Louis Oliver/The Globe and Mail
When Jeff Mo showed interest in the stock market as a teenager, his parents let him pick some investments for a slice of their retirement savings plan. Unfortunately, those high-flying tech funds plunged into the red when the dot-com bubble burst in 2000. After reading One Up on Wall Street by the legendary Peter Lynch, who advises buying what you know, the Calgarian bet on WestJet. It turned out to be a winner. Armed with a business degree, Mo was later hired by Mawer, where he further honed his stock-picking skills. His $1.5-billion Mawer New Canada Fund (closed to investors) has widely outpaced the S&P/TSX Small Cap Total Return Index since Mo took over in 2012. Now, he also runs the newer Mawer and Manulife U.S. Mid-Cap funds. We asked Mo, 37, why U.S. mid-caps are compelling and why he likes Canadian subprime lender Goeasy.
Can you describe your strategy to outperform your benchmarks?
We buy wealth-creating companies that are run by excellent management teams, have a sustainable competitive advantage and trade at attractive prices. But wealth creation is more nuanced than growing revenues or earnings. It means a firm that generates high enough profits for their investors to keep their capital in the company.
What’s your outlook for the Canadian small-caps?
I’m cautiously optimistic. Economic growth seems reasonable despite higher interest rates. We see inflation coming down. When the central bank decides to reduce interest rates, that should help risk assets like small-caps. The valuations of small-cap stocks are on average still attractive. Most companies that we own are still growing earnings.
Where do you see opportunities in the small-caps?
In the industrial sector, which has been hurt perhaps by a perception of a weakening economy. One name we like is TerraVest Industries, a conglomerate of niche, steel-based manufacturers. It is the largest producer of tanks for storing heating oil, propane and other compressed gases. It also makes oilfield well-head processing equipment, which could be why it’s classified as an energy firm. The key is for management to continue to identify low-priced acquisitions and find significant synergies.
Among financials, you like Goeasy. Why’s that?
It’s a data company operating in the subprime financial market. Goeasy uses data analytics to lend money profitably to people in severe financial straits. It may be someone lacking a good credit rating or who lives paycheque to paycheque. But the company can adjudicate the risk to properly price these loans. The bulk of them have interest rates averaging 20% to 30%. Goeasy started 30 years ago lending money to people buying furniture on installment, so it has a long history of writing loans. When the economy essentially stopped in 2020, Goeasy came through and still made money.
Your new funds focus on U.S. mid-caps. What’s your outlook?
Our universe is stocks with a market capitalization of US$500 million to US$50 billion. Last year, the U.S. market was driven largely by select, tech-related large caps. But the market performance has started to broaden to companies that are smaller than the so-called Magnificent Seven (Amazon, Alphabet, Apple, Meta, Microsoft, Nvidia and Tesla). Over the past 25 years, the average annual return of U.S. mid-caps has outperformed their large peers. There should be a return by mid-caps to their long-term average, so we think this is a sweet spot for U.S. exposure.
Your U.S. mid-cap fund owns Dollar General, whose shares had a tough time last year. Why?
It’s the largest and best operator among U.S. dollar stores. When its shares fell sharply last year, we materially added to our position. It was an opportunity to buy a high-quality company with a strong competitive advantage given its real estate footprint, scale and strong brand. Last year, its operations struggled, but it is still the most profitable dollar store as measured by profit margins. Its former CEO, Todd Vasos, came out of retirement to become CEO again and has implemented lots of changes. We’re seeing the results, and that’s probably why the stock is up quite a bit from its bottom. We think that turnaround can continue.
The Globe and Mail