Kash Pashootan in Ottawa on Oct. 2, 2015.Justin Tang
Kash Pashootan has a few ways to describe the swings in the market so far this year – and his warnings for what's to come. "We've had an appetizer of volatility," says the chief executive officerand chief investment officer at First Avenue Investment Counsel Inc., "but the main course is still on its way." He also points out that volatility is "the toll to pay" for investors who want to receive a higher rate of return over the medium to long term, instead of simply parking their money in cash. And there's more nerve-racking activity ahead, Mr. Pashootan says.
His firm manages about $450-million in assets, including through the recently launched First Avenue Dividend Growth Fund, which is holding about 10 per cent cash right now amid market volatility. The rest of the fund is in equities. The firm's dividend fund is up about 6 per cent since it was created on Feb. 13, compared with an increase over the same period of about 2.5 per cent for the S&P/TSX composite index. Over the past 12 months, First Avenue's average return for its clients was 11.6 per cent for all of its equity holdings, compared with a return of about 1.5 per cent for the S&P/TSX.
The Globe and Mail recently spoke to Mr. Pashootan about what he's been buying and selling recently, including a few lesser-known names for Canadian investors.
What's the geographic breakdown of your investments?
We've been two-thirds U.S. and one-third Canada since January, 2012. We see the Canadian market as only being a meaningful part of an investor's portfolio if we're in a commodity boom. We've had a fairly negative view on commodities over the last several years and thought there are better places to invest. We like the U.S. market for the simple reason that it's not as concentrated in commodities and there's more diversity in sectors to choose from, such as technology and health care – two sectors that are near non-existent in the Canadian stock market if you're looking for dividend-paying names.
What's your view on the recent market activity?
We've lived in an equity market for the last five years that has been intoxicated. You're now starting to see the markets sober up and feel the hangover. Over the last five years, generally speaking – especially in the U.S. market – we've been in an environment where we've had well below historical norms in volatility and well above historical norms in the way of returns. It has been a utopian period to be in equities. As a longer-term investor, we know that's not a common scenario. Moving forward, we should expect higher volatility and it's not a need to be concerned … it's more normal.
What stocks have you been buying lately?
One name we like and have been buying is Ruth's Hospitality Group [RUTH-Nasdaq], which is the company behind the Ruth's Chris Steak House restaurant chain. It has low debt and strong cash flow and its strategy has been to reinvest in the brand, including keeping the menu relevant and growing its store base by three to five new locations per year. They also have a growing dividend now yielding about 1.8 per cent. It's reasonable. It's not going to cause you to cheer and scream, but we look for growth in a combination of yield and share price. We started buying it in March, 2017, around US$20. [The stock is now trading around US$24.50.] Another one we've started buying is Investors Bancorp [ISBC-Nasdaq], a regional bank in New York and New Jersey that has seen significant asset growth. The business has traditionally been focused on personal lending, but has recently shifted more recently to small business loans, which are growing. They have good size, scale and are doing a lot of the basics right. We started buying them in March of this year around US$13.90 [currently trading around US$14.05].
What stocks have you been selling?
Our most recent sale was Federal Signal Corp. [FSS-NYSE]. They're in the business of environmental and security products for municipalities and commercial use, such as street sweepers, vacuum trucks and emergency vehicle sirens. We recently sold it, primarily because it was a big winner for us. We still like it and if there were a correction we would entertain the idea of going back in. We bought around US$13 per share in June, 2016, and sold in February at an average price around US$19.50. We also sold Apple. It's a high-quality business we really like, but saw major gains on it and wanted to lock in our profits. We started buying Apple around US$73 in October, 2013, and started selling it in October last year at an average price of about US$155.
What's the one stock you wish you bought?
Boeing is a name we wished we got into. What held us back was the uncertainty around the 787 wide-body plane they rolled out. It's a newer model for them. There were uncertainties around product demand and production timelines. Those uncertainties played themselves out as opportunities. Shareholders have profited handsomely. [The stock has risen more than 80 per cent over the past year.] There are lots of ways to make money in the market, but certainly it's one we wish we'd been a part of.
This interview has been edited and condensed.
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