Andrey Omelchak, president and CIO of LionGuard Capital Management
Focus: Canadian stocks

MARKET OUTLOOK

We are seeing an increasing number of mainly large-cap companies trading notably above their fundamental values on the back of positive fund flow dynamics. With a record number of personal investment accounts opened over the last two to three months, there has been an influx of fast money into the market. In addition, with so much institutional capital managed without reliance on companies’ fundamentals, it is warranted to see increasing cases of market inefficiencies.

With lower interest rates here to stay for an extended period, it is not a surprise that multiples paid for high growth companies with recurring revenues are on an upward trajectory. Although we fully agree that businesses with fast-growing revenues have gotten much more attractive (their intrinsic values increased substantially due to lower discount rates), we caution investors against chasing “popular” securities and oftentimes largely overpaying. We do believe that there is great sense in purchasing growing businesses that trade at large discounts to their intrinsic values.

With record amounts of dry powder in the hands of private equity and access to capital for leveraged buy-out transactions likely to improve in the second half of 2020, we fully expect to see a lot of takeout announcements including for small- and mid-cap companies over the next 6-18 months.

TOP PICKS

Sangoma Technologies (STC TSX) – Last purchased at $2.30

Sangoma Technologies is a comprehensive unified communication (UC) solution provider with presence in numerous countries. Under the leadership of its CEO, William Wignall, it has completed several highly accretive and strategically sound acquisitions and materially increased organic growth. Despite COVID-19, Sangoma’s highly resilient business model helped maintain its fiscal year 2020 guidance as it benefitted from a growing stream of recurring revenues. Recent capital raise provides the company with an opportunity to make more acquisitions and to materially increase its percentage of recurring revenues. It is important to recognize that a highly discounted, well-run operation with fast-growing recurring revenue is a prime takeout candidate by the bigger operators. Unless the company is taken out at a large premium, we believe it has all their right ingredients to be a multi-year compounder.

Mediagrif Interactive Technologies (MDF TSX)

Mediagrif is a SaaS-based, diversified technology company that operates mostly in three verticals: strategic sourcing, unified commerce and B2B market place. They recently divested most of non-core business-to-consumer (B2C) business and are now focused on highly profitable and fast-growing B2B business. Mediagrif is a big beneficiary of COVID-19, which accelerated adoption of their product offerings. Its unified commerce business saw robust customer demand amid surging e-commerce activities. Their state-of-the-art e-commerce platform, which runs on its Orchestra technology, helps major global companies sell their products online. During the COVID-19 outbreak in Italy, Mediagrif`s platform supported the only online grocery in the country. We have full confidence in management’s ability to accelerate its growth of SaaS revenues by helping many more multinational companies to sell their products online. It remains largely undiscovered by investors and currently trades at a huge discount to its valuation.

Tucows Inc. (TC TSX)

Tucows operates in three highly resilient segments: domain name (60 per cent of gross profits), Ting Mobile (30 per cent) and Ting Internet (10 per cent). Under the leadership of CEO Elliot Noss, the company has been able to create tremendous value over the years with a mix of strategic acquisitions and organic initiatives. The company has grown its domain name business to become the second-largest domain name registrar in the world. It launched Ting Mobile in 2012, which has provided good organic growth with little capital investment. The company launched Ting Internet in 2015 which provides Fiber connectivity to small cities across the U.S. With booming demand for fast speed internet connection amidst COVID-19, we see increasing opportunities to create much more shareholder value going forward.

PAST PICKS: DEC.17, 2019

Sangoma Technologies (STC TSX)

• Then: $2.34
• Now: $2.27
• Return: -3%
• Total Return: -3%

Points International (PTS TSX)

• Then: $19.15
• Now: $12.50
• Return: -35%
• Total Return: -35%

Photon Control (PHO TSX)

• Then: $1.21
• Now: $1.86
• Return: 54%
• Total Return: 54%

Total Return Average: 16%

WEBSITE: www.lionguardcapital.com