Stephen Takacsy, president, CEO and chief investment officer, Lester Asset Management
FOCUS: Canadian stocks

MARKET OUTLOOK:

Volatility has increased significantly in capital markets due to a confluence of factors, not least is the recent invasion of Ukraine by Russia. The investment environment remains very foggy due to the ongoing effects of the pandemic, central banks increasing interest rates due to high inflation fueled by supply-demand imbalances, labour shortages and supply chain disruptions that have worsened as a result of the war in Ukraine.

We expect markets to remain volatile as central banks are caught between raising rates quickly to tame high inflation (and fearing a wage price spiral) while liquidity levels are still high and trying to engineer a “soft landing” to avoid a recession.

We believe that the rate of inflation will gradually ease while the economy simultaneously slows down. As a result, we are staying diversified by industry and company in recession-resistant businesses, such as CareRx, Pet Value, Jamieson Wellness and Park Lawn. At the same time, we are finding good long-term investment opportunities at attractive valuations in the non-resource small-mid cap sector, such as Pollard Banknote, Stella-Jones, and AG Growth.

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TOP PICKS:

Pollard Banknote (PBL TSX)

Pollard is the second largest supplier of instant lottery tickets in the world and a leader in electronic lotteries in the U.S. (iLottery). There are only three players licensed in North America, so barriers to entry are huge. After a big run to over $60, Pollard’s stock has pulled back to a very attractive level of $25 due to some margin compression on higher input costs for paper, ink and foil, as well as some production inefficiencies due to overly strong demand and sales delays on higher margin products. The North American instant lottery market continues to grow as governments use it as an important source of funding, while state iLotteries are still in their early days. We expect 2022 could be another record year for Pollard. It’s such a great business that Brookfield Business Partners is paying US$6 billion, or nearly 14 X EBITDA, for Scientific Games’ instant lottery business, which would value Pollard at over $40 per share.

AG Growth International (AFN TSX)

Here’s a great way to play growth in global agriculture. AG Growth is a leading manufacturer of grain handling equipment and storage for the agriculture industry. The company recently announced record results of $1.2 billion in sales and record EBITDA of $176 million. They also have a record backlog and have provided guidance for EBITDA of over $200 million up 14 per cent. North American farm equipment demand is very strong as is their international business in Brazil, India and Eastern Europe as these regions are investing heavily to upgrade their farming infrastructure. This is a great way to play the global agriculture sector without taking commodity risk. While the stock is up 35 per cent this year, it still trades at a very cheap 8X 2022 EBITDA. We also think that AG Growth would make a great take out candidate for AGCO, a large U.S. competitor.

Stella-Jones (SJ TSX)

Looking for high-quality earnings at a dirt-cheap price? Stella Jones is the leading North American producer of railway ties and utility poles. Most of their sales are re-occurring from the replacement of wooden ties and poles, although there is strong growth in utility poles from expanding the power grid and new fire-resistant poles. They also have a residential lumber business (roughly 30 per cent of revenue) through Home Depot, which boomed during the pandemic as people stayed home and spent on home renovations. The balance sheet is very strong, allowing more acquisitions in infrastructure-related products and returns ranging from $500 million to $600 million for shareholders over the next few years through aggressive share buy-backs and annual dividend hikes. The stock is down nearly 30 per cent, and is being treated as an “unwinding of the COVID trade,” even though the lumber business continues to grow above pre-pandemic levels. The stock is a high quality name trading at a dirt cheap valuation of around 11X earnings.

PAST PICKS: April 28, 2021

Savaria (SIS TSX)

• Then: $18.75
• Now: $17.74
• Return: -5.3%
• Total Return: -2.9%

Goodfood Market (FOOD TSX)

• Then: $8.32
• Now: $2.71
• Return:  -67.42%
• Total Return: - 67.42%

Andrew Peller (ADW.A TSX)

• Then: $11
• Now: $7.27
• Return: -33.90%
• Total Return: -32.22%

Total Return Average: -34.18%