow in the face of well-heeled broadband satellite providers but they are very well run and exhibit excellent capital allocation skills.

• Then: $53.99
• Now: $58.01
• Return: 7%
• Total return: 7%

iShares 20+ Year Treasury Bond ETF (TLT NASD)

We’ve owned TLT since inception in 2014. We are of the opinion that we are going to be in a very low interest rate environment for a long time (decades, not months or years). TLT is the single best hedging tool we are aware of. Canadian investors get a double bang for their buck because generally when rates plummet (TLT rises) it also corresponds with a rise in the greenback versus loonie.

• Then: $141.86
• Now: $162.16
• Return: 14%
• Total return: 16%

Total return average: 3%