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Kash Pashootan of First Avenue Investment Counsel.The Globe and Mail

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Kash Pashootan says there’s no question a recession is coming; rather, it’s how deep it will be and how long it will last.

“We don’t think the economy has felt the full impact of the rapid rise in interest rates yet – and believe it will worsen in the next six to nine months if central banks don’t cut interest rates early in the new year,” says Mr. Pashootan, founder and chief executive officer of First Avenue Investment Counsel, which has offices in Ottawa and Toronto.

But instead of waiting on the sidelines, he argues investors should be strategic about what they buy and when.

“The market is forward-looking and will likely move higher before the economy improves. So, 2024 will likely be a positive year in the markets, especially for the second half of the year,” adds Mr. Pashootan, who oversees more than $4-billion in assets between his firm and its sister real estate company, Emblem Developments Inc.

The average portfolio at his firm holds about 10 per cent cash and fixed income, 60 per cent equity and 30 per cent alternatives.

His “dividend growers” portfolio, which includes 25 to 30 North American dividend-paying companies, is up 4.2 per cent so far this year, while his “momentum” mandate, which includes 25 North American companies that he believes have the greatest earnings growth momentum, is up 14.6 per cent. The performance is based on total returns, before fees, as of Dec 8.

The Globe spoke with Mr. Pashootan recently about what he’s been buying and selling:

Describe your investing style:

We take a pension-style approach to managing money, which includes a growing portion of alternative assets such as private equity and residential real estate. We avoid speculative companies, including small-cap stocks, and focus on mid- and large-cap companies. We also try to avoid taking the mainstream view. While the mainstream perspective can be comforting and often easy, it’s often already priced into the market.

What have you been buying?

One stock we added in November is McKesson Corp. MCK-N, a leading American pharmaceutical drug distributor. Margins are low in this business, but inventory turnover is high; the combined result is a high return on shareholders’ equity in a stable, non-cyclical business with very sticky customer relationships. McKesson also has much smaller businesses in medical and surgical equipment distribution and pharmacy technology solutions and consulting, both of which are faster-growing and higher-margin businesses.

We also added Google parent Alphabet Inc. GOOG-Q in October. Google is a leader in online advertising and has a deep and wide moat when it comes to online search and YouTube content creation and consumption. All of its businesses are growing, but we see material upside in its leading generative AI positions that make data more valuable over time with improved monetization. A key risk is the current U.S. Department of Justice anti-trust lawsuit, which could be a headwind for the stock with an uncertain outcome that could impact its earnings and valuation. However, a court decision isn’t expected until next year and will likely drag out for years with appeals and a possible second trial.

What have you been selling?

We sold cybersecurity solutions company Fortinet Inc. FTNT-Q in August. Growth has been flatlining after a period of hypergrowth. We weren’t convinced that the slowdown was sector-wide and felt that there could be some market share shift within the cybersecurity space. We still like cybersecurity and wish we had acted more quickly to replace Fortinet with CrowdStrike Holdings Inc. CRWD-Q, a company we suspect may be capturing more market share.

We also sold Johnson & Johnson JNJ-N in late November to buy McKesson. J&J, alongside some other pharmaceutical manufacturers, is in the political crosshairs over the pricing of some of its branded drugs, which have been targeted for price rollbacks under the U.S.’s Medicare program. That’s creating headwinds for the company.

Name a stock you wished you bought or didn’t sell.

In August, we contemplated buying Booking Holdings Inc. BKNG-Q, the owner and operator of online sites such as Booking.com, Priceline, Agoda, and OpenTable. We opted not to buy it due to its overexposure to Europe, where economic growth has slowed. We also thought pent-up demand for post-pandemic travel has largely been satiated and would be curtailed given the sting of high inflation. In retrospect, the business continues to perform well, and the shares have risen by about 10 per cent to all-time highs since August.

What advice do you have for new investors?

The most important factor in compounding wealth is time, not stock picks. That’s especially important for new investors, who likely have a longer time horizon. So, don’t get too cute trying to pick winning stocks. Instead, take a broader, diversified approach focusing on quality companies likely to be around for a long time.

This interview has been edited and condensed.

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