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


MARKET OUTLOOK

At the end of last year we saw a massive sell-off in stock markets, which was in part a healthy and long overdue correction. However, this correction was magnified by mindless algorithmic trading, momentum and quant funds and retail panic selling. We mentioned last time that this indiscriminate liquidation had created huge opportunities, particularly in the small- and mid-cap sectors, where many good companies were trading at historic low valuations despite record results and strong prospects.

Markets have rebounded strongly this year as fears of an impending recession have faded, central banks have stopped raising interest rates, and U.S.-China trade wars keep getting pushed out. Canadian stocks are also recovering after years of suffering from institutional outflows due mainly to our energy sector challenges. We’re taking some profits as stock rise and raising cash as global growth is indeed slowing down, but continue to see many good long-term opportunities, particularly in the neglected small- and mid-cap sector.

UPDATE

Sold 50 per cent position of Grande West Transportation around $0.80 after buying in at $1.66. New orders have been slower than anticipated.

TOP PICKS

Stephen Takacsy's Top Picks

Stephen Takacsy, president, CEO and chief investment officer at Lester Asset Management, shares his top picks: Swiss Water Decaffinated Coffee, Goodfood Market and Stella-Jones.

SWISS WATER DECAFFEINATED COFFEE (SWP.TO)
Owned since mid-2015.

Formerly called Ten Peaks, Swiss Water is the world’s only third-party processor of 100-per-cent chemical-free, organic decaffeinated coffee. Based in Burnaby, B.C. it also provides green coffee storage and handling logistics services. The company does the processing for and sells to large chains like Tim Hortons and McDonald’s, specialty roasters and global importers.

To meet growing demand, the company is building a new plant in the Vancouver area to double capacity, which should be completed this fall. It’s seeing strong demand in the U.S. and internationally, where the decaf market is still mostly chemicals-based. Growth in volumes has been good while margins are expanding. The stock is cheap at 10.8 times trailing price-to-earnings (P/E) and 8.5 times earnings before interest, tax depreciation and amortization (EBITDA) for a free-cash-flow-generating business with high barriers to entry and global growth. We own around 8 per cent of the company. It also pays an attractive 4.6 per cent dividend.

GOODFOOD MARKET (FOOD.TO)
Owned since 2017.

Goodfood is the largest meal kit provider in Canada, with an estimated 45 per cent share of this fast-growing market. Meal kits are pre-portioned fresh food with gourmet recipes delivered directly to the home.

Business has quintupled since we first mentioned Goodfood on BNN Bloomberg 18 months ago. It now has 159,000 active subscribers and a gross sales run rate of over $200 million per year. It has a national platform, with distribution centers in Montreal and Calgary. It’s also adding breakfast items and ready-to-eat meals.

Goodfood is a disruptor with a more efficient business model than traditional groceries since there’s no inventory, no wastage, minimal handling (from the supplier to the distribution centre to the home), and higher gross margins. Market cap is around $200 million, the current gross sales run rate, while grocery chains in the U.S. like Kroger and Albertsons have been acquiring meal kit companies for 1.5 to 2 times their run rate. We think Goodfood can grow sales to $500 million within a few years and will eventually be an attractive acquisition target. Stock should be worth over $6 within 18 months based on forward gross sales.

STELLA JONES (SJ.TO)
New position.

Stella Jones is the leading North American producer of railway ties and utility poles with sales of over $2 billion, most of which is recurring revenue tied to the replacement market. The company’s valuation was expensive because it made lots of accretive acquisitions, but has been range-bound for four years as growth slowed and profit margins came down due to higher input costs (lumber) and oversupply. Organic growth has resumed, margins are improving, and there are acquisitions to be made. Stella Jones trades at a reasonable 16-times 2019 earnings per share and we expect the stock to return mid-$50s.

 

DISCLOSURE PERSONAL FAMILY PORTFOLIO/FUND
SWP Y Y Y
FOOD Y Y Y
SJ Y Y Y

 

PAST PICKS: MARCH 27, 2018

Stephen Takacsy's Past Picks

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

DIAMOND ESTATES WINES & SPIRITS (DWS.V)

  • Then: $0.32
  • Now: $0.18
  • Return: -45%
  • Total return: -45%

BAYLIN TECHNOLOGIES (BYL.TO)

  • Then: $3.99
  • Now: $4.03
  • Return: 1%
  • Total return: 1%

SIENNA SENIOR LIVING (SIA.TO)

  • Then: $17.54
  • Now: $18.77
  • Return: 7%
  • Total return: 13%

Total return average: -10%

 

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

 

FUND PROFILE

Lester Canadian Equity Fund
Performance as of: Feb. 28, 2019

  • Year-to-date: 11.5% fund, 12.2% index
  • 3 years: 11.6% fund, 10.8% index
  • 10 years: 14.5% fund, 10.2% index

INDEX: TSX.
Returns are net of fees, distributions and annualized

TOP 5 WEIGHTINGS AND HOLDINGS

  1. Solium: 4.6%
  2. CN Railway: 3.7%
  3. Pembina Pipeline: 3.6%
  4. Baylin Technologies: 3.3%
  5. Goodfood Market: 3.1%

WEBSITE: lesterasset.com