Jason Del Vicario, portfolio manager at HollisWealth
Focus: North American growth stocks
The equity markets have consolidated of late after staging an impressive post-Brexit vote rally. Interestingly, our group of stocks, which can generally be described as “growth stocks.” have rallied strongly after spending July 2015 to July 2016 trading sideways. We see the likes of ATDb, CSU, CCLb and CRH all trading at or near all-time highs. We believe this to be an encouraging sign that we may experience another leg up through the next few months. However, we expect continued directionless activity until the U.S. election. It goes without saying that a Trump victory would, at least in the short term, be a negative shock as the market is not expecting this result. We feel that a Clinton victory may lead the way to a positive response for equities. We also note that we will experience the same song and dance we’ve seen for five-plus years now leading up to the next Fed rate decision in December. While I do think there’s a reasonable chance they do raise by a quarter point at this meeting, we typically see the USD and stocks sell off a bit as the prospect for a raise nears, only to see this all given back as the decision to hold is announced.
Frankly, the current environment feels a lot like a game we used to play as kids: musical chairs. Everyone knows the music (central bank-led manipulation of risk-price assets) will stop at some point, and we are all circling the chairs with baited breath.
It is very difficult to manage money in this environment, as nearly all risk-asset prices are artificially inflated under the mantra of central banks trying to engineer the “wealth effect” to stimulate spending and growth. This hasn’t worked and instead of reversing course, they are plowing ahead with more stimulus. We feel strongly that the next recession will see the Fed go negative with interest rates as this bizarro world gets … well, more bizarre! Our leading indicators suggest that a recession in the U.S. can be expected towards the end of 2018 barring an exogenous shock from China, Europe or the likes.
Given that rates are so low, one is being forced to take on risk to generate returns. We favour companies that have a proven track record of generating consistently strong returns on equity and EPS growth rates. Our preference is to own these in concentration than simply owning a basket of mediocre companies for the sake of “diversification.” We balance this exposure with varying allocations of government debt, which we expect will do well if and when the equity markets stumble. Our models continue to perform at or near the top of our peers and we are cautiously optimistic towards the end of 2016.
CONSTELLATION SOFTWARE (CSU.TO)
We’ve held this position since inception. It is our opinion that Michael Leonard and the Constellation Software management team are flat out the best capital allocators in Canada. CSU’s business model is to acquire, manage and build an industry-specific software business. They are now at the scale where they are very well diversified, servicing many different verticals in over 100 countries. They appear to be very disciplined in their acquisition strategy, sticking to a required 20 per cent+ ROIC. We recently added to the position in the high $500s and note that the stock appears set to break into new high ground, having spent the last 14 months, approximately, consolidating.
STELLA JONES (SJ.TO)
We’ve also held Stella Jones since inception. SJ is in the very exciting business of railway ties, telephone poles and, more recently, treated-wood products for residential and industrial marketplaces. They are an extremely well-run company and meet our ROE generation criteria. We note that they reduced their 2017 guidance recently, which in our opinion has created a buying opportunity. We did not take advantage of this drop as we are already overweight, but feel this is a good entry point for those who don’t own. Low organic growth goosed by accretive and strategic acquisitions.
DATA COMMUNICATIONS MANAGEMENT (DCM.TO)
This is perhaps the biggest “no brainer” I’ve come across in my career. The stock is trading at under six times trailing adjusted earnings with a cash ROE in excess of 100 per cent. The company has undergone important restructuring initiatives and importantly, Michael Sifton has not only agreed to stay on as CEO but has also made a significant personal investment in the company. I know the following might sound outlandish, but I truly believe that this company is worth at least $7 per share just to get to a sane valuation, and $10+ if they can continue to streamline their operations and pay down debt. These targets do not include any growth in earnings; management has indicated they are working on growth strategies. We recently initiated a position in the summer in the low $3s and have added to the position recently around $4.
PAST PICKS: AUGUST 19, 2016
We still own the company and note that they did announce the opening of their new bio-processing extraction facility at the end of the third quarter. We also note the company has recently attracted grant money to help in the commercialization advancement of their Pressurized Gas eXpanded (PGX) technology. Lastly, there may be a buying opportunity coming up as 10 million shares will become free for trading around the middle of November, after the four-month lock-up period of a recent Private Placement. We continue to really like the direction of this company.
- Then: $1.99
- Now: $1.84
- Return: -7.53%
- TR: -7.53%
DATA COMMUNICATIONS MANAGEMENT (DCM.TO)
Still one of our “Top Picks.”
- Then: $3.70
- Now: $4.55
- Return: 22.97%
- TR: +22.97%
ALIMENTATION COUCHE-TARD (ATDb.TO)
We were fortunate on the timing of this call during the last Market Call segment. Not two days after appearing, they announced a $4 billion+ acquisition of CST Brands, which we noted could potentially see the stock price break into new high ground; this is exactly what happened. It remains our second largest equity allocation after Fairfax Financial.
- Then: $62.15
- Now: $67.06
- Return: 7.90%
- TR: +8.02%
TOTAL RETURN AVERAGE: +7.82%
FUND PROFILE: JDV MODERATE GROWTH
PERFORMANCE AS OF SEPTEMBER 30, 2016:
- 1 month: Fund 0.61%, Index* 0.63%
- 1 year: Fund 7.91%, Index* 10.46%
- 2 year: Fund 24.03%, Index* -4.56%
* Index: Composite Benchmark: 30% TSX | 35% Universe Bond | 20% S&P Pref | 15% TSX Small Cap
TOP HOLDINGS AND WEIGHTINGS
- RP Strategic Income Fund (RPD110): 9.31%
- Constellation Software Debenture (CSUdb): 9.24%
- iShares 7-10 Yr Treasury (IEF): 7.86%
- Fairfax Financial (FFH): 6.29%
- Alimentation Couche-Tard (ATDb): 6.04%