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

MARKET OUTLOOK

Stock markets have been surprisingly strong since March, initially fueled by low interest rates, government stimulus, the reopening of businesses and vaccine hopes. Stocks rose further on better-than-expected second quarter results, although these were helped by subsidies and massive cost-cutting, which led to high unemployment. We warned in June that we would soon be entering a period of volatility as markets retraced some of its rapid gains and that there would be a marked separation between winners and losers. Most companies have removed their guidance for the remainder of the year and beyond and there’s no telling how Q3 and Q4 results will fare especially if there’s a second COVID wave. Nevertheless, some companies are thriving (e-commerce), some relatively unaffected (utilities), but many continue to suffer (travel and leisure, entertainment, restaurants, retail, commercial real estate, financials and energy). We prefer safer investments such as utilities, telecom, consumer staples, healthcare and certain technology and industrial companies, particularly those that pay high dividends that are sustainable in an ultra-low rate environment. The broad indexes will therefore remain vulnerable and value-added active managers should thrive.

TOP PICKS

Mediagrif Interactive Technologies (MDF TSX)

MDF Commerce in the new name being given to Mediagrif at their AGM Wednesday to better reflect what the company does. It provides e-commerce software solutions for large companies, much like Shopify does for small businesses. For example, MDF manages the online platform for Sobeys/IGA and the SAQ, as well as for Carrefour in Italy, which was the only online grocery service operating in the country. MDF also enables suppliers to bid on government contracts (called “strategic sourcing”) and for which MDF recently won a large contract in the U.K. with one of the largest healthcare systems in the world. MDF’s growth is accelerating due to the pandemic, as it is benefitting from the rush of businesses going online. Nearly 80 per cent of their sales come from recurring software as a service (SAAS) revenue. Whereas Shopify trades at over 40 times sales, MDF trades at around 1.5 times recurring revenue. We now own 5 per cent of the company.

BlackBerry (BB TSX)

The most unloved Canadian tech company, BlackBerry is now a pure software company with four recurring revenue streams: enterprise security software (ESS) for mobile communication, which is transitioning into a SAAS model; the QNX operating system; cybersecurity software; and a large patent licensing business. While BlackBerry’s revenues are down due to lower car sales amid the pandemic, its valuation is mainly suffering from management’s lack of credibility and poor corporate governance, especially after investors challenged a controversial refinancing of Fairfax’s convertible debenture and forced the TSX to withdraw its approval of the original terms which the board had approved. We suspect that a potential acquirer was sniffing around and that Fairfax wanted to drastically lower its costs by lowering the debenture’s conversion price at the expense of diluting shareholders rather than have it redeemed. BlackBerry trades at only 2.2 times revenues versus comparable companies trading at 5 to 6 times. We think there would be strong interest from outside parties like Microsoft, Google or Samsung to acquire BlackBerry at 2 to 3 times what the shares are trading at.

Sienna Senior Living (SIA TSX)

Sienna owns and operates over 80 long-term care facilities and retirement homes in Ontario and B.C. Due to media coverage of the pandemic and high death rate among seniors, the entire sector has been oversold. Sienna has made some impressive management changes in the past few months and really beefed up operating staff. Vacancy rates at retirement residences have only increased slightly, but this is transitory and will be absorbed by aging demographics. Sienna’s dividend is yielding over 8 per cent and is entirely covered by government-guaranteed cash flows from its long-term care facilities. Sienna has a solid balance sheet and just refinanced its 2012 debt early at very favorable rates. While operating costs have risen, governments are subsidizing a large part of these costs and will be increasing their funding to the sector to renovate older facilities, so we expect to see growth resume in 2021 with the expansion and renovation of some facilities.

PAST PICKS: SEP. 10, 2019

Diamond Estates Wines (DWS TSXV)

• Then: $0.21
• Now: $0.15
• Return: -30%
• Total Return: -30%

Goodfood Market (FOOD TSX)

• Then: $2.99
• Now: $7.33
• Return: +145%
• Total Return: +145%

Baylin Technologies (BYL TSX)

• Then: $3.00
• Now: $0.81
• Return: -73%
• Total Return: -73%

Total Return Average: +42%

Company Website: www.lesterasset.com