MARKET OUTLOOK:

Economic activity, while uneven by region, is exhibiting a strong recovery from the depths of the lockdown in 2020. With rapid vaccine deployment and a fast re-opening, the U.S. is the poster child for what Canada and other countries should see in the months ahead. 

U.S. economic activity has been very strong in recent months and consumers are out in full force spending excess savings and stimulus cheques. Restaurants are busy, live sporting events are sold out, and the power of pent-up demand is on full display. We are optimistic that Canada is not far behind. With recent improvements in vaccination rates, excess savings, and a consumer eager to get out and spend, it is only a matter of time until the hospitality and retail sectors here see a similar rebound.  

One potential fly in the ointment is inflation. Massive government spending, zero interest rate policy (i.e. free money), and supply chain bottlenecks are inevitably creating inflationary pressures.  

While central banks and many economists continue to stick with their stance that inflation is merely “transitory”, one only needs to think about day-to-day living expenses to realize that pricing pressure is everywhere.  

Housing prices, rent, food, lumber, shipping costs, the cost of a backyard renovation, or buying a boat – wherever we look, things are becoming more expensive. With such a deeply embedded view by many market participants that inflation will remain benign, this must be considered one of the key investment risks in the months and quarters ahead.  

We are increasingly positioning our strategies to protect against this risk by owning businesses with pricing power, certain commodity producers, and companies such as banks that stand to benefit from rising rates.       

         
TOP PICKS:

Logistec (LGT/B TSX) 
Last bought at $42.00 in October 2021
Logistec has two distinct businesses – marine services where it operates port terminals, and environmental services where it renews water infrastructure and provides site remediation. The company has “infrastructure-like” assets within its marine segment where it earns a fee based on volume of cargo shipped, enjoys high barriers to entry, and is typically the only operator in a given port location.  

The environmental business is benefiting from an increasing focus on environmental compliance and clean drinking water, and should benefit from increased infrastructure spending in North America in the coming years. Despite strong financial performance and a positive growth outlook, LGT.B trades at a substantial discount to comparable companies and its private market value. If Logistec’s assets were sold on the private market, they would likely fetch 70 per cent-100% per cent more in value than the public markets are currently ascribing.

Sylogist (SYZ TSX) 
Last bought at $11.50 in October 2021
Sylogist is an ERP software provider to public sector clients such as academic institutions and not-for-profit organizations. The business has had a long history of strong margins and profitability, but the management change to bring in new CEO Bill Wood should accelerate growth going forward.  

The company has made 3 acquisitions in the last 7 months under this new leadership and is poised to grow revenue by 50+ per cent in the year ahead. Despite strong growth prospects and profitability, SYZ trades at only 13x EV/EBITDA (2022E), a material discount to other Canadian software companies.  

Lassonde Industries (LAS/A TSX) 
Last bought at $178.00 in October 2021
Lassonde is one of the largest producers of branded and private label juice products in North America. The company has enjoyed a long history of profitability, organic growth, and growth via acquisition. The company is increasingly focused on growing it product portfolio in health/wellness area, and should perform well during an inflationary period due to pricing power. LAS.A is a defensive recession-resistant business, offers a 2 per cent dividend yield, and trades at a only 6.7x EV/EBITDA (2022E), a substantial discount to other beverage companies and recent private market transactions.  

PAST PICKS: June 30, 2021

Héroux-Devtek (HRX TSX) 

• Then: $17.85
• Now: $18.72
• Return: 5%
• Total Return: 5%

Uni-Select (UNS TSX) 

• Then: $16.41
• Now: $18.38
• Return: 12%
• Total Return: 12%

Ag Growth International (AFN TSX) 

• Then: $38.52
• Now: $28.59
• Return: -26%
• Total Return: -25%

Total Return Average: -3%