Full episode: Market Call Tonight for Monday, September 23, 2019
Jason Del Vicario, portfolio manager at HollisWealth
Focus: North American growth stocks
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 the general economic data is generally weak. We believe the markets have responded favourably to the central banks backing off their hawkish stance, but worry the damage caused by aggressive rate-raising in 2017/18 may already be enough to tip us into recession in the latter part 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 (from six to 12 months) is very wide e can think of reasons why the markets may scream higher in a blow off-type scenario while at the same time can provide evidence supporting a re-test of the December 2018 lows. We feel that at this time investors are presented with a glorious 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 and we suggest investors keep a very close eye on the junk bond market and specifically junk spreads. 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.
We note that investors continue to reach for yield in the high-yield and corporate-debt markets and we feel this behaviour is extremely reckless as we approach end of cycle. During the last downturn, even the highest-grade corporate debt was down 20 to 40 per cent, with lower-quality debt dropping even more. Unsuspecting investors may be shocked when their “bonds” drop as much as their equities during the next market downturn.
Putting this all together, we’ve taken opportunity to raise cash and divert allocations to non-correlated assets such as precious metals and government bonds. We do however continue to own many of the companies that meet our strict selection criteria with a focus on those that we feel can do well during periods of economic weakness. Companies such as Ross Stores, Alimentation Couche-Tard and Boyd Group were strong through the 2008-2009 recession and we expect will do well during the next one as well.
ULTA BEAUTY (ULTA:UW)
We finally decided to pull the trigger on buying shares after they plummeted 30 per cent a few weeks ago. A beauty retailer, Ulta is one of the top-performing stocks on the S&P 500 over the past number of years. They tick all our boxes: high margins, no debt, nice same-store sale growth, it’s opening new stores and also it’s buying back shares.
I’m highlighting this under-the-radar company because it’s fallen dramatically off their recent highs and we believe this is a good time to add shares. Tucows uses the excess cash flow from their established business lines of domain name registry and phone plan offerings to invest in their higher return on invested capital business line of high-speed fibre internet.
Most may be surprised to learn that long-dated U.S. Treasuries since 1982 have actually performed as well as equities with much less volatility. If as I suspect we go to zero or negative rates, this asset class will continue to perform very well. Such scenarios will also will be likely due to a recession,which won’t be great for stocks. TLT tends to zig when risk assets zag I believe it’s a great hedge for long equity positions.
PAST PICKS: SEP. 24, 2018
- Then: $41.82
- Now: $47.73
- Return: 14%
- Total return: 15%
FACEBOOK (FB:UW )
- Then: $165.41
- Now: $186.82
- Return:13 %
- Total return: 13%
VIEMED HEALTHCARE (VMD: CT)
- Then: $6.45
- Now: $9.28
- Return: 44%
- Total Return: 44%
Total return average: 24%
HillsideWealth Moderate Growth Portfolio
Performance as of: Aug 30, 2019
* Index: S&P/TSX Capped Composite Index
* Funds returns are based on re-invested dividends. Returns net of 1.5% mgmt. fees. Returns beyond 1 year are annualized FYI.
Top 5 Equity Holdings:
- Kirkland Lake Gold – 6%
- Ross Stores – 5%
- Dollarama – 5%
- Constellation Software – 4%
- MasterCard – 4%