John O’Connell, chairman and chief executive officer of Davis Rea Investment Counsel in Toronto, which oversees about $400-million in assets.The Globe and Mail
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Money manager John O’Connell isn’t making predictions about what the broader markets will do in 2023, but he’s optimistic the large-cap U.S. stocks that dominate his equity portfolio will beat the benchmarks.
“I’m less concerned today than I was last year because valuations are lower, and all the focus is on the bad news,” says Mr. O’Connell, chairman and chief executive officer of Davis Rea Investment Counsel in Toronto, which oversees about $400-million in assets.
“I look at the companies we own, and they continue to be well-run businesses with bright futures.”
Some of his top equity holdings include Bank of America Corp. BAC-N, JPMorgan Chase and Co. JPM-N, Microsoft Corp. MSFT-Q, Amazon.com Inc. AMZN-Q, Meta Platforms Inc. META-Q and Alphabet Inc. GOOGL-Q
The firm’s equity fund, which includes about 20 to 25 mostly U.S. stocks, was down 15.5 per cent in 2022. That compares to a drop of 19.4 per cent for the S&P 500 index. The fund has returned 5.7 per cent over the past three years, roughly in line with the S&P 500. The performance is based on total returns and converted into Canadian dollars.
The fund’s largest sector weighting today is information technology which, alongside Microsoft, includes companies such as Apple Inc. AAPL-Q and Accenture plc ACN-N, at about 20 per cent, followed by financials at 18 per cent.
Communication services, which include companies such as Alphabet and Walt Disney Co. DIS-N, make up 17 per cent of the portfolio. Consumer discretionary, including Amazon as well as McDonald’s Corp. MCD-N and The Home Depot Inc. HD-N, account for about 13 per cent.
The remainder of the portfolio includes health care stocks such as Stryker Corp. SYK-N and United Health Products Inc. UEEC, as well as industrial names like Raytheon Technologies Corp. RTX-N and Rockwell Automation Inc. ROK-N
The Globe spoke recently to Mr. O’Connell about his investing style and what he’s been buying and selling:
Describe your investing style
We see ourselves as owners of an interest in the companies we buy. Unlike many investors, we’re less concerned about the price of a company’s stock on a daily, weekly or monthly basis. We don’t think the stock market is necessarily a good indicator of what a business is worth in the long term. Warren Buffett once said that ‘in the short run, the market is a voting machine, but in the long run, it’s a weighing machine.’ In other words, a company’s value should be weighed over time. We believe that stocks ultimately reflect the growth in the company’s free cash flow and profitability. And as long as measures like those continue to make progress, we’re comfortable.
Also, because we invest money for individual investors, we’re very tax-sensitive. Part of that means we don’t buy and sell stocks very often; we like to own companies for the long haul. We tend to invest in big, well-established businesses that have strong products and services, strong balance sheets and are run well by strong management teams.
Why have you steered clear of Canadian stocks?
We started migrating away from Canadian stocks in 2014. We have small legacy positions in some oil and gas stocks, such as Kelt Exploration Ltd. KEL-T and energy infrastructure company Keyera Corp. KEY-T, but haven’t added an oil and gas stock in years. We didn’t play the bounce [last year] because we never sold the rally. Energy is a tough business.
Also, the capital markets in Canada are pretty small. Other than financial services and some telecommunications companies, it’s not that interesting of a market to be investing in, in our view. There are just not as many growth opportunities as there are south of the border. Why own Canadian Tire Corp. Ltd. CTC-A-T when you can invest in Amazon? We would rather own Microsoft than Open Text Corp. OTEX-T, as another example.
What have you been buying or adding to in recent months?
We did quite of bit of adding to existing positions in November and December. We ran down our cash quite a bit to around 5 per cent from 10 to 12 per cent earlier in the year. We added to our U.S. bank stocks as well as to Amazon, Microsoft, Meta and Alphabet.
These stocks were down 30 to 50 per cent [from their highs] in some cases, and the valuations were very compelling. These are valuable and important businesses with long-term durability, and investors were just throwing them out the door. You have to buy when pessimism is deep.
What are you selling or trimming?
We gave up on two investments last year. One was Stanley Black & Decker Inc. SWK-N, which we sold in August. The company didn’t seem to be able to get a hold of its inventory issues. And there were some management changes. We just lost confidence in it. We may come back to it at some point. Another was FedEx Corp. FDX-N, which we sold in May. It’s having difficulty integrating its European acquisition. It also doesn’t seem to be able to really figure out the logistics part of its business – and it’s more difficult today.
We also trimmed our position in McDonald’s in November. We think it will struggle with rising prices for food and transportation and higher wages. But we still own it.
What investing advice do you give friends and family when they ask?
My advice is to focus on why you are investing. What are your objectives? And what’s your timeframe? If your timeframe is anything less than five years, don’t invest money in the stock market. Also, don’t buy ideas – buy businesses. Think about the kinds of companies you want to own long-term and stick with them.
This interview has been edited and condensed.
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