Oct 6, 2020

Jason Del Vicario's Top Picks: Oct. 6, 2020

BNN Bloomberg

Jason Del Vicarion

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

MARKET OUTLOOK

We have seen a strong rally in risk assets through the second and third quarters. We are not sure if this is due to market participants believing we will have a V-shaped recovery or whether investors are reducing their model discount rates and arriving at much higher present values for cash flow streams. It is also possible that investors believe the central banks of the world have their backs and

prevent any sustained drop in risk assets. Will we get inflation or deflation? Will we get a second wave of the virus? Regardless, we feel there is enough uncertainty on all fronts, warranting a diversified and nimble approach at this time. The only thing we have a high degree of certainty is that companies with strong balance sheets and competitive positioning/advantages will do well no matter the economic backdrop. These “moat-y” companies therefore comprise the bulk of our holdings (presently, about 50 per cent in our balanced portfolio) with the rest split between government bonds (25 per cent), cash (7 per cent) and gold (7 per cent).

These are the signals we are paying particular attention to:

Velocity of money: Inflation won’t be an issue until this picks up. Inflation affects interest rates, which in turn affect risk asset values. This is probably the least discussed but most important metric an investor can follow.
Treasury yields: After yields plunged in March, they have formed a very flat base. A renewed plunge in rates will not be good for risk assets in the short term, as it means the market is suggesting lower growth and deflation going forward.
The U.S./Canadian dollar exchange rate
Oil and copper: Both tend to lead economic data and have leveled off, dropping as of late.

TOP PICKS

Alimentation Couche-Tard (ATD/B TSX)

We recently increased our position in the low $40s as we believe the shares are undervalued. They have de-levered in the absence of attractive acquisition opportunities and we believe there are opportunistic acquirers. They recently backed away from talks with Caltex and were outbid 7-11 for Marathon Petroleum’s Speedway chain of gas stations. While the market might not like this in the short term, we love this discipline and expect them to be aggressive when others are fearful. They sport a very healthy free cash flow yield north of 7per cent. Very well run.

The a2 Milk Company (ACOPF OTC)

This is a New Zealand company we have been following for some time. They were the first to commercialize A1 protein-free milk and baby formula. They are able to command a premium price and recently fell 30 per cent due to lowered guidance. To be sure, they still plan on growing 5 to 10 per cent this year which compared is very strong during the pandemic. The FCF yield breached 4 per centm which is solid given their growth profile. We acquired shares directly on the Australian exchange (A2M) at AU$14.

Constellation Software (CSU TSX)

I have featured this company repeatedly but it is rare that I’m able to recommend them as reasonably or undervalued… until now! Their FCF yield breached 4 per cent. For a company that has consistently grown their FCF at 30 per cent yearly, current prices present a great entry point for those who don’t own but have always wanted to.