Jason Del Vicario, portfolio manager, Hillside Wealth Management, iA Private Wealth

FOCUS: North American and global growth stocks

MARKET OUTLOOK:

Equity markets have continued to be volatile through the second quarter. Bonds have also been weak; both markets have been challenged to advance in the face of rising interest rates and elevated inflation. Our best guess is that central banks are going to keep raising rates until something ‘breaks.’ Our sense is that we are already in a recession which won’t be confirmed until later.

The big question is how far will central banks push monetary policy in the face of slower economic activity and rising unemployment? While it’s fun to speculate about the short-term decisions of central bankers and equity market direction, these are out of our control. At Hillside we focus our attention on what we can control; namely sourcing and researching high-quality businesses to own for clients. Investors are being put through a significant test where their behaviours and actions will either destroy wealth (panic selling) or set themselves up for success during the next bull market phase (hold and add). 

The investors’ mindset is different when they think and act like business owners. We want to focus on the fundamentals of the businesses we own versus the market price that ‘manic Mr. Market’ is willing to pay for these businesses in the short term. We conduct a ‘look through’ analysis semi-annually for our clients highlighting the metrics of ‘HillsideCo’ which is a weighted average of the 25-30 businesses we own. Recently the metrics were: cash earnings yield: eight per cent, three-year CAGR cash earnings: 26 per cent, debt/equity 0.5, cash earnings return on equity: 63 per cent. If you were presented with an investment opportunity with a cash yield of eight per cent, growing at 26 per cent for the past three years without much debt and fantastic re-investment opportunities how would you behave? Would you panic sell, hold or add?

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TOP PICKS:

Integrated Diagnostics (IDHC LON)

This is the ‘Life Labs’ equivalent of Egypt with shares trading in London. The business is founder-run and owned, has great returns on invested capital, uses little debt and sports relatively asset-light operations. We recently added to our position at $0.76. Shares trade below five times earnings and have a history of paying a generous and growing dividend. Investors should be aware of the risks associated with investing in emerging markets; we have chosen to deal with this risk by allocating a small portion (three per cent) of our capital to IDHC.

Evolution Gaming (EVO STO)

We have held Evolution since 2020 and recently added to our position at 909 SEK. Evolution is a worldwide leader in online live casinos and slot solutions. The company has been growing rapidly and we feel is extremely well-positioned to take advantage of markets such as Canada and the U.S., which it began entering in 2018. The business is founder-run and owned, has great returns on invested capital, uses little debt and sports asset-light operations. Key risks include: regulatory risk, ‘hit-or-miss’ risk vis-a-vis game innovation and the potential for larger acquisitions to reduce returns on capital; management has told us they favour growth over returns and that’s something we don’t love and will need to monitor going forward. 

Meta Platforms (META NASD)

We have held shares of META in our portfolios for nearly five years and recently added to our position at $160. META is being shunned by investors and is trading at extremely cheap levels in our view. META dominates social media owning four out of the top six social media platforms. Apple’s changes to their privacy settings and META’s heavy investment into the Metaverse have spooked short-term focused investors providing a very attractive investment opportunity for long-term-minded investors to accumulate shares at attractive prices. META is a free cash flow generating machine and a medium conviction (five per cent) position for us representing one of our larger positions.

PAST PICKS: June 1, 2021

Constellation Software (CSU TSX): Then: $1753.65

• Now: $1959.83
• Return: 12%
• Total Return: 12%

A2 Milk Company (A2M ASX): Then: A$5.66

• Now: A$4.56
• Return: -19%
• Total Return: -19%

Biosyent (RX TSXV): Then: $7.95

• Now: $7.80
• Return: -2%
• Total Return: -2%

 Total Return Average: -3%