Jan 22, 2018

Jason Del Vicario's Top Picks: January 22, 2018

BNN Bloomberg

Jason Del Vicario , BNN

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

The North American equity markets performed well in Q4. In particular, our high return on equity (ROE)/growth stocks surged after spending Q3 in neutral. This is a familiar pattern of late (last ~24 months) where we see our basket of stocks move higher quickly and then trade sideways for a while as they digest the gains, only to again surge higher around two to four months later. This is in large part attributable to generally favourable economic conditions and front running the expected Trump tax cuts. While we believe our core stable of companies and other consistent ROE generators can outperform no matter the general market conditions, we are mindful that we are late cycle. We are now almost nine years removed from the last recession and bear market.

We’ve been keeping a keen eye on the yield curve as it’s the best predictor of an impending recession. While the curve is flattening (short end rising while long end not rising as much) we are but two to three rate rises away from inversion. An inverted yield curve generally leads an actual recession by ~12 months. Based on our calculations we are at least ~18 months away from the next recession.

We feel the Fed/BoC and European central banks are playing catch up. Where they should’ve been normalizing rates in 2013-2014, they didn’t and are now behind the curve. They claim to be data dependent, however both inflation and GDP growth figures aren’t exceptional, yet they seem committed to raising rates.

We remain cautiously optimistic and note relative strength in commodities and financials: typical of late cycle action. We recently took the opportunity to shift some of our focus towards commodity plays. We expect this to be a 12-18 month trade. We have also reduced our exposure to $US assets with the theory being that, as animal spirits and commodity strength takes hold, we expect the CAD to outperform, the caveat being that if NAFTA is terminated we may need to re-adjust.

We have also taken the opportunity to initiate international exposure in our portfolios. North American equity valuations are stretched to say the least. The Japanese and Indian markets, in particular, are of interest to us. We note that our process of screening stocks for attractive selection criteria can be applied to any market and we are actively hunting outside of North America for attractive investment opportunities.

We note reckless speculation seems to have gripped the cryptocurrency and marijuana markets. We are sure this will end poorly but feel it’s important to keep tabs on investor willingness to speculate. As a bull market extends beyond ‘normal’ valuations, we feel it’s important to see where speculative dollars are being focused. We feel both the aforementioned markets are of low quality vis a vis, formulating financial models from which to determine valuation.

We employ a strict downside protection plan with our holdings. We have two prices for every security that we hold: if the first is breached we sell 50 per cent of the position, and if the second level is breached we sell completely. We have updated our stop prices for our securities and feel we are well-positioned no matter what the markets throw our way.

TOP PICKS

CCL INDUSTRIES (CCLb.TO)
I’ve featured this company a few times of late. We have a core number of high ROE holdings in our model portfolios and CCL Industries is one of them. The reason I’ve featured them a few times is because they are more reasonably valued than the other core holdings. CCL reached a high of ~$70 in the spring on the news they would be included in the S&P/TSX 60 index. As is all too often the case when this happens, the stock rallied on the news and has now spent the better part of seven months trading listlessly sideways. With an EV/EBITDA of 13 they, along with ATDb, are the most reasonably valued of our core holdings. They remain a very well-run company and we recently added to our position around $58.

VANECK VECTORS MORNINGSTAR INTERNATIONAL MOAT ETF (MOTI.US)
Last year I recommended MOAT, which is the domestic (well, American) version of MOTI. One of the key metrics we look at when analyzing attractive investment opportunities is the level and consistency of a company’s ROE. Morningstar also does this work and assigns a ‘moat’ rating to various companies. Companies are assigned a ‘wide,' ‘narrow’ or ‘no’ moat rating. Companies with wide or narrow economic moats (small per cent of the universe) are seen to be able to withstand competitive pressures and poor economic conditions better than those who don’t. Warren Buffett was the first to coin the phrase 'economic moat' and his record speaks for itself. We feel that the North American markets are stretched and have therefore initiated a position in MOTI in an effort to diversify away from the domestic markets but remain true to our strategy of focusing on consistently high ROE generating companies.

SANGOMA TECHNOLOGIES (STC.V)
I always like to try and bring a company to my Top Picks that is well under the radar. Sangoma Technologies fits this bill. They are a leading provider of products that enable or enhance IP Communication Systems for voice, data and video applications. They came through our screen a while back and recently announced their sixth acquisition in as many years. Subsequent to this announcement they have raise their 2018 EBITDA guidance to $5.5M. Despite a recent run in their share price, their trailing EV/EBIDTA is ~9 but drops to ~7 on a forward basis. We feel the stock price could easily push towards $2 if they can continue to execute their business plan and add value for their customers. As with any micro-cap, we caution investors to consider this or any other small company in the context of their overall asset allocation and size the position accordingly.