Stephen Takacsy's Top Picks: March 28, 2024
Stephen Takacsy, president, CEO and CIO, Lester Asset Management
FOCUS: Canadian stocks
MARKET OUTLOOK:
We continue to see a positive environment for stocks and bonds in 2024. We always believed inflation was “transitory” caused by global supply chain disruptions from the pandemic. Core inflation has since declined naturally to nearly two per cent as supply chains have normalized, not because of the rapid interest rate hikes by central banks. In fact, rate hikes contribute to inflation through a huge increase in shelter costs, particularly in Canada where there’s been massive immigration combined with a housing shortage. This is why central banks pivoted last fall and bonds rallied, with stocks following suit. The North American economy has been resilient despite higher rates and the job market remains strong with savings rates still high. So, we may be entering a “goldilocks” scenario where disinflation or even deflation occurs, allowing for rate cuts along with a still-growing economy. If the economy weakens too much, this will still be seen as good news because rate cuts would be even more aggressive.
While the bond market has fallen this year because of delayed rate cuts, we continue to invest in high-yielding short-term corporate bonds, which still trade at very attractive yields in the six to seven per cent range representing equity-like returns with very low risk. In Canadian equities, we are adding to our small/mid-cap stocks many of which are still very cheap as institutional flows out of Canada and retail fund redemptions decimated them over the past few years. Private equity firms have taken notice and have been acquiring Canadian companies at big premiums. Other bargains abound in large cap high dividend yielding sectors like telecom and energy infrastructure (Enbridge yields 7.6 per cent), and stocks in the beaten up renewable energy sector, like Boralex and Northland Power.
Pet Valu is Canada’s largest specialty retailer of pet supplies with over 780 mostly franchised stores and 18 per cent share of the market. Industry growth has been driven by increased pet adoption rates and higher spending per pet because of the humanization and premiumization of pets. Pet Valu generates 22 per cent EBITDA (earnings before interest, taxes, depreciation, and amortization) margins and strong free cash flow which they have been reinvesting into opening new stores and raising the dividend. Pet Valu has consistently beaten consensus and delivered double-digit organic growth since its IPO (initial public offer) in 2021. However, SSS (same-store sales) growth has slowed down after the post-pandemic boom and the stock has corrected from $42 to $32 creating a good buying opportunity.
The company is spending on three new state-of-the-art distribution centers in the Greater Toronto Area, Calgary, and Vancouver, which should help improve margins, and plan on opening 40 to 50 new stores per year, so strong organic growth. The stock is now trading at around 19 times 2024 price-to-earnings (versus 30 times before) which is very attractive considering double-digit EPS (earnings per share) growth should resume in 2025.
Is the old McDonald Detwiller and is the only pure-play space technology company in the world and a global leader in its field. Since the cost of launching satellites has plummeted over the past decade, there is now a whole new “space economy” developing around satellite-based telecommunication, earth observation data, and other space infrastructure, for which MDA is really well positioned. They are in three business segments: geo-intelligence, robotics, and satellite systems. MDA currently has a $3.1 billion backlog providing clear visibility for 20 per cent to 25 per cent EBITDA growth per year over the next three years.
This is driven by a $2 billion contract for Telesat’s Lightspeed broadband LEO constellation of 198 satellites expected to be financed by the Canadian government any week now. This is also driven by several other LEO (low earth orbit) constellations such as Apple’s Globalstar emergency connection and another as yet unnamed smartphone provider, possibly Google or Samsung. MDA has a technological lead over competitor having developed digital satellites which are more efficient and configurable, thus lowering operating costs for their customer. MDA was recently added to the TSX Composite Index yet is still a relatively unknown stock trading at under nine times 2024 EBITDA which is very cheap given its massive growth potential.
It is one of Canada’s leading renewable energy producers with a strong presence in Quebec, the U.S. and France. The company has long-term contracted power production agreements mostly in wind and solar. Boralex recently announced record results with 22 per cent growth in EBITDA and strong free cash flow generation. The company has a large pipeline of wind, solar, and storage projects, which in total are expected to more than double BLX’s production capacity over the next few years.
Valuations of IPPs have crashed over the past two years due to rising interest rates, project cost increases, funding needs, and in some cases dividend cuts. Boralex is well-financed and has a low payout ratio. Under $30 is a great entry point to buy the stock at a historically low multiple of around 9.5 times EBITDA, for a company that has a high-quality asset base, a robust pipeline of projects, and multi-decade tailwinds for growth.
HIGH LINER FOODS (HLF TSX)
#1 supplier to retail channel in Canada, and #1 in US to food services. Sells under own name and private label. Seafood consumption low in NA, huge potential for growth. Revenue growth stalled with consumers cutting back on higher-priced items. In rally mode again. Huge free cashflow, buying back lots of shares, increased divvie by 30%, paying down debt. Dirt cheap at 8x PE. Insiders own 40%. Feels it will be sold down the road.
- Then: $14.94
- Now: $13.27
- Return: -11%
- Total Return: -7%
LOGISTEC (LGT.B TSX)
It is in the marine cargo handling business with over 60 ports in North America. It recently made a very big acquisition which gives it a very strong position in the Great Lakes area. Has had record results of $4 per share and trades at10X P/E. They have owned it for many years and it hasn't been this cheap in a long time. The other side of the business is in environmental services including soil/water remediation and water pipe repairs - they have a record backlog.
Acquired by private equity. Likes the environmental space so much they parlayed proceeds into Canada's first Global Biodiversity Fund, comprised of about 40 stocks.
- Then: $43.99
- Now: $66.95
- Return: 52%
- Total Return: 53%
DEFINITY FINANCIAL (DFY TSX)
Very strong results recently. Premiums more than covered expenses. Raised dividend by 16%. Now allowed to lever balance sheet to make acquisitions. Growing faster than IFC, which is #1 in Canada. Trades at big discount (1.8x book value) to IFC (2.8x). Really good upside.
Swiss Reinsurance just purchased 10% of company. Possible creeping takeover? DFY is either going to make acquisitions or be acquired. Good time to buy.
- Then: $34.77
- Now: $44.15
- Return: 27%
- Total Return: 29%
Total Return Average: 25%
Honorable Mention (Strong Buy)
Quarterhill Inc. (QTRH-T)
One of his biggest positions. Fantastic board, much-improved management team with wonderful expertise in a great space. Focused on driving shareholder value. Huge backlog. Should see improved margins. Insiders buying a lot of stock.
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Source
https://www.bnnbloomberg.ca/stephen-takacsy-s-top-picks-march-28-2024-1.2052989
https://stockchase.com/company/view/4762/LGTB-T
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