Stephen Takacsy, president, CEO and chief investment officer at Lester Asset Management

FOCUS: Canadian stocks

MARKET OUTLOOK:

After faltering late last summer, global equity markets marched higher at the end of 2020 on continued government stimulus and optimism that economies will normalize with vaccinations, despite rising infections and renewed lockdowns. The on-going pandemic has created a stock-pickers market where the divergence between winners and losers is large.

This has created an opportunity for “active” portfolio managers like us to prove their strategies by outperforming general indices and ETFs. We achieved a strong of +15.6 per cent in 2020 versus +5.6 per cent for the TSX through careful stock selection and sound portfolio construction comprised of businesses that are relatively immune to the ravages of the pandemic and still able to grow. Our top contributors were companies whose growth has accelerated due to the pandemic, either from an increase in e-commerce such as Goodfood and MDF Commerce, or higher demand for software services enabling digital transformation such as Tecsys. Our returns were also helped by renewable power producers Boralex and Innergex which are enjoying strong growth and the powerful trend of ESG investing.

Equity markets are well ahead of themselves in discounting an end to the pandemic and a return to normalcy. Many risks remain regarding the vaccination rollouts and new variants or strains. However, a flood of central bank liquidity and massive government stimulus are buoying financial assets and fueling speculative investments such as cryptocurrencies, “concept” stocks such as EV, IPOs at egregious valuations, and SPACs (“blank-cheque” companies). Bubbles are forming, and caution is warranted. We have raised our cash weighting to nearly 10 per cent and continue to take a measured approach in selecting sound long term investments at attractive prices.

TOP PICKS

POLLARD BANKNOTE (PLB TSX)

We recommended this stock in June 2019 in the low $20s - it’s now in the low $30s. Pollard is the second largest supplier of printed instant lottery tickets in the world. Barriers to entry are very high with only three players licensed in North America. Instant lottery ticket sales have been growing for over 20 years and Pollard has gained share by creating innovative content on tickets and focusing on technology such as iLottery. Pollard has also expanded into charitable gaming and display merchandising. Pollard has been mostly growing organically and also by acquiring technology and content companies.

THINK RESEARCH (THNK TSXV)

Think Research is the latest health-tech company to go public. It’s a Toronto-based developer and provider of subscription based cloud-based content, connectivity and data solutions for hospitals, clinics, senior and LTC facilities, and healthcare professionals. They have a telemedicine platform providing and sharing information and data to help streamline workflows and increase efficiency throughout the healthcare system. Think Research also provides e-referrals for which they have the contract from the Ontario government and owns a network of clinics. The company’s run-rate is about $40M per year of which 75 per cent is recurring high margin SaaS-like revenue. Its valuation at 4X revenue is more reasonable than its peers plus it has a higher per cent of revenue from technology (as opposed to clinics) and better organic growth profile.

BAYLIN TECHNOLOGIES (BYL TSX)

Baylin is a world leader in wireless antenna design for mobile, network and infrastructure applications. It will benefit from huge infrastructure spending over the next 25 years with increasing wi-fi coverage (DAS), wireless network densification using small cell systems, and new antennae/components needed for 5G for connected devices. Baylin’s growth hit an air pocket in 2020 due to the pandemic delaying infrastructure spending. This year should see a big turnaround in the company’s results. At $1.30, Baylin is trading at around 6X EBITDA

PAST PICKS: February 24, 2020

CARERX – formerly Centric Health (CRRX TSX)

CareRx is Canada’s largest institutional pharmacy, supplying medication to over 50,000 patients in senior care facilities. Aging demographics provide a tailwind for organic growth as the number of seniors in homes is expected to double over the next decade. CareRX is consolidating a fragmented industry where lots of cost synergies can be realized. The stock is trading at around 7X 2021 EBITDA. The share price has the potential to double over the next few years, including an eventual sale to a larger player.

• Then: $0.16
• Now: $3.90
• Return: 26%
• Total Return: 26%

MDF COMMERCE - formerly Mediagrif (MDF TSX)

Quebec-based company that offers e-commerce solutions to large corporations. MDF recently announced a large contract for Aldi, one of the largest food retailers in the world, to set up a “click & collect system in the UK. MDF also offers “Strategic Sourcing” platforms, enabling suppliers to bid on government contracts in Canada and the U.S. Over 80 per cent of MDF’s revenue is recurring and high margin. Despite the rise in share price, MDF is trading at a modest 2.5X revenues compared to more than double that for peers. Still a very underfollowed and under-owned company.

• Then: $5.29
• Now: $14.74
• Return: 179%
• Total Return: 179%

ANDREW PELLER (ADW/A TSX)

Canada’s second largest wine producer and distributor, and one of two publicly traded wine companies. Stock is still down over 40 per cent from its all time highs as top line growth has slowed. The company has done well during the pandemic with retail grocery and online sales way up, offsetting lower hospitality, license, and export sales. Net profits and EPS are way up as S,G & A costs have been cut. A high quality and well-managed company with a growing dividend now trading at only 15X P/E and 9X EBITDA which is a big discount to the international brands like Constellation and Diageo.

• Then: $10.21
• Now: $10.25
• Return: 0%
• Total Return: 3%

Total Return Average: 69%

WEBSITE: www.lesterasset.com