Oct 28, 2020

Andrey Omelchak's Top Picks: Oct. 28, 2020

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Andrey Omelchak's Top Picks

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

MARKET OUTLOOK

With most investors fixated on U.S. presidential elections and the unfolding of the second wave of COVID-19, it is important to acknowledge that the best risk-adjusted investments are not the ones that bet on a specific election outcome (or the impact of the virus), but rather are expected to perform well regardless of how either one unfolds.

Since the onset of the virus, there have been two types of economies in North America: the “services economy” and “goods economy.” On average, the “services economy” has collapsed due to social distancing restrictions, while the “goods economy” has benefitted from the re-allocation of budgets. Rather than making a difficult prediction on when this trend will reverse, or to which extent it will continue, there is a safer way to approach this.

Overall, we encourage investors to steer away from making tough calls and instead to identify investment opportunities with high odds of performing well under varying macro conditions. With a call on the overall market direction subject to debate, a good number of growth and value companies can be found trading well below their intrinsic values irrespective of how the two matters described above unfold.

TOP PICKS

MDF Commerce (MDF TSX)

MDF Commerce is a software as a service-based, diversified technology company. They recently divested most of non-core business-to-consumer business and are now focused on highly profitable and fast-growing business-to-business segment.

MDF Commerce is a big beneficiary of COVID-19, which strongly accelerated the adoption of their product offerings. its unified commerce business has experienced robust customer demand amid a surge in ecommerce activities. Their state-of-the-art e-commerce platform, which runs on mdf’s Orchestra technology helps major global companies to sell their products online. It is a highly profitable, booming, and recurring SaaS business. To put it in perspective, during COVID-19 outbreak in Italy, mdf’s platform supported the only online grocery in the country.

DIRTT Environmental Solutions (DRT TSX)

DIRTT Environmental Solutions is a disruptive manufacturer of the customized prefabricated interior. The company operates primarily in the interior construction renovation market, which consists of prefabricated, customized modular walls, ceilings, floors, network and power infrastructure and functional millwork.

Although COVID-19 caused short-term business slowdown, in our opinion it also provided huge medium- and long-term business opportunities for the company. Our channel checks with C-level executives clearly indicate that a massive surge in office re-configurations is beginning to take place. Our analysis is further supported by recent comments by the Alphabet CEO, Sundar Pichai, who intends to evolve towards offering a “hybrid” model, which includes a blend of both remote and in-office methods of working, to its employees.

Given the flexibility and adaptability of DIRTT modular design, scalability of business operations, inherent advantages of prefabricated construction, ability to better respect social distancing during the installation process, and move towards more sustainable construction practices, we believe the company is extremely well-positioned to capitalize on forthcoming surge in office re-configurations.

Savaria (SIS TSX)

Savaria Corporation recently pre-released its Q3/2020 results, which were better than expected on the adjusted EBITDA front. The management team has clearly done a great job in this environment by focusing on operational efficiencies and further improving Garaventa operations. The pre-released adjusted EBITDA margin of 19 per cent is the highest we have seen in a long time.

In addition to what looks like a positive and sustainable improvement in profitability, Savaria is very well-positioned to make accretive acquisitions and capture market share (the company supply chain is back to full capacity, whereas some competitors are still struggling with those issues).

Over the long-term, the aging demographic continues to benefit the industry growth rate. In addition, we believe that the industry is ripe for consolidation, which is a big part of Savaria’s accretive growth story. In the near-term, we believe that with an increasing number of elderly people planning to remain in their houses, as opposed to moving to elderly people's homes, due to COVID-19 concerns, we may see an uptick in accessibility product demand.