James Telfser's Past Picks
FOCUS: North American stocks
While we acknowledge the current risks in the market, we believe the positives outweigh the negatives. We continue to see improvements globally in COVID-related vaccination rates, infections, hospitalizations, and deaths.
Real interest rates are still incredibly low and negative news regarding the supply chain appears to be peaking. We believe these factors will continue to support growth, which has been accelerating since the summer. In this environment, equity allocations will outperform, especially given the strength of the recent earnings season (Q3-21) in both the U.S. and Canada where we have seen record-breaking revenue, earnings surprises, and record-high profit margins.
We are finding opportunities in stocks that have lagged the market recently as commodities captured the incremental capital flow. We have seen several periods like this throughout our careers and have found that the dispersion between fundamentals and valuations in Canada can get particularly large during these periods. At Aventine, we gravitate towards higher quality companies with a much longer time horizon and as a result find these periods meaningful to our long-term results.
Park Lawn Corporation (PLC TSX)
At Aventine, we tend to gravitate towards companies that can compound capital over long periods of time with organic and inorganic growth opportunities. We have always been drawn to the cemetery business, which tends to be recession-proof, inflation-protected, and highly fragmented.
Currently, there are two major players within the industry – Service Corp (SCI-US) and Park Lawn (PLC-TO) – in addition to several private equity players. As such, the industry is still dominated by mostly independent operators, which comprise 89 per cent of the market.
We expect Park Lawn to continue its long track record of successful M&A by utilizing its pristine balance sheet – currently 1.2x Net Debt/EBTIDA. Park Lawn has completed $700 million in deals (31 acquisitions) since 2014 and has consistently generated strong returns on capital.
While organic growth has been strong during the pandemic (~11.5 per cent), which is set to normalize, the company has built a $130 million war chest through a bought deal to execute on their internal pipeline of potential acquisitions.
We expect to realize several catalysts by way of announced deals and earnings surprises in the years to come, especially if management can live up to their guidance of closing $100-$150 million in deals annually in the $20 billion funeral and cemetery industry.
Linamar (LNR TSX)
We believe investors should advantage of the current discounted valuations of the auto parts manufacturers such as Linamar. The supply chain challenges are well-known at this point, and we believe positive surprises are more likely than negative ones.
We were quite encouraged by the performance and commentary out of Linamar this week, which reinforced our view that this is a best-in-class management team with an attractive revenue mix. Not only did they outperform peers operationally, but they also generated enough free cash flow to now be net debt-free, increase their dividend by 25 per cent, and launch an NCIB to buy back 10 per cent of the float.
There is a very long runway for growth and deliveries given the challenges have been on the supply side which should benefit Linamar in the future, post this period of volatility. At the current valuation of 4x EBITDA there is a large margin of safety build into the shares.
Enghouse Systems (ENGH TSX)
After a challenging summer for Enghouse, on the back of tough y/y comparisons, we see the light at the end of the tunnel and believe current levels offer an attractive entry point. With an impressive long term track record of both revenue growth and M&A, and a renewed focus on cloud-based recurring revenue, we believe that organic and inorganic growth will increase in 2022, along with their valuation.
The pandemic has created challenges for cross-border M&A which has held back their due diligence process. Furthermore, we will be rounding the noisy y/y declines in Vidyo, their video collaboration segment.
Revenue is expected to be north of $510M in 2022 ($477M in 2021) and if they close some acquisitions during the year, we believe the stock will once again trade in line with historical multiples of 17-19x EBTIDA which would equate to a $65+ stock price.
Sangoma Technologies (STC TSXV) *1 for 7 stock split on November 8th 2020
- Then: $2.90
- Now: $27.00
- Return: 33%
- Total Return: 33%
Otis Worldwide (OTIS NYSE)
- Then: $65.20
- Now: $83.40
- Return: 28%
- Total Return: 29%
ATS Automation Tooling Systems (ATA TSX)
- Then: $17.83
- Now: $50.01
- Return: 180%
- Total Return: 180%
Total Return Average: 81%