Andrey Omelchak, CEO & CIO, LionGuard Capital Management
Focus: North American equities
Top picks: Electrovaya, TFI International, Mattr Corp
MARKET OUTLOOK:
In the U.S., investor enthusiasm remains concentrated around artificial intelligence (AI) and the outsized weight of mega-cap technology companies. Their dominance has propelled valuations to historically high levels, with the S&P 500 now trading near 22 times forward earnings.
The so-called “Magnificent Seven” stocks now command valuation multiples well above the broader market, with many trading at 30 times forward earnings or higher. Together, they represent an unprecedented share of the index, leaving overall market returns heavily dependent on a narrow group of companies.
Numerous other companies’ valuation levels are also testing the higher end of their past ranges. Sustaining large index returns would require either further earnings surprises or additional multiple expansion scenarios that are possible, but nevertheless increasingly reliant on a concentrated group of technology stocks.
In Canada, the economy is on a weak footing with unemployment rising, consumers increasingly stretched, and many businesses holding back on investment. While Canadian indexes have benefitted from the massive run-up in the resources complex and market optimism that tariff matters will be resolved favorably, prudence might be warranted with CUSMA/USMCA re-negotiations still ahead.
Despite overall market optimism, a number of select securities are available at highly attractive valuation levels. With capital flows in Canada increasingly chasing the resources complex, short-term volatility for non-resource companies has increased tremendously. This mirrors dynamics seen in numerous past resource sectors up cycles, where capital flows create mispricing elsewhere.
Disciplined investors can take advantage of this short-term dynamic by acquiring pieces of high-quality non-resource equities at attractive valuation levels.
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TOP PICKS:
Electrovaya (ELVA TSX)
Electrovaya is a a top pick as the company is set to more than triple manufacturing capacity while ramping its U.S. Jamestown facility, positioning itself as a key North American battery supplier. At the same time, it recently started a second shift, to satisfy booming demand, in its Mississauga plant.
Its clients include Walmart, Raymond (part of Toyota) and the world’s biggest e-commerce company. In addition, Electrovaya is building new OEM relationships, including just-announced partnership in Japan, with more to OEM relationships to come.
With 45 times U.S. production credits (this alone can amount to over 20 per cent of it’s enterprise value) and “Buy America” qualifications in place at Jamestown, it has a critical competitive edge versus much lower-quality Chinese competitors.
Electrovaya is directly exposed to multiple high-growth and mission-critical industries including energy storage systems (smart grid support, back-up power, data centers), robotics and autonomous systems (industrialization, warehouse automation), aerospace and defense (including airport ground support equipment and potential drone applications), forklifts, etc.
Several of its end markets are growing at over 25 per cent per year. Its top line is poised to multiply several fold and margins to expand. Backed by disciplined and highly capable management, high insider alignment, and best technology in the industry (100 per cent safety track record, critical to end markets such as data centers, warehouses, military application, etc.; best longevity/durability), Electrovaya is quickly evolving into a highly profitable, strategically essential battery platform for some of the world’s biggest companies and government agencies with committed and growing budgets.
TFI International (TFII TSX)
TFI International is a top pick as North America’s leading transportation and logistics consolidator, with operations spanning Canada, the U.S., and Mexico across Package & Courier, Less-Than-Truckload (LTL), Truckload, and Logistics.
The company serves a diverse set of end markets including industrial, retail, e-commerce, and refrigerated freight. Management has completed over 90 acquisitions since 2016, consistently integrating targets to expand scale and improve margins.
Recent organic improvements at U.S. LTL (TForce Freight) are poised to improve the operating ratio for this segment of the business, before accounting for better pricing on the back of more satisfied client base. With a strong financial profile, over 10 per cent forward free cash flow yield (with 13 to 15 per cent normalized FCF yield in sight), and aggressive buybacks, TFII trades at an attractive valuation potentially near the bottom of a much-prolonged three-year trucking recession. TFII is supported by one of the best management teams in the sector. It is also likely to benefit from an eventual spin-off of its LTL operations, which is likely to unlock the value for shareholders.
Mattr Corp (MATR TSX)
Mattr is a top pick as the company continues its transformation into a streamlined, higher-margin infrastructure solutions provider. Mattr has divested non-core assets and sharpened its focus on composite technologies, engineered polymer solutions, and pipeline integrity services markets with strong secular demand in energy transition, water management, and industrial infrastructure.
They also successfully integrated AmerCable acquisition, business that is poised to benefit from data center buildouts. Execution on margin expansion remains a central theme, with management targeting sustained earnings before interest, taxes, depreciation, and amortization (EBITDA) margin improvement supported by operational discipline and a growing backlog.
Long-term visibility remains strong with order books and end-market demand providing multi-year growth drivers. The company continues strong share buybacks, capital allocation strategy we fully agree with. We believe that patient investors will be rewarded, as organic improvements translate into much higher free cash flow generation.
| DISCLOSURE | PERSONAL | FAMILY | PORTFOLIO/FUND |
|---|---|---|---|
| ELVA TSX | Y | N | Y |
| TFII TSX | Y | N | Y |
| MATR TSX | N | N | Y |
PAST PICKS: September 10, 2024
Lumine (LMN CVE)
Then: $36.21
Now: $46.37
Return: 28%
Total Return: 28%
Trisura Group (TSU TSX)
Then: $39.27
Now: $39.78
Return: 1%
Total Return: 1%
Knight Therapeutics (GUD TSX)
Then: $6.04
Now: $6.34
Return: 5%
Total Return: 5%
Total Return Average: 11%
| DISCLOSURE | PERSONAL | FAMILY | PORTFOLIO/FUND |
|---|---|---|---|
| LMN CVE | N | N | Y |
| TSU TSX | N | N | Y |
| GUD TSX | N | N | Y |
