Jason Del Vicario's Top Picks: Constellation Software, Parex, Texas Pacific Land
We’ve been concerned about heightened recession risk for over a year now, taking the opportunity to slowly shift our portfolio to what I refer to as a “barbell” approach.
On one side, we have equities that we find using our proprietary quantitative screening technique. These companies generally possess the following attributes: little to no debt, high and consistent margins and asset turn, they’re buying back shares and run by capable management teams. We have also started to pay attention to how we expect companies to do in a recession by looking at how they did during the financial crisis. We believe companies like Ross Stores and Dollarama can in fact improve their results during periods when the consumer is struggling.
On the other side, we have securities we feel can zig if when the markets zag. U.S. Treasuries, Canadian government bonds, gold and silver are such examples. We don’t know if or when the consumer will roll over and tip us into a recession, but the longer this “expansion” continues, the sharper the inevitable correction will be.
We caution against reaching for yield at this stage of the cycle. Our sneaking suspicion is that corporate debt is where we’ll see signs of cracks leading to the next downturn. Pay particular attention to high yield spreads for clues.
In short, we continue to play offence while being very mindful of the downside risks. Interestingly, in spite of being quite conservatively positioned through 2019, we were able to match our benchmark due to the alpha generated from strong security selection. We believe our clients will benefit from our continued cautious stance.