Jason del Vicario, portfolio manager at HollisWealth

Focus: North American growth stocks
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MARKET OUTLOOK
The North American indices are for the most part trading near all-time highs. We note that the U.S. markets have wobbled a bit as a result of the failed health-care-reform bill. The failure of this bill throws into question the ability of the Trump administration to push through a barrage of changes. We also note that the Canadian markets have been weak of late in the wake of the TD sales scandal and renewed downward pressure on oil prices. Our sense is the market is not adequately pricing a “lower-for-longer” oil market. Oil inventories are the highest they’ve ever been and from our perspective we would not be shocked to see oil challenge this cycle’s lows of $25 to $30 a barrel. This of course would not be good for the TSX nor the dollar.

As followers and readers of our work know, we select stocks based on our strict selection criteria. While the Canadian equity markets are dominated by financials, energy and materials, we have very little exposure to these sectors as most of the companies in those sectors do not meet our criteria. This was the case at inception (September 2014) and remains our position today. So while we may be a bit sanguine about the direction of the general markets going forward (and of Canada, in particular), we are keen on the prospect of our individual positions. Our stocks as a group possess above-average ROE and EPS growth metrics and can loosely be defined as “growth stocks.” This area of the market underperformed financials/energy/materials in 2016. However, this trend has begun to reverse itself as of early February. 

In short, while we feel the general markets may be hard pressed to move higher in the short term, we feel confident our group of companies will continue to grow their earnings and generate strong ROE metrics. While this may not lead to short-term advancement, we feel confident that over time their superior growth/profitability metrics will be rewarded, which in turn will allow for continued outperformance of our model portfolios. Examples of such companies include Dollarama (DOL.TO), Alimentation Couche-Tard (ATDb.TO) and Constellation Software (CSU.TO), to name a few. 

Lastly, we remain fully invested; all three of our models are maximum equity weighted.

TOP PICKS

DATA COMMUNICATIONS MANAGEMENT (DCM.TO)
This is now the third time I’ve had DCM as a top pick and I’m highlighting it again as the stock price has been weak of late and we feel the current level represents an excellent entry point. The company issued some news in early February, namely continued cost reduction, the acquisition of two print companies and investment in new printing equipment. The market reacted favourably as the stock rose over 60 per cent in relatively short order. Since then, we’ve had an earnings release that was below market expectations and the stock has sunk right back down into the low $2 range. If one closely read the MD&A of the release, one would’ve noted that management provided guidance for F2017 adjusted EBITDA in the $22 to $26 range. While the market is clearly taking a wait-and-see approach, where else can you find a company with a market cap of $30 million with these types of financial metrics? While this stock isn’t for the faint of heart, we feel it is grossly undervalued and represents significant upside and limited downside. We originally bought in the mid-$4s in October and added at $2.08 late November.

BIOSYENT (RX.V)
This is a company we’ve owned since inception (and that is a previous top pick) that in our view has been unfairly beat up of late (much like DCM). We are witnessing a trend, especially with growth stocks, where the market’s focus is very short term in nature. RX recently announced their Q4 and year-end results and they were very good. They continue to grow their top and bottom lines while sporting a healthy ROE of over 30 per cent. We note that they have a women’s health product that they anticipate to start selling in mid-2018 and two cardiovascular products estimated to ship in 2019. These, along with new product additions, will help the company meet their state objectives of growing top and bottom lines at 20 per cent+ over the next seven+ years. We believe the recent swoon in price represents an excellent entry point.

BOYD GROUP INCOME FUND (BYD_u.TO)
We’ve held Boyd since the summer of 2016 when we bought it at $79. Boyd is in the autobody repair business. They are focused on increasing same store sales as well as being a consolidator in the sector. They sport impressive cash ROE and adjusted EPS growth metrics. On the surface they look overvalued with a PE ratio of 68. One has to dig a bit deeper to get the full picture, however — a lot like the case of Constellation Software (CSU). While their TTM net earnings was $30 million, their operating cash flow was $91 million and free cash flow $78 million. We like companies that have a large difference between their net income and cash earnings as this may not be fully understood and priced in by the markets. The long-term chart on this company is nothing short of spectacular and we look for them to continue their impressive run. The stock can be had for approximately $84 these days, which we feel represents fair value.
 

PAST PICKS: JANUARY 24, 2017

MARKET VECTORS ETF TRUST (MOAT.US)
While this isn’t something we own in our model portfolios, we would if we were looking for an ETF proxy to the types of stocks we own. For someone who is looking for broad U.S. market exposure to companies that have wide economic moats and are fairly valued in relation to their intrinsic value, we would continue to recommend holding/adding this ETF.

• Then: $35.87
• Now: $37.50
• Return: +4.54%
• TR: +4.54%

MASTERCARD (MA.N)
We’ve held this position since inception (September 2014) when we bought it at approximately $75. We recently added to the position in November 2016 as it broke to new high ground at $101. Since then, the stock has moved nicely higher on the back of general market strength and continued deliverance of strong earnings growth. We feel Mastercard will continue to dominate the electronic payments industry along with Visa and Amex. All three have long runways of growth as more people adapt credit-card use worldwide.

• Then: $109.92
• Now: $112.06
• Return: +1.94%
• TR: +1.94%

PACIFIC INSIGHT ELECTRONICS (PIH.TO)
We note that PIH declared somewhat weak earnings on February 13. The stock has moved from the $10 range to $8 since then. The company had some non-recurring costs associated with product launches and the company notes that there is “uncertainty in the market around North American trade mechanisms.” Reading between the lines, it would appear the market and management are concerned with the trade rhetoric coming out of the White House. The company notes they are reviewing contingency plans in relation to its operations in the event of changes to existing trade agreements. I will note that while the company is based in Nelson, B.C., they do have production and other operations south of the border. I would suggest that until we get more clarity on this front, the stock is likely to remain weak in the near term.

• Then: $9.72
• Now: $8.04
• Return: -17.28%
• TR: -17.28%

TOTAL RETURN AVERAGE: -3.6%
 

PERSONAL TWITTER: @jasondelvicario
COMPANY WEBSITE: www.hillsidewealth.ca
LINKEDIN: www.linkedin.com/in/jason-del-vicario-cfa-57b98b