Jordan Zinberg’s Top Picks for July 26, 2024
Jordan Zinberg, president and CEO, Bedford Park Capital
FOCUS: Canadian small, mid-cap stocks
Top Picks: Payfare, Ag Growth, Foraco
MARKET OUTLOOK:
Following a very strong first quarter, Canadian equities as an aggregate traded sideways in the second quarter of 2024. Now that second-quarter earnings season is upon us, equity markets are starting to awaken from their summer doldrums.
Within the small and mid-cap segment of the equity market where we focus, two key themes are emerging. The first is small/mid-cap outperformance relative to large caps. During the second quarter, and consistent with the first quarter, Canadian small and mid-cap stocks outperformed their large-cap counterparts. Most of the strength we have seen among smaller companies has been underpinned by the energy and materials sectors, however, there have been outstanding opportunities for investors in other sectors are well.
The second key theme is a dramatic resurgence in small/mid-cap merger and acquisition activity. Recently announced transactions include companies that have traded on the Canadian equity markets for many years including Park Lawn, Canadian Western Bank, Stelco, Tricon and Sleep Country, among others. The reason for this resurgence is quite clearly valuation. Sophisticated market participants including both private equity as well as strategic buyers are looking at these companies and seeing value at current levels. Small-cap equities continue to trade at a substantial discount to large caps, presenting a robust opportunity set for investors.
TOP PICKS:
Payfare (PAY TSX)
Payfare is a Canadian fintech company which provides gig workers instant access to their earnings instead of waiting for a traditional pay cycle. An early mover in a space that’s growing extremely fast, the company has established partnerships with Uber, Lyft and Doordash and is now looking at new market segments. Payfare is profitable, has an above-average return on equity profile, and margins continue to expand. The stock trades at a low valuation given the company’s growth rate and pristine balance sheet.
Ag Growth (AFN TSX)
Ag Growth is a food infrastructure business which provides farmers and commercial customers with equipment and engineering solutions. Over the past few years, the company has exhibited steady growth across multiple markets with margins moving higher each year. Management has indicated that 2024 results will be back half weighted, and the company recently confirmed rumours that they received and quickly rejected an offer from a competitor that was priced at a substantial premium.
Foraco (FAR TSX)
Foraco is a leading global drilling services contractor which operates across several major mining regions. The company has gone through a major transition in recent years, focusing its footprint on stable jurisdictions, signing long-term contracts with tier-one customers, and demonstrating dramatically improved financial performance. Despite consistent growth in revenue and profits, the company remains relatively unknown among investors and trades at under five times 2025 earnings.
PAST PICKS: JULY 4, 2023
Mainstreet Equity (MEQ TSX)
Core holding in portfolio. Very strong asset base. Sharp management with founder who has lots of skin in the game (~50%). Excellent quarter with higher revenue and cash flow. New M&A - bought ~600 apartment as sellers wanted to sell before capital gains tax . Expecting 20,000 apartments by the end of the year. One of the best compounding companies in Canada.
- Then: $137.60
- Now: $191.78
- Return:39%
- Total Return: 39%
Lumine Group (LMN CVE)
Excellent company that continues to own. Spin out from Constellation Software. Active in media and communications sector. Larger M&A that has been very secretive. Long term - excellent business for shareholders.
- Then: $18.23
- Now: $36.23
- Return:99%
- Total Return: 99%
Source Energy Services (SHLE TSX)
Oilfield services company that continues to own. Has been able to consistently generate revenues and profits. Recently announced joint venture with Trican Well Services. Expecting ~$20/share price going forward. LNG will also boost demand for services as well.
- Then: $5.00
- Now: $12.24
- Return:145%
- Total Return: 145%
Total Return Average: 94%
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