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Hugo Lavallée quite deliberately swims against the tide when trying to pick winners for his funds. As a contrarian investor who oversees $6.5 billion in assets, he looks for beaten-up stocks with upside potential for his small- to mid-cap funds. And he even finds those opportunities in companies with rich valuations or without earnings. The strategy has paid off. The Fidelity Canadian Opportunities fund he’s managed since 2008 and the Fidelity Greater Canada fund (which can invest in foreign stocks) have outpaced the S&P/TSX Completion Index and even the S&P/TSX Composite Index, including dividends, over the long haul. Since May, Lavallée has added the Fidelity Climate Leadership fund to his duties too. We asked the 42-year-old why he’s upbeat on Dollarama and why Toronto-Dominion Bank is a top bet in his climate fund.

Why do you shy away from the herd?

It’s in my DNA. I walk my dog, but I avoid crowds. I go to lunch early. I ski early or late. I try to find a Tim Hortons with fewer cars in the drive-through. I put on winter tires early and laugh at the people who get caught in the first snowstorm. I bring the same to the stock market—I look where there’s less competition.

How do you pick out-of-favour stocks?

The pandemic created opportunities last year, but there are contrarian ideas all the time. It can happen when firms invest ahead of growth, miss cash-flow guidance or acquire a company the market doesn’t love. We added to our Kinaxis holding this past March when its stock got cheaper. The supply-chain software maker’s guidance missed Street expectations, and revenue fell due to COVID-19. But its software is clearly a key asset given that many companies have product shortages due to supply-chain disruptions.

Where are you finding bargains now?

Busted initial public offerings and special-purpose acquisition corporations (SPACs) have been my focus lately. I tend to buy consumer and technology stocks with a market cap of less than US$5 billion. A lot of SPACs went out of favour very quickly. Many of them are garbage, but there are some interesting companies that have been painted with the same brush, so that’s an opportunity. We own IronSource, an Israel-based mobile advertising technology firm that went public through a SPAC.

Dollarama is a major holding in both your small-cap funds. Why is this dollar store attractive?

Dollarama became a top bet earlier this year when its stock suffered during the pandemic. Everyone was focused on COVID-19 restrictions on sales, higher costs and lower margins, but that will eventually normalize. It also has an incredibly high cash-on-cash return of around 50% from new store openings. It has opportunities to open more stores in Canada, while its Latin America business adds a nice kicker to its growth plans.

Why do you run a climate fund too?

During my holidays in 2018, I really started noticing my family’s changing habits and discussions at the dinner table about climate change. We got a Tesla electric vehicle in 2016 and started using clothing resellers. Before the pandemic, I stopped flying to Toronto when I could take the train. Carbon is not the future. The decarbonization trend is accelerating, so I seeded the idea to start a fund to unearth solutions to climate issues.

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What stocks do you own that are part of that trend?

We like U.S. climate solution providers such as Darling Ingredients, which makes renewable diesel from animal fats, and SolarEdge Technologies, which provides inverters that are a key part of solar panels. ThreadUp sells second-hand clothing online, and it is a circular fashion play. But we also own companies that are changing their business models to decarbonize. We own Denbury, which is pivoting from enhanced oil recovery to a carbon-capture play.

How did TD Bank wind up in your climate fund?

TD Bank belongs to our climate leader bucket. Banks have a huge role to play in decarbonization. They can change a company’s ways with the cost of debt or withholding financing. TD was the first bank in North America to go carbon neutral in 2010 by changing its operations and buying carbon offsets. It is also the first Canadian bank to set a net-zero greenhouse gas emissions target for its financing activities by 2050. Hopefully, the banking system will accelerate that timeline.

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Stephanie Foden/The Globe and Mail

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