Stephen Takacsy, president, CEO & chief investment officer, Lester Asset Management
Focus: Canadian equities

MARKET OUTLOOK:

Over the past few months, we finally saw a massive sell-off in stock markets led by the U.S, which we believe is a healthy and long overdue correction. The U.S stock market was disconnected from the rest of the world (which was already struggling), with rich valuations led by a small group of tech stocks, and an escalating U.S-China trade war to start which were going to start having an impact on corporate earnings. There were also increasing financial risks from rising interest rates, potential wage inflation from a tight labour market and higher cost imports subject to Trump’s tariffs. Also, there were other signs of a market top as evidenced by various speculative manias such as cannabis stocks and cryptocurrencies which have been crashing in value.

However, the sell-off was magnified by algorithmic trading, momentum and quant funds selling, and retail panic selling from margin calls and ETFs. This explains a lot of the volatility we've have been seeing on an intraday basis. Also, the Canadian stock market has been suffering from institutional outflows due to our energy sector challenges. We’ve seen indiscriminate liquidation exasperated by current tax loss selling which has created huge opportunities, particularly in the small and mid-cap sectors. There are many great companies trading at historic low valuations despite record results and strong prospects. Also, some higher-yielding dividend stocks and preferred shares have dropped to very attractive levels as a result of the rise in interest rates.

TOP PICKS:

CENTRIC HEALTH (CHH.TO)
Last buy around $0.25

Centric is one of Canada’s largest specialty pharma providers of medication and healthcare services to senior residences serving 31,000 beds. A new CEO from Cardinal Health was recently hired to improve profits at the pharma business which was recently impacted by drug price reforms in Ontario and Alberta and its sale of non-core assets to pay down debt. Centric also announced an agreement with Canopy Growth to supply medical cannabis to senior communities and is launching a revolutionary automated drug delivery device for seniors living at home called Karie. The company is one of the best bargains on the TSX. Once the surgery clinics are sold in the next few months and the pharma profits start to increase, the stock could easily double. The technology investment in Karie alone could be worth more than Cnetric’s entire market cap which gives it additional upside. The stock is trading at under six times earnings before interest, taxes, depreciation, and amortization (EBITDA) pro-forma asset sales.

VELAN (VLN.TO)
Last buy around $9.00

Valen is an Industrial valve manufacturer is based in Montreal and is the world leader in nuclear valves. After a few down years, backlog has been growing and management is focused on improving margins through production efficiencies and selling higher value added products. Velan is a classic value investment trading at a massive discount to tangible net book value. The strock trades at $9 versus a tangibale net book of $17 and has $3 per share in cash. We don’t think the company should remain public. Instead, it should be sold to a large multinational player in order to be competitive on a global scale. If Velan were to be sol to a larger stategic player,  the stock should be worht $20. 

NFI GROUP (NFI.TO)
Last buy around $38.00

NFI Group is one of three major manufacturers of transit buses and motor coaches in North America. The stock is down nearly 40 per cent in the past few months and yet it released record profits. While growth has slowed from acquisitions and the multiple has contracted, backlog is strong and margins are steady with little impact from tariffs. NFI is also a leader in electric buses. This recession proof business is trading at under 10 times earnings. It also has a 4 per cent dividend yield. We expect this company to continue growing its earnings per share and the stock to move back into the $50s.

 PAST PICKS:

DIAMOND ESTATES WINES AND SPIRITS (DWS.TO)

• Then: $0.33        
• Now: $0.23        
• Return:-29%      
• Total return: -29%

BADGER DAYLIGHTING (BAD.TO)

• Then: $28.14     
• Now: $31.88      
• Return:13%       
• Total return: 15%

PARK LAWN CORP (PLC.TO)

• Then: $20.65     
• Now: $23.17      
• Return:12%       
• Total return: 14%

Total return average: 0%