Dec 12, 2016

Stephen Takacsy's Top Picks: December 12, 2016

BNN Bloomberg

Stephen Takacsy , BNN

Stephen Takacsy, chief investment officer at Lester Asset Management

Focus: Canadian equities and corporate bonds
_______________________________________________________________

MARKET OUTLOOK
Since the U.S. elections, most North American equities are even more overvalued due to the hopes of corporate tax cuts and massive stimulus spending.The market’s brutal sell-off of bonds and high-yield stocks was not unlike the “taper tantrum” in 2013. This “Trump tantrum” will prove to be a great buying opportunity for high-yield defensive stocks. Nobody really knows what Trump will do (not even Trump himself) or what he will be allowed to do. We don’t think that he can sustainably increase U.S. growth rates or create much inflation, since the U.S. election doesn’t change the fact that we live in a slow-growth, highly-indebted, deflationary world with aging developed populations and excess capacity. This is not to mention the uncertainty created by anti-globalization trends like Brexit. In fact, Trump’s protectionist stance could have devastating effects on what little global growth there is.

We took advantage of the correction in high-yield sectors to add to our large cap utility, renewable energy, pipeline and telecom holdings, as they will rebound when reality sets in. These companies will continue growing their stable dividends over the long run, and are much safer investments than bonds. Post-U.S. election, winners among Canadian companies, many of them small/mid-cap, will be those with operations in the U.S. that will benefit from infrastructure and other spending, and/or from a stronger U.S. dollar. We are also holding 12 per cent in cash and waiting for better valuations.

TOP PICKS

NAPEC (NPC.TO)

New position. Recently purchased at under $1 during new equity issue.
Quebec-based leading provider of construction and maintenance services to electrical and gas utilities. Nearly 80 per cent of revenues are now from the U.S.
New management team has cleaned up corporate structure and has a new strategic plan to aggressively grow core business and improve margins.
Large capex programs underway in the U.S. to replace aging gas and electrical distribution systems. Opportunities could grow with further boost in U.S. infrastructure spending.
Recently completed what should prove to be a very accretive acquisition in the NYC area. Pro-forma revenues of $400 million and backlog of nearly $800 million.
Stock is very cheap at under 6X forward EBITDA versus U.S. comparable companies which have rallied since U.S. elections. Target price $2.50 within a few years.

BORALEX (BLX.TO)

Core long-term holding since 2012.
Quebec-based renewable energy company focused mostly on wind and hydro power, split roughly 50/50 between Canada and France.
Highest growth profile in the sector and lowest valuation.
Market cap of $1.3 billion.
Excellent management.
Just increased dividend (current yield of 3.5 per cent).
Recently acquired Niagara wind farm and issued shares at $16.65.
Stock sold-off during Trump tantrum due to its high yield and renewable energy exposure.
Excellent buying opportunity now.
Have been buying for new clients at these levels. One of our top three positions.

INPUT CAPITAL (INP.TO)

Core holding since IPO in 2013.
Saskatchewan-based specialty finance company with a unique business model engaged in buying and selling canola.
Advances funds to farmers in return for a long-term stream of canola production purchased at a fixed price.
Helps provide cheap capital to farmers so they can invest to increase crop yield and profits.
Input is only a few years old and has huge potential to grow.
Stock is correlated to deployments which drive future revenues. Strong cash margins and free cash flow generation. Just initiated a dividend.
Excellent management.
Recently bought a large block at $1.60 and now own three per cent of the company.

DISCLOSURE	PERSONAL	FAMILY	PORTFOLIO/FUND
NPC	Y	Y	Y
BLX	Y	Y	Y
INP	Y	Y	Y

PAST PICKS: DECEMBER 17 2015

PRISM MEDICAL (PM.V)
Since sold to Swedish company Handicare for $14 per share in August. We held our shares until then and tendered to the offer.

Then: $9.85
Now: $13.99
Return: +42.03%
TR: +42.03%*

*Until August sell date

QHR CORP. (QHR.V)
Since sold to Loblaw (Shoppers Drug Mart) for $3.10 per share in October. We held our shares until then and tendered to the offer.

Then: $1.23
Now: $3.09
Return: +151.21%
TR: +151.21%

NEULION (NLN.TO)

Core holding since early 2014.
U.S.-based leading technology company enabling video streaming of live and on-demand sports content and TV Everywhere over Internet-connected devices.
Agreements with sports teams, broadcasters, video/cable distributors.
Revenues based on usage and subscribers revenue sharing.
Stock was hit hard in 2015 when NHL sold its U.S. digital broadcast rights to MLB, who uses their own technology platform. Since then, NHL has had problems with MBL and has been paying NeuLion to help them out.
Meanwhile, NeuLion has renewed contracts with NFL and NBA, and has been growing internationally, for example with Univison (largest Spanish broadcaster) and English Football League.
Disney recently paid $1 billion for 33 per cent of MLB Advanced Media, a huge valuation multiple. We expect NeuLion to be acquired eventually at a much higher valuation than it is trading at today.
NeuLion has no debt and plenty of cash (US$60 million+) and is aggressively buying back shares.
Then: $0.77
Now: $1.00
Return: +29.87%
TR: +29.87%

TOTAL RETURN AVERAGE: +74.37%

DISCLOSURE	PERSONAL	FAMILY	PORTFOLIO/FUND
PM	N	N	N
QHR	N	N	N
NLN	Y	Y	Y

UPDATES

BADGER DAYLIGHTING

Buy price: Under $20 in 2015.
Sell/reduce price: We recently trimmed around 20 per cent of our position at an average price of $30.
Not so cheap anymore, but still a great business and a great company.
Core holding.

ANDREW PELLER

Buy price: Under $3 in 2011 (adjusted for stock split).
Sell/reduce price: We recently trimmed around 10 per cent of our position at over $12.
Not so cheap anymore, but still a great business and a great company.
Core holding.

FUND PROFILE: LESTER CANADIAN EQUITY FUND

PERFORMANCE AS OF NOVEMBER 30, 2016: