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

MARKET OUTLOOK

It’s quite obvious that the ongoing growth of passive investing will continue to contribute to a growing number of mispriced securities, while record levels of passive capital will be actively deployed to take advantage of those irrationalities. We therefore expect a major “wave” of M&A activity, including on small and medium-capitalization companies, for years to come.

TOP PICKS

SANGOMA TECHNOLOGIES (STC:CT)

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 increased organic growth to over 10 per cent yearly. With a strong and disciplined management team, we feel that Sangoma is very well-positioned to capture the massive opportunity in the shift from on-premise to cloud-based UC.

While U.S. investors have recognized major opportunities in the space and awarded large players (such as Ring Central and 8x8) with lofty valuations, Sangoma still trades at a huge discount versus its larger peers. With STC’s recurring UC software-as-service revenue growing at over 10 per cent, we believe it is just a question of time until Sangoma gets the credit that it deserves. Recent stock price performance is just the first step in the right direction.

 In addition, it is important to recognize that a highly discounted well-run operation with a 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 from this point on.

POINTS INTERNATIONAL (PTS:CT)

Points International is a cross-listed, Canadian-based technology company that serves the loyalty program industry. Through the company’s web-based e-commerce platform, loyalty program operators can enhance the monetization of their loyalty programs while increasing the engagement of its members. The company’s main business, the Loyalty Commerce Platform (LCP), is growing steadily and contributing to increasing free cash flow per share.

Points is actively buying back its own shares. Furthermore, strong confidence in the company’s prospects is clearly reflected in management’s financial guidance. Points’ official 2020 goals are to achieve a gross profit in the high $90 million range (from currently estimated $60 million in 2019) and for adjusted EBITDA to reach the mid-$40 million range (from the currently estimated $20 million in 2019).

 In our opinion, other business lines are not essential to the growth of LCP and are largely masking the true profitability of the Company. Divestitures of non-core business segments should translate to an immediate 40%+ accretion to the Company’s stated EBITDA and huge accretion to the Company’s free cash flow per share.

 At these levels, Points International should be of major interest as a take-out target to a strategic acquirer or private equity investor.

PHOTON CONTROL (PHO:CT)

Photon Control is a manufacturer of fiber optic sensors. Their temperature and position sensing solutions are applied in the equipment used to manufacture semiconductor chips, notably memory chips.

We like Photon because of their exposure to the memory chips market, which are key enablers of data analysis. As more data is generated, the need for Photon’s optic sensors should be increasing at a fast rate for years to come.

The company is in outstanding financial position with a net cash levels equal to almost 30 per cent of its current market capitalization. Through the first three quarters of this year, the company has allocated $7 million towards buybacks.

With almost all U.S. wafer fab equipment manufacturers trading at all time high prices, Photon’s stock price has largely failed to reflect positive industry projections.

PAST PICKS: JULY 27, 2017

CHESSWOOD GROUP (CHW:CT)

• Then: $13.10
• Now: $10.20
• Return: -22%
• Total return:-7 %

FIRAN TECHNOLOGY GROUP (FTG:CT)

• Then: $4
• Now: $3.75
• Return: -6%
• Total return: -6%

LAURENTIAN BANK (LB:CT)

• Then: $54.15
• Now: $44.74
• Return: -17%
• Total return: -6%

Total return average: -6%

FUND PROFILE

LionGuard Opportunities Fund
Performance:

• 1 month: 9.03% fund, 3.59% index
• 1 year: 25.01% fund, 15.71% index
• 3 years: 10.51% fund, 7.32% index

INDEX: S&P/TSX Total Return Index.