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

Focus: Canadian equities
_______________________________________________________________

MARKET OUTLOOK

World stock markets continue to be complacent, trading at rich valuations despite tepid growth, which risks being derailed by anti-globalization and increasing financial risks such as high debt levels combined with rising interest rates. A sure sign of a near-top are the massive inflows from investors piling into ETFs, which mindlessly buy stocks irrespective of valuations or prospects, and various speculative manias such as bitcoin/cryptocurrencies, blockchain and marijuana-related stocks trading at nonsensical levels. In addition, we are now witnessing the start of trade wars, which we warned about shortly after Trump was elected. For this reason, we continue holding larger cash balances than usual. Nevertheless, there are attractive opportunities in the less liquid and underfollowed Canadian small/mid-cap segments, the valuations of which have not been driven up by fund flows because they are not part of any ETF basket of stocks. In fact, some companies are trading near the low end of their historic valuation range despite prospects never having been better. Also, some yield stocks have pulled back to attractive levels due to rising interest rates.

TOP PICKS

Stephen Takacsy's Top Picks

Stephen Takacsy of Lester Asset Management shares his top picks: Grande West Transportation, Altus Group and Solium.

GRANDE WEST TRANSPORTATION (BUS.V) – New position in 2018
B.C.-based developer of North America’s only single-frame heavy-duty medium-sized transit buses (30 to 35 feet) sold to public (municipalities) and private (airports) markets. The “Vicinity” bus was designed from scratch with BC Transit Authority and is cheaper, lighter, more fuel efficient and sturdier than competing buses, which are made by modifying larger ones. (New Flyer CEO raves about the Vicinity bus). Business model is “capital light” with manufacturing in China and final assembly in Vancouver and Atlanta. Stock came down due to some deliveries being delayed by one quarter, providing a great entry point. We visited the company in May and were very impressed. Backlog is strong at 240+ buses with potential to grow as municipalities “right-size” their fleets by replacing larger buses with medium-sized ones. Several catalysts should drive share price higher in next few months such as large orders from Atlanta Transit Authority and other U.S. customers. Market cap is around $100 million, and we expect the stock to double as order flow grows. Recently purchased more around $1.35.

ALTUS GROUP (AIF.TO) – Core holding since mid-2016
Global provider of software for commercial real estate management and consulting services for property taxes and appraisals, used by banks, pension funds, insurance companies and real estate owners. Altus is transitioning from a consulting services company to a technology company as it migrates clients to its analytics software and integrates more of its services onto its platform in order to cross-sell these. Strong organic growth from acquisitions. We expect multiple to expand as recurring licence revenue from their software platform grows. The stock has pulled back as Altus is investing heavily in growth. Market cap is $1.2 billion. Altus pays a two-per-cent dividend. We recently added to our position at under $30.

SOLIUM (SUM.TO) – Core holding since early 2017
Global provider of software services for the administration of employee stock option and share purchase plans for private and publicly-traded companies. In 2017, Solium signed “white-label” agreements with Morgan Stanley and UBS and has been migrating their customers to its own platform. Solium has also been acquiring companies that offer complementary services such as employee-compensation data and business- valuation analytics. While expenses have risen, sales are growing quickly, comprised of one-time set-up fees, recurring revenue and transaction charges. Market cap is $650 million. We recently bought a block at $10.
 

DISCLOSURE PERSONAL FAMILY PORTFOLIO/FUND
BUS Y Y Y
AIF Y Y Y
SUM Y Y Y


PAST PICKS: JUNE 26, 2017

Stephen Takacsy's Past Picks

Stephen Takacsy of Lester Asset Management shares his top picks: K-Bro Linen, Equitable Group and Ten Peaks Coffee.

K-BRO LINEN (KBL.TO) – Core position since March 2017
Canadian leader in laundry and linen services to the growing health-care and hospitality industries. High barriers to entry and limited competition. K-Bro has 30 per cent market share in Canada with long-term contracts at high renewal rates. It is the lowest cost producer and is nearly finished a major capex program to build new plants in Ontario and B.C., which will increase capacity and lower costs and allow K-Bro to widen its lead over the competition. Recently acquired Fishers Topco in Scotland. Stock has come down due to transition costs of new plants and minimum-wage increases, which the company can pass on to most customers within a year. We expect improving margins as costs are absorbed and K-Bro wins more business. It is now a great buy at 9x 2009 EBITDA. Pays a 3.3 per cent dividend. We recently added to our position at $35.

  • Then: $39.46
  • Now: $37.15
  • Return: -6%
  • Total return: -3%

EQUITABLE GROUP (EQB.TO) – Core holding since early 2015
Now Canada’s largest alternative-mortgage lender having gained significant market share from Home Capital.  Announced record profits in 2017 and increased dividend four times since we recommended it last year. Very strong management team and board. Despite what the U.S. short sellers portend, non-performing loans are at record lows. New B-20 mortgage rules stress tests may slow originations, but Equitable is still expecting to grow and generating strong EPS and high ROE (15 per cent+). Stock is trading at 0.8x book value ($67 and growing to $74+) and only 6.5 x 2018 EPS. We recently added to our position in the low $52s.

  • Then: $61.91
  • Now: $57.80
  • Return: -7%
  • Total return: -5%

TEN PEAKS COFFEE (TPK.TO) – Core holding since mid-2015
Based in Burnaby, B.C., the company is the world’s only third-party producer of decaffeinated coffee using a 100-per-cent chemical-free Swiss Water process. Also provides coffee storage and handling/logistics services. Customers are large chains like Tim Horton and McDonald’s, specialty roasters/coffee chains and global importers. Decaf is growing faster than coffee, and methyl chloride used to decaffeinate most coffee is being increasingly shunned worldwide. Competition is shrinking as two older chemical-free CO2 plants have recently closed in the U.S. and Europe. TPK is forecasting double-digit volume growth in 2018, and is opening a European office to meet additional demand there. It is currently building a new plant to increase capacity by 50 per cent, which will be ready in 2019. Stock is very cheap at 14x trailing P/E and 0.6x sales for a consumer-product company with high barriers to entry, strong free cash flow generation and global growth potential. Also pays a 4.1-per-cent dividend. We recently added to our position in the low $6s, and now own eight per cent of the company.

  • Then: $6.34
  • Now: $5.99
  • Return: -6%
  • Total return: -2%

TOTAL RETURN AVERAGE: -3%
 

DISCLOSURE PERSONAL FAMILY PORTFOLIO/FUND
KBL Y Y Y
EQB Y Y Y
TPK Y Y Y


FUND PROFILE: LESTER CANADIAN EQUITY FUND

Performance as of May 31, 2018:

  • 3 months: Fund* -0.3%, Index** 4.6%
  • 1 year: Fund*4.4%, Index** 7.5%
  • 3 years: Fund* 21.8%, Index** 16.7%

* Fund returns include reinvested dividends and are net of all fees and expenses
** Index: TSX Composite Total Return


TOP HOLDINGS AND WEIGHTINGS

  1. Andrew Peller: 3.8%
  2. CN Rail: 3.5%
  3. Logistec: 3.3%
  4. Badger Daylighting: 2.9%
  5. Boralex: 2.8%


WEBSITE: www.lesterasset.com