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

FOCUS: Canadian stocks

MARKET OUTLOOK:

Equity markets are ahead of themselves in discounting an end to the pandemic and a return to normalcy, hitting all time highs. A flood of central bank liquidity and massive government stimulus are inflating financial assets and fueling speculative investments like cryptocurrencies, technology stocks, “concept” stocks such as EV, IPOs and SPACs (“blank-cheque” company).

Bubbles have formed and caution is warranted. Leadership has shifted from “growth” to “value” stocks. We see this more as a rotation by momentum investors from “growth at a ridiculous price” (which included many pandemic stocks) to playing the “reflation/reopening” trade (which includes many recovery stocks). This move is being accentuated by rising bond yields which is deflating high multiple stocks.

While we are “value” investors, we don’t really like to categorize the market as either “growth” or “value” – stocks are either overvalued, undervalued, or impossible to value. For us, “value” is buying companies at less than their intrinsic value – this could be deep value, relative value versus peers, growth at a reasonable price, opportunistic, etc. Despite the recent highs, we still see many areas that we consider undervalued such as, energy infrastructure, consumer staples, industrials, and asset managers.

TOP PICKS

ANDREW PELLER (ADW/A TSX)

Canada’s second largest wine producer and distributor, and one of two publicly traded companies. The stock is down 45 per cent from its highs, yet it has continued to grow its sales and earnings by acquisition and new product launches. A well-managed company with strong brands and 40 per cent+ gross margins. Peller is trading at a P/E of only 12X and only 8.5X EBITDA which is a huge discount to recent winery IPOs in the U.S. We expect Peller to report record sales and profits within a few months which should be the catalyst to getting its share price moving back into the mid to high teens (EPS of $0.80+). The company is also starting to buy back shares. One of the few high quality companies whose shares are still dirt-cheap.

BAYLIN TECHNOLOGIES (BYL TSX)

A world leader in wireless antenna design for mobile, network and infrastructure applications that will benefit from huge infrastructure like wireless network densification using small cell systems and new antennae/components needed for 5G. Baylin’s growth hit an air pocket in 2020 due to the pandemic delaying telecom infrastructure spending. This year should see a big turnaround in the company’s results with all segments firing on all cylinders. The company has also fixed its balance sheet by lowering debt levels. At $1.20, Baylin is trading at around 6X EBITDA, which is half of what its peers trade at.

THINK RESEARCH (THNK TSXV)

THINK is a digital health company which quietly went public via an RTO and is more reasonably valued than its peers. It provides cloud-based tools and solutions like order sets, VirtualCare, connectivity and data solutions for hospitals, clinics, senior homes, LTC facilities, and healthcare professionals. Their telemedicine platform provides and shares information to streamline workflows and increase efficiency throughout the entire healthcare system. It also owns a network of clinics to showcase their products. Think recently acquired MDBriefcase, a global provider of online continuing medical education. The current run-rate is about $40M per year of which $30M or 75 per cent is recurring high margin SAAS-like revenue. It is the cheapest of all the publicly traded companies in the sector with one of the highest per cent of revenue coming from technology (as opposed to clinics), and strong organic growth.

PAST PICKS: April 28, 2020

CareRX (CRRX TSX) – formerly CENTRIC HEALTH (CHH TSX) - **1 FOR 20 STOCK SPLIT, 06/23/2020**

CareRX is Canada’s largest institutional pharmacy supplying medication to senior care facilities. The stock is up since the pandemic began for three reasons: their business is unaffected by the lockdowns because seniors need their medication; they made several large accretive acquisitions making them the number one player in Canada; and they are winning new business from competitors. CareRX is also launching telemedicine services and announced a partnership with Think Research to supply virtual services to senior facilities. The stock has the potential to double over the next few years.

• Then: $0.23
• Now: $5.15
• Return: 12%
• Total Return: 12%

MDF COMMERCE (MDF TSX) - formerly Mediagrif

MDF Commerce is an e-commerce solutions provider for large companies like Sobeys/IGA, Dollarama, and Carrefour in Italy. The company recently announced a huge contract with Aldi, the largest food retailer in the world, for a click and collect platform for its U.K. stores. MDF also enables suppliers to bid on government contracts, and recently won a large contract with NHS in the U.K., one of the largest healthcare systems in the world. MDF’s growth accelerated during the pandemic with the rush for businesses to digitize. Nearly 80 per cent of MDF’s sales are recurring SaaS revenue. Whereas Shopify trades at over 35X sales, MDF trades at under 2.5X revenues.

• Then: $5.39
• Now: $12.80
• Return: 137%
• Total Return: 137%

SIENNA SENIOR LIVING (SIA TSX)

Owns and operates over 80 long term care facilities and retirement homes in Ontario and B.C.. It suffered from negative headlines during the pandemic and higher vacancy rates. However, this is transitory – there will be massive demand as the number of seniors in Canada increases. Sienna has a solid balance sheet and is entirely covered by government-guaranteed cash flows from its LTC facilities. While operating costs have risen, governments are subsidizing a large part of these costs. We expect to see growth resume in 2021 with the expansion and renovation of some facilities.

• Then: $12.95
• Now: $14.91
• Return: 10%
• Total Return: 16%

Total Return Average: 55%

WEBSITE: www.lesterasset.com