Full episode: Market Call for Wednesday, February 17, 2021
James Telfser, partner and portfolio manager at Aventine Investment Counsel
Focus: North American stocks
The combination of low interest rates with historic levels of fiscal and monetary support will continue to lead to premiums on companies demonstrating above average growth. The shrinking opportunity set for positive risk-free real rates of return will continue to push investors out on the risk curve, into equities and alternative income solutions. This scenario also brings out speculators who will continue to inflate asset prices. There are certain areas of the market which concern us, but we caution against trying to time a market correction.
Improving year-over-year growth in 2021, combined with the prospect of reopening the service side of the economy, leads us to continue to be constructive in the medium term. In addition, trends in market breadth, volatility, and financial conditions continue to suggest an above average equity weight.
Akumin has been executing well on their business plan of acquiring and integrating diagnostic imaging clinics in the U.S. (primarily MRI and CT Scans). They are now the number two player in North America, behind RadNet (RDNT NASD), with 125-plus centres. Their business has several strong macroeconomic tailwinds, most notably demographics. Akumin should also benefit from operating leverage as they continue to scale and deploy technology to centralize their clinics. While the pandemic slowed organic growth momentum, we have been impressed with the management team’s ability to navigate this uncertainty by maintaining relatively high EBITDA Margins (~25 per cent) in 2020. Akumin has been taking advantage of the fragmented nature of the industry through several accretive acquisitions and is now the market leader in terms of margins and organic growth.
We are both long term shareholders and supporters of the management team at Intertape Polymer Group. Traditionally ITP has been viewed as an average growth business however, with their focus on industrial tapes and packaging, we believe they are on the verge of a re-rating as e-commerce becomes a larger source of revenue. We credit the management team for preparing the company to thrive in the current environment through timely acquisitions and investments, resulting in increased market share. ITP’s Q3-20 results were very impressive (EBITDA of $64.5M vs. consensus of $41.1M) and showcased a massive step-up in profitability and growth. We project a continuation of these trends in 2021 leading ultimately to multiple expansion as ITP remains 3-4x cheaper than its packaging peers.
Constellation Software is the original software consolidation play. Recent results continue to demonstrate successful execution on capital deployment and free cash flow generation. We applaud the recent spinout of Topicus and, given its early success, view this strategy as a potential future value enhancement technique, as efficient capital recycling generates higher returns. In addition, we support management’s decision to pursue larger acquisitions at the expense of special dividends and believe that this will ultimately lead to higher returns for shareholders.
PAST PICKS: January 22, 2020
Akumin Inc (AKU TSX)
- Then: $4.39
- Now: $4.50
- Return: +3%
- Total Return: +3%
FirstService Corp (FSV TSX)
- Then: $131.36
- Now: $188.05
- Return: +43%
- Total Return: +44%
Bristol-Myers Squibb (BMY NYSE)
- Then: $67.43
- Now: $60.26
- Return: -11%
- Total Return: -8%
Total Return Average: +13%
Company Twitter handle: @aventine_mgmt
Personal Twitter handle: @james_telfser
Company website: Aventine.ca