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Colin Stewart.The Globe and Mail

Money manager Colin Stewart is holding a lot of cash for clients this holiday season, waiting for more stock market discounts he believes will come in the new year.

“We think there are going to be some great opportunities ahead,” says Mr. Stewart, chief executive officer and portfolio manager at JC Clark in Toronto, which manages about $300-million in assets focused on the small- and mid-cap sectors.

The firm is currently holding about 25 to 40 per cent cash in client portfolios, up from 20 to 25 per cent at the start of the year and well above the average of about 10 per cent.

“The overall market picture could be challenged in the near term,” Mr. Stewart says, citing rising interest rates and recession forecasts that have weighed on stocks throughout 2022.

“We’re still defensively positioned, but we’re finding many new businesses and companies to do our homework on. I expect that, over the next six to nine months, we’ll likely deploy at least some of that cash into new opportunities.”

The firm’s flagship fund, the JC Clark Preservation Trust, is down 12.4 per cent for the year ended Nov. 30. That compares with a drop of 13 per cent for the Russell 2000 Index and a decrease of 6.1 per cent for the S&P/TSX SmallCap Index over the same period.

The fund has seen an annualized return of 8.1 per cent since it was created in May, 1999. That compares with an annualized return of 7.8 per cent for the Russell 2000 Index and 4.7 per cent for the S&P/TSX SmallCap Index over the same period. All performance data are based on total returns and net of fees.

The Globe and Mail recently spoke to Mr. Stewart about what he’s been buying and selling.

Describe your investment style.

We have a bottom-up, fundamental value investing approach. So, instead of focusing on the macro-economic picture – although we do pay attention to it – we focus mostly on attributes of a particular business. We sometimes refer to our style as applying a private-equity-type approach to the public markets. By that I mean we perform significant due diligence on the investments; we look for solid, predictable businesses with strong free cash flow profiles and try to own those for the long term. It means we don’t look at startups or early-stage businesses, and we don’t focus on resources because of the inherent earnings volatility. Instead, we tend to concentrate more on understandable industrial, consumer and financial types of businesses across North America, in particular, small- and mid-cap companies. We believe there are more hidden gems in that area of the market.

What have you been buying or adding lately?

A couple of stocks we’ve been adding to include Logistec Corp. and Pollard Banknote Ltd., both trading at big discounts to what we believe they’re worth longer term.

Logistec LGT-A-T has two core businesses; one is operating marine terminals across North America, where it provides cargo handling for essential goods and enjoys long-term customer relationships, and the other is an environmental business that helps with the renewal of water infrastructure and removing chemicals to improve water quality. We think there are many opportunities for Logistec to grow organically and through acquisitions.

Pollard Banknote PBL-T is a leading provider of instant-scratch lottery tickets in Canada and globally. One of its growth areas is its online lottery business. Pollard operates in a very attractive industry with steady, consistent growth, even in more difficult economic times. The business also has very high barriers to entry. Three players globally dominate this industry, and Pollard is one of them.

A recent new buy was funeral home and cemetery operator Park Lawn Corp PLC-T. The business was strong during the height of the COVID-19 pandemic, driven in part by an increase in people looking to pre-arrange those services. However, the share price has fallen by about 40 per cent year to date due to tough comparisons from recent years, which is what got us interested. It’s an example of a good long-term, recession-resistant business that enjoys high barriers to entry and, over time, will also benefit from the aging population.

What have you been selling?

Pet Valu Holding Ltd. PET-T, one of the leading pet retailers in Canada, is a stock we sold over a couple of weeks in October. It’s a great business that has benefited from the rise in pet ownership since the start of the pandemic, but in our view, it has become expensive, so we took some profits.

What advice do you give family and friends when they ask?

Generally, I tell them to buy great businesses when they’re on sale, especially if it’s due to temporary issues, and then hold them for the long term.

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