Montreal-based lead portfolio manager of Fidelity Greater Canada Class, Hugo Lavallée, says contrarian thinking is one of the cornerstones of his success over a decade at the fund's helm.
Being a contrarian means having the intestinal fortitude to step in and buy promising businesses when they are being shunned by the market. It’s difficult to do and often means enduring lagging performance while waiting for the stock price to come around.
Buying Low Means Being Different
The approach has paid off handsomely. The all-cap Fidelity Greater Canada Class has an outstanding performance record, with its five-year average annual compounded return of 16.8% on the F Series trouncing Morningstar’s Canadian Focused Equity Category comparable average of 6.0% as well as the index’s 7.8%. The 5-star fund is ranked silver by Morningstar.
“You have to buy stocks when the companies are down on their luck and then wait for the market to come your way,” says Lavallée, equity research analyst at Toronto-based Fidelity Investments Canada. “It comes naturally to me and has been one of the most important tools in my box since I’ve been in the investment business.”
Time is Key
Lavallée says it always “feels wrong” to be contrarian, as it goes against the human tendency to avoid danger and risk. His perspective on time is the key ingredient, as he looks past the next quarter, six months or year and applies patience when necessary.
“The combination of a great business with a great story at a great price does not exist --it’s a unicorn,” he says. “You want to buy when a great business has temporarily fallen on hard times or is unrecognized, and wait for it to come into favour. It’s a different perspective and you’re always dealing with uncertainty.”
He says his style was shaped when he joined the investment business in 2002, and there was an abundance of inexpensive stocks in the wake of the tech meltdown. Times were tough, but he could “pull the pin” and buy attractive companies at good prices, which paid off as fear dissipated and investors returned to the market. When spirits are high in the stock market, he becomes cautious.
Lavallée’s goal is to buy stocks that could double over five years, equating to about 15% a year. There are more of these opportunities now than at the beginning of this year, and he has been busy.
Feel Great > Feel Good
He has been “leaning into” technology, consumer discretionary and industrial stocks that have been heavily sold off and is less interested in “feel-good defensive” stocks like consumer staples.
Many tech firms aren’t making much money currently and have seen their stock prices beaten down, he says, but some have well-capitalized balance sheets and the potential to pivot and become profitable.
“The market has been punishing companies that are not making money, and that’s going to lead to some behavioural changes,” Lavallée says, “For years, the emphasis was to grow as fast as possible with less emphasis on earnings and cash flow margins. It was growth above all else, and that was upside down.”
Managers of some companies are now more focused on profitability, and assuming better control over their operational and capital expenses, he says. With much executive compensation stock-based in the tech industry, management is highly motivated to turn things around.
Lavallée likes to utilize the 49% foreign content allowed in Fidelity Greater Canada Class and is mostly focused on U.S. stocks in this area. However, he is seeing some opportunities in Europe, which is out of favour.
Europe Should Settle Eventually
“Things are tough in Europe right now, with war in Ukraine and high energy prices,” he says. “It’s going to be a painful winter, but it’s hard to imagine that it will be worse next winter, and I’m looking beyond what’s happening now.”
He successfully employed his contrarian strategy when stock markets plunged at the onset of the Covid pandemic. For example, he took positions in discount retailers like Dollarama Inc. (DOL) and Five Below Inc. (FIVE) in 2020, when lockdowns had people staying home, some shopping malls closed down in Québec, and online shopping was taking over.
A year later, these stocks rebounded strongly and he still holds them in the portfolio. He took some profits on Five Below, but “re-engaged” this past summer when the price dropped again.
Fidelity Greater Canada Class Series F had a spectacular year in 2020 when it gained 55%, and another good year in 2021, when it gained 23%. This year it’s lagging slightly with a year-to-date loss of 9.1% at Nov. 16, compared to the category’s loss of 7.2%, but the fund still maintains a robust three-year average annual gain of 21.1%.
A company added to recently is Boyd Group Services Inc. (BYD), which operates collision repair centres and has been struggling with supply chain issues and labour availability – problems Lavallée views as temporary.
Lavallée says just a few big winners can make a huge difference to returns. His fund usually holds a generous number of names, from 75 to 100, with larger weights in 10 to 20 favourites. He also manages five-star Fidelity Canadian Opportunities and silver-medalist Fidelity Climate Leadership, and some ideas come from his work on these two funds, particularly in the small cap arena.
Suit the Investment Term to the Situation
Fidelity Greater Canada Class has a fairly high turnover, although there are a few long-term holdings such as food retailer Metro Inc. (MRU) and Constellation Software Inc (STZ). Lavallée is always ready to act fast if things change for better or worse and may track a business for years before a drop in price creates an attractive entry point.
“Markets are constantly changing and you need to react quickly to take advantage of opportunities,” he says. “When Covid hit, the stock market was down 40%, and that was an amazing opportunity to pivot the fund. We’re now in another tough bear market, and our turnover will probably be up this year.”
