Wine and Software Are Top Picks for Mutual-Fund RefugeesBy
5i Research founder isn’t deterred by high valuations
Hodson’s hidden gems include Savaria, Goeasy, People Corp.
Constellation Software Inc. and winemaker Andrew Peller Ltd. are among top stock picks for Peter Hodson, founder of 5i Research Inc., an independent research firm whose model portfolio has more than doubled Canada’s benchmark stock index.
Hodson, former chairman of Sprott Asset Management, is looking for growth stocks that offer low leverage, high insider ownership, growing cash flow and revenue and high returns on equity. Flying under Bay Street’s radar also helps.
Hodson left Sprott in 2011 to start his own firm geared to “mutual-fund refugees.” His customers, who have assets of more than C$1 billion ($798 million), are mostly individual investors who pay C$159 annually for research, including model portfolios. 5i’s balanced equity model portfolio, started in March 2013, has returned 142 percent, 100 percentage points more than the total return of the S&P/TSX Composite Index.
“If a company is expensive on a valuation basis, all we need to do is find out why it’s expensive on a valuation basis,” he said. “If it’s justified and sustainable then we want to be all over that particular name.”
He cites Constellation as an example of a stock that’s been viewed as overvalued for a long time, but keeps rising. “I remember when I was a fund manager and it was C$18 and people were saying it was too expensive; now we’re close to C$700 and they still say it’s too expensive,” Hodson said.
Another hidden gem is Savaria Corp., a Quebec-based company that manufactures mobility equipment, Hodson said. Demand for its products will grow as the population ages. The company has high insider ownership, a strong balance sheet and recently hiked its dividend by 38 percent.
Other underappreciated growth companies that Hodson recommends include Goeasy Ltd., which leases furniture and appliances and offers consumer loans, and People Corp., a human-resources consulting firm. Hodson also likes wine-maker Andrew Peller, calling it a "Steady Eddie" business that’s ignored by Bay Street.
"All they do is sell wine and generate cash flow," he said. "Yet here’s a $500 million market cap company and it has a grand total of one analyst on the stock."