Stephen Takacsy's Top Picks: September 25, 2023
BNN-Bloomberg...Market Call
Sep 25, 2023
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Stephen Takacsy, president CEO and CIO, Lester Asset Management
FOCUS: Canadian stocks
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MARKET OUTLOOK:
Equity and fixed-income markets continue to be volatile on fears of sticky inflation, higher-for-longer interest rates, and an economic slowdown. We believe that this volatility has presented some excellent buying opportunities in both stocks and bonds. In equity markets, a handful of tech stocks have been responsible for most of the rise of the S&P 500 Index, with the rest of the market lagging, despite a still strong economy and generally good earnings. In Canada, oil stocks and Shopify are largely responsible for most of the S&P/TSX Composite Index's positive return.
Small to mid cap stocks have really struggled this year and present particularly compelling valuations trading well below intrinsic value. Fixed-income markets currently provide the most attractive risk-return, particularly in short-term corporate bonds which are yielding “equity-like” returns of six per cent to eight per cent with little to no risk. Investors should take advantage of this unique opportunity since these high rates won’t last with inflation coming down from elevated year-ago levels and the economy slowing. We believe that the rate hiking cycle is over, although central banks will continue to maintain a hawkish tone to get inflation back down to the two per cent to three per cent target range.
We believe there will be a “soft landing” in Canada and the U.S. as their economies remain resilient with low rates of unemployment. Investor sentiment has been very bearish which is a great contrarian indicator with lots of cash on the sidelines. Our fixed-income portfolio is mainly comprised of higher-yielding short-term corporate bonds and yields over seven per cent with a duration of only 3.5 years, while our stock portfolio remains well diversified in recession-resistant businesses most of which are generating record profits. We also own many safe high dividend-yielding stocks like telecoms, pipelines, utilities, and banks which look particularly attractive at the moment. We also own companies benefiting from long term trends such as aging demographics (Savaria, Park Lawn, Neighbourly), digitization and automation (CGI, Tecsys, and ATS), and infrastructure (Stella Jones, AG Growth, Logistec). We have been taking advantage of volatility to add to our holdings in high quality companies at more reasonable valuations such as Pet Value, Jamieson Wellness, Richelieu Hardware, CCL and Colliers International.
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Top Picks
Savaria is a global leader in home accessibility equipment and patient-handling products. It manufactures and sells home stair lifts and home elevators, as well as mattresses and ceiling lifts for long term care facilities. In 2021 it purchased Handicare of Sweden making Savaria the largest player of home accessibility in the world. Results in 2023 have shown strong organic sales growth in both home accessibility and patient handling, and increasing profit margins. The company also continues to have a near-record backlog. The stock has pulled back recently on two things. Firstly the second quarter saw a $5 million hit to EBITDA due to the implementation of a new ERP system in its European operations which is a one-time event. Secondly the company recently issued equity to pay down debt which caught the market by surprise. This has created a great buying opportunity as the stock is now trading at around nine times EBITDA, the low end of its historic range. This is a unique growing business that is benefiting from strong long-term tailwinds of aging demographics and the desire to live at home longer. It also pays a 3.7 per cent dividend. This is a long-term core position that we have been adding to.
A beaten up undervalued technology stock with a potential catalyst.
MDF Commerce is an undervalued tech stock. It develops and manages e-commerce platforms for larger corporations such as Sobeys and Aldi, and also owns business-to-government platforms enabling suppliers to bid on government contracts which is called “e-procurement.” MDF is the leader in e-procurement in Canada and is also now the number one player in the U.S. with only a six per cent market share as the U.S. remains very fragmented. It recently announced some significant regional government wins in Arizona, Arkansas, and Hawaii, and has a robust pipeline of states that wish to digitize its procurement systems. Roughly 80 per cent of MDF’s sales are high-margin recurring revenue. The stock is dirt cheap and trades at just over one times revenue. The plan is to unlock value by selling off non-core businesses such as their e-commerce platforms and focusing on the higher multiple faster-growing e-procurement business. Based on recent multiples paid for e-procurement companies, MDF could be worth as much as $12 per share, triple what it’s trading at today at $3.50. Meanwhile, a U.S. fund noticed how cheap the stock is and has accumulated 12 per cent of the company over the past year.
Velan is a world leader in designing and manufacturing complex industrial valves and is considered the gold standard in nuclear valves which are manufactured by its subsidiary in France. This is a stock we last recommended at $5 in 2022, and earlier this year the company accepted a $13 take-over offer by a U.S. company called FlowServe. The stock was trading near $13 after the deal was announced but recently pulled back to around $10 on worries that the government of France was going to block the sale because of a change of control in the nuclear valve business. We think this fear is overblown as we see no difference between the company being controlled by U.S. shareholders or Canadian shareholders. Meanwhile, Velan and FlowServe have extended the deadline to close the sale. We sold our stock after the announcement at around $12.75 and have since repurchased shares at around $10. We expect the French government to approve the sale this fall and that the sale of Velan will close at the agreed price of $13 for a quick 30 per cent return.
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PAST PICKS: November 7, 2022
NEIGHBOURLY PHARMACY (NBLY TSX)
- Then: $23.42
- Now: $13.74
- Return: -41%
- Total Return: -41%
Rolling up small pharmacies (3rd largest pharmacy chain in Canada with 300 locations) Strategies to consolidate what is still a very fragmented market in Canada. But growth by acquisition stories are unpopular right now as investors are concerned about debt. This company however is producing strong free cash flow to cover their debt. Record results fueled by steady growth of aging demographics. Sales increasing from increased scope of practice in Ontario and B.C. (Their pharmacies can treat more patients and prescribe more medication). Since IPO at $17.00, revenues and profits have more than doubled to 900 million in sales and 100 million in EBITDA. Asset-light business with good same-store sales and increasing margins with a long-runway for growth. Could be a takeout target down the road. Valuation at a low with just 9 times EDITDA. Currently adding to position.
CARGOJET (CJT TSX)
- Then: $130.35
- Now: $94.57
- Return: -27%
- Total Return: -27%
High margin, high return on capital company. Has 90 percent of Canada's overnight freight market while doing this with little or no risk (guaranteed long-term contracts with heavy volumes servicing Amazon, Canada Post and DHL). Growth has currently slowed in e-commerce market since Covid ended so overnight volumes have contracted a bit. They are still managing their costs very well. Still generating healthy margins. It is as cheap as it has ever been trading at just 7 times EDITDA. Limited competion with high barriers to entry. Volumes are expected to be down for rest of year so was sold at a tax-loss but will likely repurchase it at year end as business remains attractive with good management team.
PARK LAWN (PLC TSX)
Funeral services company. Has owned since it was 6 dollars. Only publicly traded company in Canada in the death industry. 2nd biggest company of its kind in North America but still has only 2 percent of the market due to the fragmented nature of the market. Recession proof business with high margins, high barriers to entry. Huge tailwinds with aging demographics with the senior population expected to double over the next 20 years. Excellent management team in the U.S. which is focused on organic growth and M&A. Stock of company is down due to correction in the small and Mid-cap space. Great entry point trading at just 8 times EDITDA. Unique business with strong free cash flow. Recently teamed up with Brookfield to buy another company, Carriage Industries which would double the size of Park Lawn but the offer has not been accepted and is till on the table. Adding to positions at these levels.
- Then: $22.30
- Now: $19.39
- Return: -13%
- Total Return: -12%
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- Source
- https://www.bnnbloomberg.ca/stephen-takacsy-s-top-picks-september-25-2023-1.1976057
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