Stephen Takacsy, chief investment officer at Lester Asset Management
Focus: Canadian equities

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MARKET OUTLOOK

World stock markets, particularly in the U.S., have been trading at rich valuations despite tepid growth and increasing financial risks such as rising interest rates. A sure sign of a near-top were 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. We’re now witnessing a dramatic rise in volatility as foretold in our January 22 letter and expect this to continue. For this reason, we were holding a larger-than-usual amount of cash. In addition we now have the threat of trade wars, which we warned about shortly after Trump was elected.

Nevertheless, we continue to find attractive opportunities in the less liquid and underfollowed Canadian small and mid-cap segment, where ETF fund flows have not driven valuations to unreasonable levels (some companies have been trading at historically low valuations despite good results). We also remain focused on companies that are expanding in the U.S. We continue to hold more cash than usual so that we can take advantage of opportunities to acquire good companies more cheaply. Some large caps we follow are starting to look attractive.

TOP PICKS

Stephen Takacsy's Top Picks

Stephen Takacsy, president, CEO and chief investment officer at Lester Asset Management, shares his top picks: Diamond Estates Wines, Baylin Technologies and Sienna Senior Living.

DIAMOND ESTATES WINES (DWS.V)
CORE HOLDING

Diamond is the only publicly traded wine company in Canada besides Andrew Peller and the third-largest VQA producer in Ontario. Sales growth has accelerated thanks to new legislation allowing wine to be sold in grocery stores in that province. Diamond now has the largest supermarket wine shelf space at over 12 per cent market share. Currently, 70 grocery stores sell wine and this will quadruple to 300 over the next few years.

Diamond’s export sales to China are booming. It also owns an agency that imports wines, beer and spirits. We expect Diamond to make acquisitions and consolidate the fragmented wine market. The Beutel family owns 21 per cent and we own just under 10 per cent, having bought our last block at $0.28. Enterprise value is around $60 million or 1.7 times trailing-twelve-month sales, cheap for a fast-growing beverage company. As sales and profits grow and multiple expands, the stock should double over next two years.

BAYLIN TECHNOLOGIES (BYL.TO)
NEW HOLDING

We acquired 5 per cent of the company last December. Baylin is a world leader in wireless antenna design for mobile, network and infrastructure applications. They have a huge long-term growth opportunity, with increasing wi-fi coverage (DAS), wireless LTE network densification (small cell systems) and new antennae and components needed for 5G and connected devices (micro cells).

Baylin’s new CEO has really turned around the company by reducing costs and expanding product lines to lessen reliance on the mobile segment (where Samsung is largest customer). The company just announced a large acquisition of Montreal-based Advantech, which has complementary RF and microwave products for satellite and wireless base stations. We expect a significant sales increase and cost synergies, with revenues reaching more than $120 million and EBITDA of $23 million plus. Our target price is $6 within 12 to 18 months based on 9 times 2019 EBITDA.

SIENNA SENIOR LIVING (SIA.TO)
NEW HOLDING

Sienna Senior Living owns over 100 long term care facilities and retirement homes in Ontario and B.C. It’s the second-largest publicly traded retirement residence owner after Chartwell. The stock has great defensive characteristics in this volatile market. The dividend yield is 5 per cent.

Rising interest rates should not impact this stock as rental leases are short-term in nature and can be adjusted for inflation. It should be steadily increasing its net operating income and adjusted funds from operations (AFFO) per share, and growing dividends over the long run. Sienna was recently added to TSX Composite Index.

 

DISCLOSURE PERSONAL FAMILY PORTFOLIO/FUND
DWS Y Y Y
BYL Y Y Y
SIA Y Y Y

 

PAST PICKS: MARCH 22, 2017

Stephen Takacsy's Past Picks

Stephen Takacsy, president, CEO and chief investment officer at Lester Asset Management, reviews his past picks: NAPEC (acquired by Oaktree in February); Corus Entertainment and Veresen.

NAPEC (NPC.TO)

Acquired on Feb. 16 by Oaktree for $1.95. We held our shares until the end and voted in favor at the shareholders meeting. Our 5 per cent stake was the swing vote.

  • Then: $1.05
  •  Feb. 15, 2018 (last day of trading): $1.94
  • Return: 85.23%
  • Total return: 85.23%

CORUS ENTERTAINMENT (CJRb.TO)

We trimmed our position by 50 per cent between $8 and $9 due to ongoing weakness in ad revenues. Management also needs to invest in ad tech.

  • Then: $12.49
  • Now: $6.81
  • Return: -45.47%
  • Total return: -39.61%

VERESEN (VSN.TO)

Acquired in October by Pembina Pipeline for around $18.50 in cash and stock. We trimmed some Pembina since we owned it already, but really like the company.

  • Then: $13.69
  • Now: $18.51
  • Return: 35.20%
  • Total return: 39.87%

Total return average: 28.49%

 

DISCLOSURE PERSONAL FAMILY PORTFOLIO/FUND
NPC Y Y Y
CJRb Y Y Y
VSN Y Y Y

 

FUND PROFILE

Lester Canadian Equity Fund
Performance as of: February 28, 2018

  • 3 Months: 2.1% fund, -3.2% index
  • 1 Year: 10.1% fund, 3.2% index
  • 3 Year: 23.3% fund, 10.8% index

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

TOP 5 HOLDINGS AND WEIGHTINGS

  1. Andrew Peller: 4.0%
  2. Logistec: 3.3%
  3. CN Railway: 3.0%
  4. Boralex: 3.0%
  5. Sienna Senior Living: 2.8%

WEBSITE: www.lesterasset.com