Stephen Takacsy on BNN=Bloomberg’s Market Call – April 28,2020

Stephen Takacsy on BNN=Bloomberg’s Market Call – April 28,2020

MARKET OUTLOOK

Today’s economic collapse is the result of governments protecting citizens from a deadly virus and forcing human and commercial behavior to change to contain its spread. Governments have imposed harsh restrictions on everyday life, forcing non-essential businesses to shut down while many essential one’s struggle to cope. While central banks have stabilized the financial system and governments announced massive stimulus packages, these restrictions are having a material negative impact on businesses and we don’t know how long they will last. It is not surprising that governments chose to protect the health of its citizens over protecting the economy, but this will come to a head as the population’s economic welfare continues to decline.

For investors, there was little time to react. Businesses that were normally recession-proof such as movie theaters and quick service restaurants closed overnight. This is not a normal environment to do fundamental analysis, so we need to do a much deeper dive into our companies and continuously assess how they are being impacted as the situation continues to evolve. We keep asking ourselves: How have our companies been impacted and how will they fare if the lockdown drags on? At what rate will they recover once restrictions are lifted? Will human behavior change causing a permanent impairment in certain businesses and creating opportunities in others?

We have participated in more conference calls with senior management in the past month than we normally would in a year. It is “different this time” and businesses will recover at different rates. We are being prudent trying to assess where the best opportunities lie and position our portfolio for strong long-term returns once governments loosen restrictions and allow the economy to function more normally.

TOP PICKS

CENTRIC HEALTH (CHH TSX)

Centric is one of Canada’s largest providers of medication to senior care facilities. The stock has performed really well and is up since the pandemic began for two reasons: 1) lockdown or not, seniors need their medication and 2) the company is completing a large accretive acquisition which will make them the no. 1 player in Canada. Centric has a strong balance sheet to continue consolidating this fragmented industry. The stock is still cheap and has the potential to double over the next 12 months. We have been accumulating shares and now own around 5 per cent of the company.

MEDIAGRIF INTERACTIVE TECHNOLOGIES (MDF TSX)
New position.

Mediagrif providea Shopify-like e-commerce solutions, but for much larger companies. They manage the online platform for Sobeys/IGA and also for Carrefour in Italy, the only company enabling online food orders during the peak the crisis. It also owns platforms that enable suppliers to bid on government contracts, allowing corporations to exchange data with their suppliers and customers. This is one of the rare companies doing well in this environment and benefitting from businesses going digital. Whereas Shopify trades at 35 times revenue, Mediagrif trades at just under one time. We have been accumulating shares and now own 5 per cent of the company.

SIENNA SENIOR LIVING (SIA TSX)

Sienna owns over 100 long-term care facilities and retirement homes in Ontario and B.C. Due to COVID-19 and the high number of deaths among seniors, the entire sector has been way oversold. Vacancy rates at their retirement residences have increased slightly, but this is transitory and will be absorbed by aging demographics. Sienna’s dividend is now yielding over 8 per cent and is entirely covered by government-guaranteed cash flows from its long-term care facilities. Sienna has a solid balance sheet and trades at a huge discount to multi-residential REITs. We bought more shares during March and April.

Stephen  Takacsy, CEO and chief investment officer, 
Lester Asset Management