Jason Del Vicario's Top Picks
Jason Del Vicario, portfolio manager at HollisWealth
Focus: North American Growth Stocks
The North American equity markets got off to a rip-roaring start to Q1, but since January 26, we’ve experienced a fair amount of volatility. Our basket of high return on equity (ROE)/growth stocks have held up better than most; in fact, we have delivered very solid outperformance year-to-date in relation to the indexes and our benchmarks. 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 most 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 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 (the short end is rising while the 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 about 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 pick-up in economic activity from already robust levels.
We feel the Fed, the BoC and the ECB are playing catch-up. Where they should’ve been normalizing rates in 2013 and 2014, they didn’t 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. 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're prepared no matter what the markets throw our way.
Lastly, it’s worth noting that when stocks lead and break to new highs, this often portends to the markets doing the same. Based on this, our best guess is the markets take out the January highs and resume the cyclical bull market that began in 2009.
This is our second-largest holding. We recently attempted to apply our screen to the world universe of stocks. While only 27 pass the test in Canada, we were overwhelmed with hundreds of stocks that met our criteria. When we increased the ROE cutoff from 20 to 30 per cent, we managed to whittle the list down to a more manageable 120. Of those 120, only three Canadian stocks made the cut: Constellation Software, Dollarama and Spin Master. We own all these stocks in concentration and are now actively looking to add higher-quality names to our holdings.
Dollarama remains hands-down the best Canadian retail option. We would suggest the company ranks highly when compared with its international peers as well. We see a long runway for them to continue to compound shareholder wealth at very heady rates. They missed their last quarterly results by a penny and the stock is stuck in around the $150 range. We recently added to our already overweight position at $149. We consider this to be a very solid company.
CONSTELLATION SOFTWARE (CSU.TO)
Dovetailing from the previous comments on Dollarama, the management team of Constellation Software are the best capital allocators in Canada. This stock remains poorly understood by the Street in that they look at the lofty price-to-earnings ratio and quip: "nice run; too expensive." All you should do is pull out a calculator and their financial statements and look at the cash ROE or cash earnings. You'll see that the company, in relation to their ROE and return on invested capital (ROIC) metrics, is inexpensive. 99 per cent of analysts, portfolio managers and the investing public will think I’m crazy suggesting a stock that's up as much as this company is inexpensive, but the math supports my opinion. Either way, they have a proven track record of adding significant shareholder value. They have increased their deal hunting team, expanded their geographical reach and I expect them to continue to compound shareholder wealth at above-average rates for years to come. They remain to be our largest position. We have neither added nor reduced since we last featured them.
SPIN MASTER (TOY.TO)
Spin Master is a Canadian success story that's just starting to gain traction in the investment community. They're a nimble and innovative toy maker. They use the excess cash flow from very popular and successful lines like “Paw Patrol” to reinvest back into product innovation as well as to acquire other brands. Most recently, they acquired GUND from Enesco, furthering their position in the plush toy market. Their stock price has been beaten down lately because of the Toys 'R' Us fiasco. But we believe the drop was overdone and took the opportunity to add to our position at about $49. So far, this seems to have been a fortuitous move as the stock rallied 7 per cent after their most recent quarterly results. This is a core holding of ours.
PAST PICKS: JULY 10, 2017
3-for-1 stock split June 20, 2018.
Top 3 stock in Canada. It remains a core position of ours.
- Then: $122.03
- Now: $52.16
- Return: 28%
- Total return: 29%
ISHARES BARCLAYS 20+ YR TREAS. BOND (TLT.US)
We were early on this call. The idea here was to start to derisk a bit. We think the call makes more sense now than last year and we're in the process of slowly derisking our portfolios in advance of the next recession. We haven’t a clue when that will be, but suffice to say we're much closer to the next recession than we're removed from the last one. We own a small position and will be looking to add.
- Then: $122.90
- Now: $120.56
- Return: -2%
- Total return: 0.4%
ROSS STORES (ROST.O)
This remains a core holding of ours. We continue to like the company's ability to generate excellent and steady return on equity while opening new stores and buying back shares. We added to the position in the high $50 when Ross Stores was beaten down with the rest of the retail space in summer 2017. The stock has rallied nicely and we continue to own it.
- Then: $54.80
- Now: $85.38
- Return: 56%
- Total return: 57%
Total return average: 29%
Hillside Wealth Moderate Growth Portfolio
Performance as of: June 12, 2018
- 1 Month: 3.29% fund, 1.91% index
- 1 Year: 12.86% fund, 5.88% index
- 3 Year: 9.14% fund, 3.38% index
* Index: S&P/TSX Composite Index
**Based on reinvested dividends. Returns net of 1.0 per cent management fees.
TOP 5 HOLDINGS AND WEIGHTINGS
- Cash: 12%
- Constellation Software Debenture CSUdb.TO: 10%
- RP Strategic Income Fund: 9%
- Constellation Software (CSU.TO): 5%
- Dollarama (DOL.TO): 4%
- iShares 7-10 year Treasury (IEF): 4%