Stephen Takacsy on BNN-Bloomberg’s Market Call, Nov 9, 2021
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MARKET OUTLOOK:
Most world stock markets rebounded from the sharp drop in September on the anticipation of strong corporate earnings, despite a plethora of negative news which included rising bond yields, earlier than anticipated central bank tightening, persistent inflation due to supply chain disruptions and labour shortages, and potential contagion from massive debt defaults in the Chinese real estate sector.
Markets continue to be driven by easy money from low interest rates and momentum investing, with little regard for valuation, led by a narrow group of large cap stocks in the U.S. This has created bubbles in stocks like Tesla and other EV plays, as well as in cryptocurrencies and other new asset classes like non-fungible tokens.
The TSX’s return has been almost entirely driven by energy, financials, and Shopify, and more recently the gold sector, driven mainly by inflows by foreign investors. Money has been sucked out of other sectors creating great investment opportunities at compelling valuations such as in renewable energy, certain industrials, healthcare technology, senior living and non-energy small cap stocks. We continue to be very focused on valuation when deploying cash in what we consider to be an expensive equity market.
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TOP PICKS:
D2L (DTOL TSX)
D2L just went public last week. It is a 20-year-old Waterloo-based world leader in cloud-based learning platforms that deliver online education and training for schools, universities and corporations. D2L has around 1000 customers and 15 million users in 40 countries.
Their platform helps customers deliver a combination of in-class, at-home and mobile learning experiences that can be personalized and integrated with other technologies. The pandemic was a massive wake-up call for institutions and corporations to upgrade their on-premise systems. D2L has a subscription-based business model with long term contracts, so great revenue visibility of which 90 per cent is high margin recurring SaaS revenue.
Its annual revenue run rate is up over 20 per cent in the past 12 months to US$144M. Gross margins are over 60 per cent. The company specifically wanted the IPO placed in long term institutional investors hands (not hot money) and priced at a meaningful discount of around 3.7X forward sales versus U.S. peers like Instructure and Powerschool which trade at over 8X sales and TSX-listed Docebo which trades at over 15X sales. Excellent opportunity to buy a high quality fast growing tech companies at a discounted price.
CareRX (CRRX TSX)
CareRX is Canada’s largest provider of pharmacy services to senior care facilities (LTC and RR) with a market share of over 20 per cent. Growing organically and by acquisition having just completed the purchase of 2 large competitors that will generate significant cost synergies by consolidating fulfillment centers.
Sales are expected to reach $400M next year with 100,000 beds serviced. CareRX is also involved in helping provide telehealth services to senior facilities such as VirtualCare in partnership with Think Research, and launched Pharmacy at your Door for seniors living at home.
In the next 15 years, the number of seniors in Canada will double, so CareRx will benefit from very strong demographic tailwinds. CareRX is cheap trading at around 7 X 2022 EBITDA, versus a company like Neighbourly which is consolidating small pharmacies and has similar margins and is trading at 20X EBITDA.
AG Growth International (AFN TSX)
AG Growth is a leading North American manufacturer of grain handling equipment and storage for the agriculture industry. The company will do nearly $1.2 billion in sales this year and record profits, and also has a record backlog going into next year. Their international business in Brazil, India and Eastern Europe is booming as these regions are investing heavily to upgrade their existing farming infrastructure.
The stock is really beaten up due to a lawsuit involving the collapse of some storage bins that may have been improperly installed by a 3rd party. AG Growth has already taken sufficient provisions to cover the entire cost of remediation, so any insurance proceeds will be gravy and lead to a reversal of some of the provisions. The company also has a fast growing technology business called Suretrack. The stock trades at a very cheap 7X 2022 EBITDA versus its long term average of 9x. We also think that AG Growth would make a great take out candidate for AGCO, a large U.S. competitor.
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Stephen Takacsy, president, CEO and chief investment officer, Lester Asset Management
WEBSITE: www.lesterasset.com
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