Stephen Takacsy on BNN-Bloomberg’s Market Call, Dec 13, 2021

Stephen Takacsy on BNN-Bloomberg’s Market Call, Dec 13, 2021

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MARKET OUTLOOK:

Volatility has increased in equity markets due to fears of the new Omicron variant and central banks increasing rates earlier than anticipated to fight persistent inflation fueled by supply chain disruptions and labor shortages. 

Markets have been 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. This has created bubbles in stocks like Tesla and other EV plays, as well as in new asset classes like crypto currencies and non-fungible tokens. 

The TSX’s return has been almost entirely driven by energy, financials, and Shopify, and more recently the gold sector, driven by massive inflows into ETFs 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, and non-energy small cap stocks. We continue to be focused on valuation when deploying cash and are starting to see some good opportunities in the overvalued tech sector.

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TOP PICKS:

D2L (DTOL TSX)

D2L is a world leader in cloud-based e-learning platforms for schools, universities, and corporations with 1000 clients in 40 countries. The pandemic was a massive wake-up call for educational institutions and corporations to upgrade their legacy on-premises 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. D2L just reported strong results with annual revenue run rate growing over 20 per cent to US$150M. 

It also announced several large contracts: with the State University of New York (SUNY), the largest post-secondary systems in the U.S. with 400,000 students across 64 colleges and universities and with British Columbia's Ministry of Education for up to 670,000 students in schools across the province. 

D2L trades for around 3.5X forward sales with is less than half of its U.S. peers like Instructure and Powerschool (8X sales) and less than one quarter of TSX listed Docebo (15X sales). The recent pull back is an excellent opportunity to buy into a high-quality technology success story. We think the shares can double or even triple over the next few years.  

TECSYS (TCS TSX)

We recommended Tecsys at $15 in 2019 and it’s been one of the top 30 best performing stocks on the TSX over the past 3 years. The company develops and sells end-to-end supply chain management software solutions. So, they’re right in the “sweet spot” with all the current supply chain problems. 

Their main clients are healthcare networks in the U.S. (so networks of hospitals and clinics like the Mayo clinic), a vertical which they dominate. They also service businesses with complex distribution needs like wholesaling (like auto parts) and transportation logistics, as well as retailers with omni-channel sales (so bricks & mortar and e-commerce).

The company just reported another quarter of record sales with growing high-margin recurring SaaS revenue and also has a record backlog. TECSYS shares have come down a lot during the recent tech stock correction and presents a great buying opportunity. We think this will be a $100 stock in a few years.

QUARTERHILL (QTRH TSX)

Quarterhill was formerly called Wilan, which was an IP patent licensing company. The patent portfolio continues to throw off lots of cash, which the company is using to acquire companies in the Intelligent Transportation Systems (ITS) sector. 

It just bought ETC, a cloud-based road tolling software provider with a 17 per cent market share of toll lanes in the U.S. It also owns International Road Dynamics, a world leader in weight-in-motion technology, traffic data collection, sensors and imaging. 

This is a global growth industry that will benefit from massive infrastructure spending as governments seek additional sources of revenue. Quarterhill is currently bidding on over $4 billion worth of contracts. If you do a sum of the parts analysis, the IP portfolio is worth around $2 per share, while the Intelligent Transportation segment is worth around $3.50 per share. In addition, there’s also a large amount due from Apple for patent infringement that was awarded to Wilan by a jury that could be worth up to another $1 per share, for a total of $6.50 per share versus its current trading price of $2.50. The company has been aggressively buying back shares and the CEO bought a large amount as well.

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PAST PICKS: January 25th, 2021

POLLARD BANKNOTE (PLB TSX)  

Then: $34.74

Now: $36.52

Return: 5%

Total Return: 5%

Think Research (THNK CVE)

Then: $4.44

Now: $1.14

Return:  -74%

Total Return: -74%

Baylin Technologies (BYL TSX)

Then: $1.78

Now: $0.83

Return: -53%

Total Return: -53%

Total Return Average: -41%

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

WEBSITE: www.lesterasset.com