Stephen Takacsy's Top Picks
FOCUS: Canadian stocks
Volatility has increased in equity markets due to fears of the new Omicron variant and central banks increasing rates faster and more often than anticipated to fight nagging inflation fueled by supply chain disruptions and labour shortages.
Markets have been driven by easy money from low interest rates and momentum investing, with little regard for valuation, led by a narrow group of overbought large cap stocks.
The bubble that was forming in technology stocks has been partially deflated and is healthy since there was much froth in the market, however much risk remains in new asset classes like crypto currencies.
The TSX’s return over the past year has been almost entirely driven by energy and financials, driven by massive inflows into ETFs by foreign investors.
Money has been sucked out of other sectors creating great investment opportunities at compelling valuations such as in renewable energy, certain industrials, healthcare, and non-energy small cap stocks.
We expect market volatility to gradually subside as the rate of inflation comes down from comparisons with low pandemic prices, supply/demand gets back into balance post pandemic, and central banks take a measured approach to normalizing rates without overtightening.
LOGISTEC (LGT.B TSX)
Logistec’s main business is providing marine cargo handling services in over 54 ports across North America including the largest container terminal in Montreal. Business is obviously booming given what we hear about supply chain issues in ports, and Logistec is the only publicly-listed company on the TSX that you can invest in to gain exposure to the marine cargo handling business.
They also have a fast growing environmental division that’s involved in water infrastructure repairs and soil remediation. We expect record results to be reported in March, yet the stock has barely moved over the past year. We estimate that the shares are trading at a P/E of only 12X earnings and will surpass their previous high of $57 during the year.
VELAN (VLN TSX)
Velan is a world leader in designing and manufacturing nuclear and complex industrial valves. The company released great results this week with hugely-improved profit margins following a very successful 3-year turnaround plan. They also have a strong backlog of orders which is expected to grow as their big end markets like energy and nuclear power strengthen.
The stock is also one of the cheapest on the planet, trading at less than 50 per cent of net book value of $17, and just over 3XEBITDA. We continue to push the company to buy back shares as this would be highly accretive and to eventually maximize shareholder value by selling the company. The stock is trading under $9, and we believe Velan is worth between $20 and $30 per share if sold to a strategic buyer.
QUARTERHILL (QTRH TSX)
Quarterhill was formerly called Wilan and owns an IP patent licensing portfolio that continues to generate lots of cash. The company has been using this cash to acquire companies in the intelligent transportation systems (ITS) industry. For example, they recently acquired ETC, which processes 17 per cent of all electronic toll lanes in the U.S. through its cloud-based platform, and they also acquired International Road Dynamics, a world leader in weight-in-motion technology and traffic data collection.
The exciting news in December is that Quarterhill announced a strategic review to sell its IP patent portfolio and become a pure play ITS company. We believe that the IP patent portfolio alone is worth what the stock is currently trading at now, and that the ITS business is worth at least another $2.50 per share. So, the stock should be trading at around $5 versus $2.60 today. We really like the upside on this stock and the fact that there is a big catalyst coming to unlock value.
PAST PICKS: January 25, 2021
Pollard Bank Note (PLB TSX)
- Then: $34.74
- Now: $36.15
- Return: 4%
- Total Return: 5%
Think Research (THNK CVE)
- Then: $4.44
- Now: $1.15
- Return: -74%
- Total Return: -74%
Baylin Technologies (BYL TSX)
- Then: $1.78
- Now: $0.85
- Return: -52%
- Total Return: -52%
Total Return Average: -40%