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Andrey Omelchak’s Top Picks for September 10, 2024

Andrey Omelchak, president and CIO at LionGuard Capital Management, discusses his outlook for the markets.

Andrey Omelchak, president and CIO, LionGuard Capital Management

FOCUS: Canadian stocks

Top Picks: Lumine, Trisura Group, Knight Therapeutics

MARKET OUTLOOK:

At LionGuard Capital Management we focus on investing in high-quality, mispriced businesses, avoiding the temptation of making market predictions. Our disciplined, bottom-up approach centers on long-term value creation, with a deliberate strategy to stay out of the commodities complex.

This year, the Canadian small-cap space has witnessed a notable wave of takeouts, which in our opinion underscores that these companies were mispriced. Contrary to what some might think, we do not believe that buyers have overpaid for these assets—often, quite the opposite. As interest rates come down, we expect more take-outs of mispriced assets.

Despite the pickup in takeouts, capital pools allocated to Canadian small and mid-cap companies remain very limited, providing numerous opportunities for astute investors. As always, smart management teams are making their businesses stronger, increasing their per share value at high rates of return and when possible, taking advantage of mispriced stock valuations.

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TOP PICKS:

Andrey Omelchak's Top Picks:Lumine, Trisura Group, and Knight Therapeutics Andrey Omelchak, president and CIO at LionGuard Capital Management, discusses his top picks: Lumine, Trisura Group, and Knight Therapeutics.

Lumine (LMN CVE)

Lumine is one of Canada’s most exciting growth stories, spun off from Constellation Software in 2023. As a global Vertical Market Software (VMS) consolidator, focused on providing niche, mission-critical software solutions to the communications and media industry, Lumine has consistently delivered strong results, achieving strong growth in revenue and EBITDA since its first acquisition in 2014, with a 29 per cent ROIC in full year 2022. The company’s vast addressable market, ability to deploy capital at returns exceeding 25 per cent, and favourable acquisition environment position it for continued success. In our opinion, Lumine’s long-term value-enhancing growth potential is not fully priced in, offering significant upside for investors. Furthermore, we believe they can deploy a significant amount of capital in the near term, which will be highly accretive to shareholders.

Trisura Group (TSU TSX)

Trisura is a Canadian-based specialty insurance company with strong operations in both Canada and the U.S. We believe its proactive risk management, including minimal exposure to wind, hurricane, and wildfire risks, and the successful renewal of reinsurance coverage, positions the company well for future stability. In Canada, Trisura enjoys high profitability with some of industry’s best combined ratios. The U.S. fronting platform is also poised to drive substantial premium growth, supported by strategic hires and enhanced risk management teams. Current valuation multiples are highly attractive given the company’s quality and robust organic growth prospects. We see Trisura as an excellent long-term compounder, with the potential for high-teens long-term ROEs, and would not be surprised if it becomes a takeout target at a large premium.

Knight Therapeutics (GUD TSX)

Knight Therapeutics stands out as a hidden gem, driven by its strong free cash flow generation, huge net cash position, and strategic leadership under Jonathan Ross Goodman, known for his extraordinary success with Paladin Labs. The company’s focus on licensing new drug therapies and expanding in Latin America has led to significant revenue growth, yet the stock remains tremendously undervalued. With $100 million in net cash, additional hidden assets worth up to $160 million, and an active large share buyback program, Knight has everything except good stock liquidity covered. Coupled with high normalized free cash flow yields and the potential for big margin expansion, Knight is poised for long-term growth and increasing per-share intrinsic value. Given the extent of mispricing, we would not be surprised to see a management buy-out at any time.

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