Stephen Takacsy's Top Picks: Jan. 28, 2019

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

MARKET OUTLOOK

A year ago, we warned viewers that various speculative manias such as cannabis stocks, cryptocurrencies and blockchain were signs of a market top. Towards the end of 2018, we finally saw a massive sell-off in equity markets led by the U.S. The American stock market was disconnected from global markets which were already struggling and it was grossly overvalued, mainly led by a small group of tech stocks. Rising interest rates, a strong U.S. dollar and U.S. trade wars started having an impact on U.S. corporations, as 44 per cent of S&P companies derive their revenues from foreign markets that were slowing down.

The pull-back in equity prices was amplified by computer-driven algorithmic program selling, high-frequency trading, momentum strategies, quantitative models, the liquidation of several large hedge funds, and the indiscriminate selling of baskets of stocks held in ETFs triggered by panicky and leveraged retail investors as well as tax loss selling. It’s estimated that 85 per cent of trading volume had nothing to do with actual company fundamentals, a fact borne out by the equally rapid rebound in stock prices being experienced by global equity markets thus far in 2019. The “the herd effect” has only gotten bigger with the growth in automated trading and ETFs, leading to more pronounced periods of over and undervaluation.

This suggests that markets are becoming less efficient, creating better opportunities for active portfolio managers going forward. While valuations have come down to more attractive levels, given the ongoing economic and geopolitical uncertainties, equity markets are likely to remain volatile. We continue to be very selective and generally stick to defensive stocks with low exposure to cyclical or economically sensitive sectors relative to the market.

TOP PICKS

VELAN (VLN.TO)
Long-term core holding.

Velan is a world-leading manufacturer of complex industrial and nuclear valves with sales of half a billion dollars. The stock is down 50 per cent over the past year due to lower profitability. Backlog is growing and management is focused on improving margins by cutting costs, closing money-losing plants (they just announced la major plant closure in Montreal last week), optimizing their global supply chain and selling higher-value-added products. Stock is trading at under $10 while book value is around $19.

We believe that if sold to a strategic player, the company would be worth between 1.3 times and 1.5 times book value per share or $25 to $30. We purchased more shares at around $9.

NFI GROUP (NFI.TO)
New position.

NFI is one of three major manufacturers of transit buses and motor coaches in North America. The stock is down over 40 per cent in the past few months and yet company released record profits. Backlog is strong and margins are steady with little impact from tariffs. NFI is also a leader in electric buses. The company generates strong free cash flow and is recession-proof due largely to bus replacement cycle. NFI trades at under nine times price-to-earnings and pays a 4.5 per cent dividend. The company has been buying back massive amounts of shares and we expect it to continue growing earnings per share and the stock to move back into $50s.

SIENNA SENIOR LIVING (SIA.TO)
Core holding.

Sienna owns over 100 long-term care facilities and retirement homes in Ontario and B.C. It’s the second-largest publicly traded retirement residence owner after Chartwell. The company has great defensive characteristics in this volatile market. The dividend yield is currently 5.3 per cent. Rising interest rates shouldn’t impact this stock, as rental leases are short-term in nature and can be adjusted for inflation. It should be steadily increasing its net operating income and adjusted funds from operations per share and growing dividends over the long run. It was added to TSX Composite Index last year.

PAST PICKS: JAN. 29, 2018

BAYLIN TECHNOLOGIES (BYL.TO)

• Then: $3.82
• Now: $3.66
• Return: -4%
• Total return: -4%

PLAZA RETAIL REIT (PLZ_u.TO)

• Then: $4.27
• Now: $3.99
• Return: -7%
• Total return: -0.03%

GUARDIAN CAPITAL (GCGa.TO)

• Then: $26.50
• Now: $22.63
• Return: -15%
• Total return: -13%

Total return average: -6%

FUND PROFILE: LESTER CANADIAN EQUITY FUND

Performance as of: Dec 31/18

• 1 year: -13.6% fund, -8.9% index
• 3 years: 7.1% fund, 6.4% index
• 10 years: 13.2% fund, 7.9% index

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

TOP 5 HOLDINGS

1. Baylin Technologies: 3.7%
2. CN Railway: 3.7%
3. Goodfood Market: 3.4%
4. Pembina Pipeline: 3.4%
5. Solium Capital: 3.2%

WEBSITE: lesterasset.com