Jason Del Vicario's Top Picks: Sep. 24, 2018

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

MARKET OUTLOOK

The North American equity markets got off to a rip roaring start to Q1, but since Jan. 26 we’ve experienced a fair amount of volatility. We noted in June that we felt the S&P 500 would break through their late January highs and this has happened recently.

Our basket of high return on equity/growth stocks have held up better than most. In fact, year-to-date we’ve delivered very solid outperformance in relation to the indexes and our benchmarks. In particular, we see dividend stocks under significant pressure. Not only were they trading at historically high valuations, but they’re now swimming up river with rates rising. This will impact the majority of Canadian investors who’ve been chasing yield by piling into high dividend paying stocks. We generally prefer companies that reinvest their excess cash flow back into the business in order to achieve higher returns on invested capital.

We’ve been keeping a keen eye on the yield curve as it has historically been the best predictor of an impending recession. While the curve is flattening (the short end is rising while long end is not rising as much), we’re two to three rate rises away from inversion. An inverted yield curve generally leads an actual recession by around 12 months. We follow a number of recession-leading indicators and none of them are flashing warning signs at this time; a few are actually pointing to a pick-up in economic activity from already robust levels.

We feel the Fed, the BoC and the ECB are playing catch-up. Whereas they should’ve been normalizing rates in 2013 or 2014, they didn’t and are now behind the curve. They claim to be data-dependent, but both inflation and GDP growth figures aren’t exceptional and still they seem committed to raising rates. Something like 11 of the last 13 recessions occurred during this type of rate environment, so we continue to monitor this closely.

We note a number of high-quality companies have seen their share prices battered in 2018 and have traded a historic low valuation levels when coupled with profitability metrics. Starbucks, Facebook Dollarama and Constellation Software are a few such examples.

TOP PICKS

DOLLARAMA (DOL.TO)

Dollarama remains a core holding of ours. The stock sold off some 20 per cent after their most recent earnings report. In the short term, investors seem to be concerned with slowing growth but in our view the long-term thesis remains in force. Namely, they still have a long runway for new stores in Canada. In addition we’re very excited to see what they do regarding the February 2020 option to purchase a majority stake in the Central and South American Dollar City franchise they have co-developed. We noted the Dollar City store count has now reached 137. In our view, this provides shareholders with excellent long-term growth prospects and we expect them to exercise the option. We also note the company has a history of buying back its own shares and expect they’ll be aggressively doing this given the recent price drop. We will be looking to add to our position in the next few weeks.

FACEBOOK (FB.O)

Facebook is a similar story to Dollarama in many respects. Current mood is their growth and margins are slowing and the stock has been beaten up of late. According to our metrics, Facebook is the cheapest they’ve been since their IPO. Management spooked investors in their most recent analyst call, but we feel this was a calculated play on their part to try and divert regulator attention away. The company dominates their space with many growth levers to pull like monetizing Instagram, Whatsapp as well as capturing greater dollars from their 2.2 billion users to name a few. Once the narrative changes, investors will again focus on their dominant position and insane profitability. Facebook has a large economic moat in the form of the very powerful network effect. We will be looking to add to our position in the next little while.

VIAMED HEALTHCARE (VMD.TO)

This is a new position for us. Viamed was spun out of Patient Home Monitoring and are active as a respiratory services provider in the U.S. The demand for their services is increasing as they can save the healthcare system by caring for patients in their homes versus expensive hospital care.  Of course, they also benefit from the aging population tailwind. We initiated a small position in the low $5 range and despite the recent run, we believe the stock can approach $10 as they continue to execute their business plan. Note that this is a small company and we recommend sizing the position accordingly.

PAST PICKS: SEP. 18, 2017

BOYD GROUP INCOME FUND (BYD_u.TO)

This is a core holding of ours and we’re pleased with the results.

• Then: $91.62
• Now: $128.94    
• Return: 41%
• Total return: 41%

CCL INDUSTRIES (CCLb.TO)

This is also a long term hold for us. The stock has traded sideways for a while. The company is well run and we feel it represents good value at current levels.

• Then: $56.98
• Now: $59.07
• Return: 4%
• Total return: 5%

CONSTELLATION SOFTWARE (CSU.TO)

This is a long-term core holding of ours. We’re looking to add to our position after trimming a bit over $1,000.

• Then: $687.00
• Now: $949.51
• Return: 38%
• Total return: 39%

Total return average: 28%

FUND PROFILE

Hillside Moderate Growth
Performance as of: Aug. 31, 2018

• 1 Month: 2.8% fund, -1.0% index
• 1 Year: 15.2% fund, 6.9% index
• 3 Years: 9.2% fund, 5.5% index

Index: S&P/TSX
Returns are inclusive of reinvested dividends and a 1 per cent management fee.

TOP 5 HOLDINGS AND WEIGHTINGS

1. Cash: 14%
2. Constellation Software Debenture: 9%
3. Dollarama: 5%
4. Constellation Software: 4%
5. Spinmaster: 4%

TWITTER: @jasondelvicario
WEBSITE: www.hillsidewealth.ca
BLOG: www.hillsidewealth.ca/blog/