Why this asset manager sees FirstService, Novo Nordisk and Microsoft as good long-term holdings

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Money manager Paul Harris believes the biggest mistake investors make is buying bad companies – which he believes the stock market has no shortage of.

“The way markets are constructed is designed for investors to gamble rather than invest. That’s okay. I don’t have a problem with anyone doing that, but it’s not what I want to do,” says Mr. Harris, a partner and portfolio manager at Toronto-based Harris Douglas Asset Management Inc., which has assets of about $163 million US dollars managed.

“Just because it’s on the stock market doesn’t mean it’s a good deal. My job is to look for really good companies and try to hold onto them for as long as possible.”

Mr. Harris cites well-known research by Arizona State University professor Hank Bessembinder that shows that less than 4 percent of stocks account for all net gains in the U.S. stock market over a 90-year period (1926 to 2016), according to the study.

For that reason, Mr. Harris has largely stuck with the same two dozen or so stocks that his team bought for clients when he founded his firm five years ago. He invests in North American companies with strong balance sheets and a successful track record of return on capital.

The Harris Douglas Equity Portfolio currently holds 28 stocks across sectors such as technology, healthcare and consumer staples. The five largest holdings today include Novo Nordisk A/S NVO-N, Microsoft Corp. MSFT-Q, Apple Inc. AAPL-Q, Costco Wholesale Corp. COST-Q and FirstService Corp. FSV-T.

As of September 30, the fund’s one-year return was 24.8 percent, while its three-year and five-year returns were 9.6 percent and 11.1 percent, respectively. Performance is based on total return, less fees.

The Globe recently spoke with Mr. Harris about what he buys and sells:

Name three stocks that you own and are purchasing for new customers.

FirstService Corp. FSV-T, the Toronto-based property management company, is a stock we bought five years ago when we launched the fund. Our average cost is $108.02. The company provides property management for condominiums and apartment complexes in Canada and (mainly) the USA. It also owns homebuilding franchises such as California Closets and Paul Davis Restoration, among others. FirstService was good at making small acquisitions to expand in different areas. It’s never been a cheap stock, so when we see it go down we buy more. One risk for the company may be overpaying for an acquisition, but it has been a good buyer over the years.

Novo Nordisk A/S ADR NOVO-N, the Denmark-based global healthcare company that makes well-known diabetes drugs such as Ozempic and Rybelsus, is another stock we have held for five years. Our average cost basis is $26.67.

Diabetes and weight loss medications have become very popular in recent years, driving the stock higher, but people are underestimating the longer-term value. Further research shows that these medications can help solve other problems such as heart disease, sleep apnea, and liver problems once people who take them lose weight.

While there are a growing number of competitors in this sector, companies like Novo Nordisk and Eli Lilly and Co. LLY-N have a huge lead. Obesity rates need to be reduced as it is a very expensive health problem worldwide. Novo Nordisk isn’t as diversified as Eli Lilly, which poses a risk to the stock, but we still think it’s a great company. I continue to buy the shares for new customers.

Microsoft Corp. MSFT-Q is another stock that we have owned since the inception of our company. Our average cost is $52.28. It is one of the few companies that has been at the forefront of AI [artificial intelligence]. Most companies have a lot of data, but it is very chaotic. Microsoft, given its large and diverse customer base, has this great advantage to help companies understand their data and use it effectively using AI, while also integrating with many existing products such as Outlook or Office. The stock has performed incredibly well for us over the years and I continue to buy it for new clients. While we may not see the same growth in AI in the short term as we have seen in recent years, it is still a good deal in the long term.

Name a stock you recently sold.

I haven’t sold a stock since 2020, and that was Gildan Activewear Inc. GIL-T. We sold it in the early days of the pandemic because a significant percentage of its business came from events – and without such events, we felt the returns would be poor. As for other stocks, I don’t feel the need to sell anything because the companies I own have performed well and are growing my clients’ wealth. I would only sell them if they started doing something completely different.

This interview has been edited and condensed.