Stephen Takacsy's Top Picks: June 29, 2016

Stephen Takacsy, Chief Investment Officer and Portfolio Manager, Lester Asset Management

FOCUS: Canadian Equities (Non-Banks & Resources)

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MARKET OUTLOOK:

Given the weak global economic backdrop, we find stocks to be expensive in general. To find good value and upside, we have concentrated on dividend-paying Canadian small/mid cap companies with predictable cash generating businesses, which are either domestically focused, or able to expand North America-wide or internationally. Examples are in the renewable energy, technology, health and consumer staples sectors, as well as larger companies in telecom and power generation. Given the run-up in Canadian equities, we have taken some profits and are currently holding over 5 per cent in cash. The U.K. referendum to exit the EU will create much uncertainty and no doubt slow down global trade further. Equities remain very much a “stock-pickers” market as volatility has increased significantly on the major indices. Caution is warranted and dividend yield remains an important part of investor returns going forward.

Top Picks:

D-Box Technologies (DBO.TO)

World leader in motion systems for the entertainment market (movies, video games and virtual reality) and industrial applications (vehicle training and simulation). We expect seats with D-BOX motion systems to be installed in roughly 3 per cent of all auditoriums worldwide over the next 10 years, following an evolution similar to that of 3-D screens. D-BOX is now present in China where over 80 auditoriums per week are being built. Our model indicates a potential stock price $1 to $2 per share depending on sales growth and profit margins. Top pick in April 2015 and has since rallied by over 100 per cent on record revenues, earnings and sales backlog. Market cap is only $100M, and stock still undervalued in relation to global growth potential, lack of competitors and growing recurring revenue stream derived from movie ticket sales on an increasing worldwide installed base. Core holding.

Sandvine (SVC.TO)

Global leader in broadband network policy control solutions and business intelligence. Helps global telecom and wireless providers with internet traffic management tools to optimize their networks and with data analytics. Very inexpensive tech stock trading at 5 X EBITDA, a significant discount to U.S. peers. Stock is underpinned by over CAD $1.30 in cash per share (50 per cent of share price)and regular share repurchases under $2.50. Generates high margins and strong free cash flow. Recently starting paying a dividend of 2.7 per cent. Results can be lumpy so buy on weakness like now. We have been adding to our position at the $2.55 level. Company reports Q2/16 on July 7. Core holding.

Badger Daylighting (BAD.TO)

North America’s largest operator of hydrovac services (excavation by high water pressure trucks). Growth has been hampered by slowdown in Oil & Gas industry, particularly in Western Canada. However, penetration has been strong in the U.S. and in the utility sector where hydrovac services remain less developed and fragmented. We expect a strong rebound in 2017 results as the energy sector picks-up again and infrastructure spending grows. Badger generates strong margins and free cash flow with which it is paying down debt rather than building new trucks. Valuation is reasonable at 7.6 X 2017 EBITDA. Dividend yield is around 2 per cent. We would consider adding on weakness. Core holding. 

Past Picks:  June 18, 2015

Savaria (SIS.TO)

• Then: $5.85
• Now: $8.09
• Return: +42.79%
• TR: +42.79%

Prism Medical (PM.V)

• Then: $9.45
• Now: $12.41
• Return: +31.32%
• TR: +36.64%

Ag Growth International (AFN.TO)

• Then: $49.22
• Now: $40.01
• Return: -18.71%
• TR: -12.48%

Total Return Average: +22.32%

Name: LESTER CANADIAN EQUITY FUND

Performance as of: May 31, 2016

3 months: Fund +14.4%, Index* +10.2%

1 year: Fund +0.3%, Index*-3.3%

3 years: Fund +20.5%, Index*+21.7%

* Fund returns are based on reinvested dividends and are net of fees

** TSX Total Return (including dividends)

Top 5 holdings and weightings:

1. Boralex - 4.4%
2. Andrew Peller - 4.0%
3. Prism Medical - 3.7%
4. QHR - 3.6%
5. D-Box - 3.4%

Website: WWW.LESTERASSET.COM