Stephen Takacsy, president, chief executive officer and chief investment officer, Lester Asset Management

FOCUS: Canadian stocks

MARKET OUTLOOK:

Volatility continues to rule capital markets in 2022 due to the aftereffects of the pandemic, including supply and demand imbalances, labour shortages, supply chain disruptions exacerbated by Russia’s attack on Ukraine and renewed lockdowns in China. These factors have caused inflation rates to remain much higher for longer than anticipated, inciting central banks to raise interest rates more aggressively to suppress demand. There is no doubt that rising rates and high inflation will slow down the economy, some parts more than others (i.e. real estate and consumer discretionary spending). Canada and the U.S. should be able to engineer a “soft landing” as they are coming from a strong place with low unemployment, high personal savings, still low-interest rates and strong currencies.

We believe that the rate of inflation will ease as the economy slows down. Central banks will end the tightening cycle sooner than markets anticipate as supply and demand for goods come more into balance and supply chains normalize.

Nevertheless, we are staying well diversified in recession-resistant businesses, including telecommunications and pipelines, and also those benefitting from strong thematic tailwinds. These include renewable power (Boralex, Northland Power), aging demographics (CareRx, Savaria, Park Lawn, Siena Senior Living), the digitization of everything (CGI, TECSYS, MDF Commerce), and Infrastructure spending (Brookfield Infrastructure, WSP Global). We have also been adding high-quality companies “thrown out with the bathwater” in the sectors such as consumer discretionary and industrials for which prices have significantly corrected, such as Canadian Tire, Pet Value, Cargojet, Richelieu Hardware, and CCL.  

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TOP PICKS:

MDF COMMERCE (MDF TSX)

A beaten-up technology stock with tremendous value and is a potential catalyst.

MDF Commerce is one of many overly beaten-up tech stocks. It develops and manages e-commerce platforms for larger corporations such as Sobeys/IGA, Dollarama, and Aldi, one of the largest food retailers in the world for a click-and-collect platform for its 1,000 U.K. stores. MDF also owns business-to-government platforms enabling suppliers to bid on government contracts called “e-procurement.” MDF is consolidating this sector in the U.S. through mergers and acquisitions and made a transformational acquisition last year of Periscope making them the number one player in this fragmented market. This acquisition required a large amount of equity financing, which is why the stock initially came down. Labour shortages and COVID restrictions have delayed deployments which recently hurt financial results. Roughly 80 per cent of MDF’s sales are high-margin recurring SaaS revenue. The stock is dirt cheap and trades at around 1x revenue and an activist U.S. fund has taken note and recently disclosed that it has accumulated 11 per cent of the company. There are also two new very strong board members with serious tech experience. One plan to unlock value would be to sell the e-commerce business, repay all debt and focus on the higher multiple e-procurement business. Even using very low multiples would justify a stock price north of $6, which is more than triple what MDF is trading at today at $1.70. 

PARK LAWN (PLC TSX)

Aging demographics and industry consolidation.

The only publicly traded company in Canada in the “deathcare” industry. PLC owns funeral homes, crematoria and cemeteries in Canada and the U.S. It’s a great recession-proof high-margin high-barriers to entry business with strong tailwinds from aging demographics. Excellent management and operations based in the U.S. where they are focused on an mergers and acquisitions strategy to consolidate a still very fragmented industry as the number two player after Service Corporation. EBITDA is expected to double to $150M by 2026, at a 15 per cent CAGR. The stock was added to the TSX Composite last year. The recent pull back from $42 to $33 is a great entry point into this unique business trading at only 16X 2022 P/E with a healthy balance sheet and strong earnings growth and free cash flow.

GUARDIAN CAPITAL (GCG.A TSX)

Fastest growing asset manager and wholesaler of life insurance policies. It has around $53 billion in AUM (institutional portfolio management) and over $30 billion in AUA (financial advisory). Growing organically and by acquisition as they diversify their asset management business internationally. It’s also been the best performing stock in the asset management sector over the past 12 years (quadrupled), yet still trades at a 40 per cent+ discount to its intrinsic value.  Sum-of-the-parts analysis shows that Guardian’s shares are worth over $50 versus the $28+ current trading price, and they could easily monetize their life insurance business at a much higher multiple than what their stock is trading at. Guardian is great at returning cash to shareholders through aggressively buying back shares including recent large blocks purchased at $33 and $34, and regular dividend increases (3.4 per cent yield). A very well-managed high-quality value stock with good growth.

PAST PICKS: September 20, 2021

CareRX (CRRX TSX)

• Then: $5.81
• Now: $4.16
• Return: -28%
• Total Return: -28%

CLOUDMD (DOC TSXV)

• Then: $1.64
• Now: $0.39
• Return: -76%
• Total Return: -76%

FLAGSHIP COMMUNITIES REIT (MHC.U TSX)

• Then: $17.92
• Now: $15.50
• Return: -11%
• Total Return: -11%

 Total Return Average: -38%