Stephen Takacsy, president, CEO and chief investment officer at Lester Asset Management
Focus: Canadian stocks

MARKET OUTLOOK

Equity markets continue to be strong in 2020 even in the face of economic disruption caused by the coronavirus. Comparisons are being made with the SARS scare in 2002, but the amount of international air travel in China has risen nearly tenfold since then, China’s manufacturing output has risen eightfold and China now represents 20 per cent of global GDP versus 8 per cent back then.

Most asset classes have continued to rise on the back of accommodative central bank policy, with low interest rates driving valuations higher and pushing investors to reach for yield and take on greater risk, even the so-called “smart money” like private equity. In fact, disappointing IPOs such as Uber’s and failed IPOs like WeWork’s indicate that a pre-IPO bubble has formed in private equity. The best asset class is the publicly-traded small/mid-cap sector, where valuations are well below private market values.

Investors should have low exposure to China and cyclical sectors given global economic and trade uncertainty.

TOP PICKS

CENTRIC HEALTH (CHH TSX)

Centric is one of Canada’s largest distributors of medication to senior care facilities. The stock is down because they recently sold their surgery clinics at a lower price than the market expected and did a large equity financing at $0.12 to pay down debt. David Murphy, the new CEO from Cardinal Health, is now focused only on the core drug distribution business and has done a great job cutting costs and improving margins. We see significant organic growth opportunities to grow their customer base. Centric also now has the balance sheet to make accretive acquisitions to consolidate the institutional drug distribution space. The shares have the potential to triple through organic growth and acquisitions, plus an eventual sale to a larger player as has been the trend in the U.S. We bought a large block of shares in December to average down.

MEDIAGRIF (MDF TSX)

Quebec-based Mediagrif sells software solutions and owns valuable business-to-business (B2B) e-commerce platforms enabling buyers and sellers to do business on-line. Examples include suppliers bidding on government contracts, corporations interacting with their suppliers and customers and digital marketplaces. The stock is down because the company took large write-offs in its business-to-consumer segment (classified ads, jobs and dating sites) which are being sold, and eliminated its dividend to redeploy cash to grow its B2B platforms.

The company’s new CEO just announced his first acquisition and is focused on providing end-to-end e-commerce solutions to small and medium businesses like Shopify. He has a very successful track record of creating shareholder value in the tech space, having sold businesses to large corporations such as OpenText.

The B2B business generate recurring revenues and high gross margins. The company is now investing in IT and salespeople, so EBITDA margin is coming down at the expense of top line growth. Mediagrif is likely worth $9 to $10 per share based on a modest two times revenues. It’s a great time to buy the stock as the company is in transition and most investors haven’t bothered to look at its new B2B strategy.

ANDREW PELLER (ADW/A TSX)

Andrew Peller is Canada’s second-largest wine producer and distributor. The stock is down 45 per cent from its highs as top line revenue has slowed, but the company has been pruning lower margin brands and focusing on premium products to gross margins. Gretzky brands (wine, whisky and beer) are doing very well. Earnings per share continue to grow as they control selling, general and administrative costs and are now buying back shares. The valuation is now at a huge discount to international brands like Constellation and Diageo. It’s an excellent time to buy shares in a high-quality and well-managed company.

PAST PICKS: JAN. 28, 2019

VELAN (VLN TSX)

• Then: $11.20
• Now: $7.00
• Return: -38%
• Total return: -37%

NFI GROUP (NFI TSX)

• Then: $33.65
• Now: $32.03
• Return: -5%
• Total return: 1%

SIENNA SENIOR LIVING (SIA TSX)

• Then: $17.24
• Now: $18.10
• Return: 5%
• Total return: 11%

Total return average: -8%

FUND PROFILE

Lester Canadian Equity Fund
Performance as of Jan. 31, 2020

• 3 months: 7.4% fund, 5.9% index
• 3 years: 6.1% fund, 7.7% index
• 10 years: 16.0% fund, 11.0% index

INDEX: TSX Total Return.
Returns are based on reinvested dividends, net of fees and annualized.

TOP 5 HOLDINGS

1. Boralex: 4.3%
2. Algonquin Power: 3.9%
3. Innergex: 3.5%
4. Tecsys: 3.4%
5. K-Bro Linen: 3.1%

WEBSITE: lesterasset.com