Jason Donville, president and CEO, Donville Kent Asset Management

FOCUS: Canadian growth stocks

MARKET OUTLOOK:

The small and mid cap rebound, which started in November 2023, has continued into June. We believe this is the start of the next bull cycle for small and mid cap growth stocks and it could last the typical five-to-seven year cycle timeframe. 

From the real time data we monitor, it looks like inflation is now under control. We believe the Fed will see this in the coming months, as they rely on outdated metrics. This is a timely topic as both Canada and England appear to be on the cusp of cutting rates and joining other countries like Switzerland and Mexico who have already cut. The Fed’s dual mandate will shift from battling inflation to protecting employment.

In the broader picture, the actual specifics are much less important than the direction of rates. Are the direction of interest rates higher, sideways, or lower? Small cap stocks got hit the worst as interest rates rose and that underperformance appears to be reversing as interest rates change direction.

The direction of rates, plus historically low small cap valuations and a record amount of cash on the sidelines, sets the table for the next cycle in growth stocks. Each new cycle has winners and losers. We believe investors should focus on companies that are operating in the most attractive industries but can also show reliable profitability.

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TOP PICKS

VerticalScope (FORA TSX)

VerticalScope owns and operates a portfolio of online forums that have over 113 million active users. The company is highly profitable and is able to re-invest those profits by acquiring less well-run forums and transitioning them to their tech stack and optimizing their revenue. With the growth in AI, VerticalScope’s most valuable asset is their data, with over 2 billion user-created posts. Similar to Reddit, we expect VerticalScope to sign data licensing agreements with the leading LLMs.

Propel Holdings (PRL TSX)

Propel is a consumer fintech lending platform that serves the U.S. and Canada. Their backend technology can process more than 60,000 unique applications per day which allows for rapid growth with minimal additional cost. For over a decade, they have been able to prove they can do this profitably, which is why banks white label their platform or sign licensing deals for their technology. Propel launched their technology platform in 2013, which is now supported by an 87-person in-house software development team including several PHDs.

Zedcor (ZDC CVE) 

Zedcor leases mobile security towers, but the business is much more than that. Their towers are equipped with technology that allows for 24/7 Live Verified Monitoring, including radar, and AI that can identify and classify objects. This allows for each location to set parameters for different times of the day, specific boundaries, types of movement allowed for specific objects (people, cars, animals, etc.), plus set how the system should respond in each case. All of this is supported by their in-house monitoring team in Calgary, and done very profitably. An investor shouldn’t think of Zedcor as an equipment company but as a technology company where the client is paying a monthly service fee for surveillance that is done both cheaper and more effectively than in-person security.

PAST PICKS: MARCH 12, 2024

Converge Technology (CTS TSX)

• Then: $5.72
• Now: $4.87
• Return: -15%
• Total Return: -15%

Constellation Software (CSU TSX)

• Then: $3777.10
• Now: $3827.92
• Return: 1%
• Total Return: 1%

Vitalhub (VHI TSX)

• Then: $6.01
• Now: $7.22
• Return: 20%
• Total Return: 20%

Total Return Average: 2%