May 2, 2019

Jason Del Vicario's Top Picks: May 2, 2019

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Full episode: Market Call for Thursday, May 2, 2019

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

MARKET OUTLOOK

Much has changed in the past few months. I wouldn’t say the recent rally has taken us by surprise, but it is curious given economic data is generally weak. We believe markets have responded favourably to the central banks backing off their hawkish stance, but worry the damage caused by aggressive rate raising may already be enough to tip us into recession in the latter half of 2019 or in 2020. The yield curve continues to flatten and has in fact inverted across certain maturity dates. Rate-sensitive sectors like autos and home builders have rolled over and these tend to lead economic activity. We feel the spectrum of outcomes in the short term (6 to 12 months) is very wide and can think of reasons why the markets may scream higher in a blow-off scenario while at the same time providing evidence supporting a retest of the December lows. Investors are being presented with an opportunity to take a hard look at what they own and make any necessary changes.

Our best guess is trouble will appear first in the credit markets. While households deleveraged somewhat after 2008 (more so in U.S. than Canada), non-financial corporate debt has skyrocketed. Much of this has gone towards propping up companies that aren’t profitable or to juice financial engineering (namely stock buybacks). This borrowing binge stands on weak ground, as it’s predicated on the constant supply of cheap money and companies not experiencing a drop in demand for their products or services. We would look to drastically reduce our risk beyond our current conservative stance if cracks begin to appear in the corporate debt markets.

Investors continue to reach for yield in the high-yield and corporate-debt markets. We feel this behaviour is extremely reckless as we approach the end of the cycle. During the last downturn, even the highest-grade corporate debt was down 20 to 40 per cent, with lower-quality debt dropping more. Unsuspecting investors may be shocked when their bonds drop as much as their equities during the next market downturn.

We’ve taken opportunity to raise cash and divert allocations to non-correlated assets such as cash, precious metals and government bonds. However, we’re employing a barbell strategy of sorts: We continue to own companies that meet our strict selection criteria while also owning these very “boring” assets which can rise during periods of economic uncertainty or weakness.

TOP PICKS

Jason Del Vicario's Top Picks

Jason Del Vicario, portfolio manager at HollisWealth, shares his top picks: Rightmove, Constellation Software and CI Financial.

RIGHTMOVE (RTMVY.PK)

Rightmove is a property portal in the U.K. It’s the best screening stock we’ve found. The company dominates the property search market in Britain, with a greater than 70 per cent market share. They’re ridiculously profitable, boasting margins north of 70 per cent. They have no debt and are aggressively returning capital to shareholders via dividends and share buybacks. This has been a hugely successful investment and while they aren’t cheap, we’re reminded of Warren Buffet, who says, “I’d much rather pay a fair price for an excellent business than an excellent price for a fair business.”

CONSTELLATION SOFTWARE (CSU.TO)

I probably talk about Constellation Software too much, but I was fortunate to attend the company’s annual general meeting this morning and continue to be in awe of this operation. Much like Rightmove they aren’t cheap, but excellent companies are rarely cheap. This company continues to execute their business plan and I would argue this is one of the premier companies in the world, not just Canada. What’s even more amazing is that this company continues to fall under most people’s radars.

CI FINANCIAL (CIX.TO)

This company operates in a space that I’m very familiar with. Active money management is a business that is feeling pressure on all fronts. Fees are dropping and assets are moving towards cheaper passive strategies. While we certainly understand this shift, we believe that active management done well will continue to be of value to investors, especially in Canada where we have limited diversification options. CI Financial is cheap yet profitable. This is not a “forever hold” for us, but we feel that the risk/reward relationship is strong here. We see upside of $30 per share and downside of $16 per share.