Jason Del Vicario, portfolio manager, Hillside Wealth Management, iA Private Wealth

FOCUS: North American growth stocks

MARKET OUTLOOK:

Since my last appearance (Jan. 2022), the markets have continued to be volatile, especially post-Russian invasion of Ukraine. 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 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 zero per cent (or maybe even negative this time around) and firing up the printing presses.

For those interested in macroeconomics, I would point out the yield curve, which few are discussing; this signal (when it inverts) has virtually a perfect track record at predicting economic downturns… yes, a polite word for recessions! The yield curve has plummeted of late and is approaching zero and could invert. 

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 holdings and asset allocation are aligned.

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TOP PICKS:

Games Workshop PLC (GAW LON)

Games Workshop is a business based in the UK that mainly develops the Warhammer games, which generate crazily high loyalty among hobbyists. This fanatical fan base has been built over decades and provides a strong source of competitive advantage. The company has consistently high returns on invested capital, is asset light, rock solid balance sheet and while not founder owned/run (our preference), the management group have demonstrated superior capital allocation skills. We recently acquired shares at 78 & 72 pounds, which are levels below our estimate of intrinsic value. This is a medium conviction level position for us; 5 per cent equity weighting.

Plus500 (PLUS LON)

Plus500 is a company we’ve owned for approximately a year while we’ve been familiar with the company for a couple of years. They are an Israeli-based financial platform company offering a myriad of financial products; currently heavily skewed towards CFD (contracts for difference) trading. The company has very high margins and returns on capital, lots of cash and while the cash flows have been more volatile that we normally like the shares are cheap and have provided long term investors with excellent returns. We acquired shares most recently at the 12 pound level late 2021. This is a low conviction level position for us; 3 per cent equity weighting.

Topicus.com (TOI CVE)

Baby CSU (Constellation Software) is just that; the “little sibling” of one of the most successful capital allocation machines the world has ever seen. We were “given” shares as a result of our heavy CSU position and we like Topicus for all of the same reasons we are attracted to CSU. We recently added to our position in the low $80s and while the shares are by no means cheap we see great things ahead for TOI shareholders. Given the limited public history (IPO 2021) this is a low conviction level position for us; 3 per cent equity weighting.

PAST PICKS: March 8, 2021

iShares 20 Year T-Bond ETF (TLT NASD)

• Then: $137.83
• Now: $134.34
• Return: - 3%
• Total Return: - 0.9%

Chemed Corp. (CHE NYSE)

• Then: $430.84
• Now: $476.11
• Return: 10%
• Total Return: 11%

Clorox (CLX NYSE)

• Then: $187.76
• Now: $133.74
• Return: - 29%
• Total Return: - 26%

Total Return Average: - 5%