Full episode: Market Call for Monday, March 8, 2021
Jason Del Vicario, portfolio manager, Hillside Wealth Management, iA Private Wealth
Focus: North American growth stocks
Market activity has become interesting of late. Interest rates have spiked, leading many to call out heightened inflation risks. While we’ve also noted increased inflationary pressures, we are mindful of Bob Farrel’s market rules: when all experts and forecasts agree, something else is going to happen. There is a big tug of war going on between deflation and inflation camps. On the one hand, we have central banks printing money on a level they’ve never done before (inflationary); on the other, we have elevated savings rates and unemployment as well as a productivity gap that has existed since 2008 (deflationary). If rates rise much further from here, we’ll start to see this impact growth going forward which will bleed into deteriorating risk asset prices. This cycle has played out a number of times since 2008 and it doesn’t seem we can shed our addiction to free and plentiful money. We have no idea how or when these cycles end, but it likely won’t be pretty.
While the macro picture is obscure, we choose to spend most of our time searching and researching high quality companies. We define ‘high quality’ as those that have a consistent history of producing above-average returns on invested capital with little to no debt. We love companies that can grow or continue to achieve elevated ROICs without having to invest gobs of additional capital. We also require strong capital allocation skills. Of the 100,000 publicly traded companies on the planet, we have found about 100 that meet these very strict selection criteria. We seek to own these companies in concentration (15-25 names) and feel this is our best hedge against a world that is increasingly complex and tricky to navigate. As Warren Buffet once quipped, "Time is the friend of the good business."
If the inflation consensus is wrong, much like it was coming out of 2008, then TLT will do very well. It has had a horrible start to the year with rates spiking but I do not believe we have seen the low in rates that have been in a very well established bull market starting in 1982. There is just far too much debt in the world to believe we are going to see massive inflationary pressures going forward. Coupled with the CAD being relatively high, this is a great level for a Canadian investor to add some protection to their holdings.
I have been researching Chemed of late and really like their easy-to-understand business lines: namely plumbing (Roto Router) and a large and growing hospice care business. While the two businesses do not have much in common, the financials of both are excellent. The company is well run and is at a decent level to build a position. They have a long history of increasing their dividends.
Clorox shot up after the pandemic started as demand for their bleach and cleaning products increased. The company owns a number of brands and has an established history of achieving consistently strong ROICs. The stock has sold off as the market, incorrectly in our view, assumes once the pandemic is over demand for many of their products will fall off. While that may be true to some extent, we feel the selloff is overdone. This represents a decent level to build a position in this well-established company. They also have a long history of increasing dividends.
PAST PICKS: May 5, 2020
Microsoft (MSFT NASD)
In our view, Microsoft is the best of the ‘big tech’ stocks. They have a strong moat and returns on invested capital. We envision owning them for a long time.
- Then: $180.76
- Now: $231.82
- Return: 28%
- Total Return: 30%
Kakaku.com (2731 TYO)
Kakaku is a really innovative and profitable company. They have pivoted their restaurant review/booking app in response to COVID, demonstrating their ability to execute on the fly. We also envision owning them for a long time.
- Then: ¥2151.00
- Now: ¥3230.00
- Return: 50%
- Total Return: 51%
Ross Stores (ROST NASD)
We have owned since inception in 2014. We were stopped out of half our position in March 2020 and have yet to buy back. This is a very well run retailer.
- Then: $88.77
- Now: $118.07
- Return: 33%
- Total Return: 33%
Total Return Average: 38%
Company Twitter Handle: @hillside_wealth
Personal Twitter Handle: @jasondelvicario
Company Website: www.hillsidewealth.ca
Other: Jason Del Vicario (www.linkedin.com/in/jasondelvicario)