First, the good news: According to Robert (Hap) Sneddon, stock markets are likely to go up again over the next six months or so as investors feast on growth stocks in areas such as financials, technology and even energy. However, the bad news, according to Mr. Sneddon, president and chief portfolio manager at CastleMoore Inc., is that a "reconciliation" may be coming in 2018. The Globe and Mail recently spoke with Mr. Sneddon, who manages just under $100-million in assets, about what he's buying and selling, and about the one Canadian consumer stock he wishes he bought, which has more than doubled since he first looked at it.
Describe your investing style?
We don't buy sectors that show weakness. We manage risk by selling, versus diversification. We prefer to focus on the sectors that work. We look at volatility, drawdown and recovery. We were 100-per-cent cash in 2008. I remember getting calls from investors in May/June 2008 saying, 'why am I paying you to keep my money in cash?' We missed that big swoosh down. (They felt better about it in the fall of 2008). It may be time to do it again in the not-too-distant future. We think things are going to be very problematic in 2018.
What's your prediction of where markets will go from here?
Our thesis is that we're going to start a significant correction again in 2018. In the meantime, I expect we'll have a pretty strong bull market that might start here soon. I think we're bottoming here right now. The market has a binary element to it: pro-growth securities and defensive ones. We're in a defensive run right now. Bonds rallied recently. The Fed raised [interest rates] against data that's weakening. In the short term, we think that will exhaust itself and then we'll start this pro-growth rally: financials, energy, tech, industrials, consumer discretionary – those kinds of things. We'll have a run that could be quite strong into late 2017. That will confuse a lot of people who are nervous right now and bearish. It will drag people into the market. It's the other side of that run where, I believe, we'll have that reconciliation. We might have some pain ahead, but then I think we'll be much closer to a 25-year bull market. I'm optimistic that we have a great future ahead of us, but there's one more act to go before that starts.
What stocks have you been buying lately?
We've been selling defensive securities for the last while and slowly buying more cyclical stocks. We started to buy a bit of energy, for example, including Suncor and the XEG [iShares S&P/TSX Capped Energy ETF]. We might get rid of some of our long bonds we've had for a while here because inflation talk might push yields up during the next bull run we'll see in the next six months. We're also picking up some of the more pro-growth stocks. We bought Royal Bank recently and are looking at JP Morgan and a bunch of other financials.
What have you sold recently?
Some consumer staples: We sold Wal-Mart and Saputo about a month ago. We felt there was limited upside at this point in time. It's part of our move to sell down the defensives. We also sold BlackBerry recently and some U.S. tech including Apple, Hewlett-Packard, and Oracle.
What stock do you wish you bought?
Dollarama. We've never picked it up. It's one I kept looking at since it was trading at around $50. It's now up at around $120. You can't regret it too much, or it will kill you.
This interview has been edited and condensed.