MARKET OUTLOOK:

While many government restrictions remain in place and infection rates are rising from the spread of new variants, the value of financial assets continues to be inflated by ultra-low interest rates set by central banks. Many assets are in bubble territory (cryptocurrencies, EV, tech stocks, SPACs…). As reality eventually sets in, some trades will unwind (Bitcoin, commodities, real estate…). 

Momentum investing has dominated stock markets lately and has sucked money out of more traditional areas creating great long term buying opportunities in oversold sectors like Renewable Energy (Boralex, Innergex) and less liquid small and mid-cap stocks. 

We have been cautious, not wanting to be a hero by playing the “re-opening/reflation trade,” but rather owning stable companies and holding a large cash balance even at the risk of lagging the broader market on the upside. 

TOP PICKS:

CareRX (CRRX TSX)
A safe way to play healthcare: Aging demographics and industry consolidation

CareRX is Canada’s largest provider of pharmacy services to senior care facilities (LTC and RR). They just completed two transformative acquisitions: acquiring the LTC pharmacy divisions of Medical Pharmacies and Rexall, making CareRX the #1 player in Canada with a market share of over 20 per cent. They are also winning new business from competitors such as the recently announced win of 1,500 beds. 

Sales expected to reach $400M next year with 100,000 beds serviced. CareRX has also started providing telehealth services to senior facilities such as VirtualCare in partnership with Think Research, and launched Pharmacy at your Door for seniors living at home. In the next 15 years, the number of seniors in Canada will double, so CareRx will benefit from very strong demographic tailwinds. CareRX trades at a very reasonable valuation of around 9 X 2022 EBITDA.

CloudMD Software (DOC TSXV)
Digital healthcare/telemedicine at a reasonable price

One of the fastest growing healthcare technology solutions providers to enterprises, clinics and patients. They are making a big push into EHS (Enterprise Health Solutions) by offering a centralized “whole patient/one stop shop” platform integrating primary care, mental health, eye care and other specialty care for employers and insurance companies. This will make it easier and quicker to deal with employee health issues and reduce absenteeism which is a big problem today. 

They made a series of very interesting acquisitions which they are in the process of integrating. Pro-forma annualized revenue run-rate is expected to be around $140M with EBITDA between $5M and $10M. The stock has been weak like most small caps in this space which provides a great buying opportunity to invest in the digital health sector at a reasonable price of under 3X revenues versus peers trading at much higher multiples. 

Flagship Communities REIT (MHC-U TSX)
A unique and stable sub-asset class in real estate

Owns 58 manufactured housing communities and nearly 10,000 lots in the US Midwest: Kentucky (Louisville), Ohio (Cincinnati), Missouri (St-Louis), Illinois (Springfield). MHC are valuable assets as few new communities have been built over the past 20 years since municipalities don’t collect very much tax on these properties and so are not issuing new permits (“mobile” homes depreciate like cars, so the land generates most of the taxes). 

Very fragmented industry owned by “mom & pop” independent operators (top 50 only have 15 per cent of U.S. market). Very stable tenant base and low capex. Major consolidation play with SG&A cost synergies and revenue growth through rent increases and value-added services like parcs, higher occupancy and “water metering”. US$ denominated Canadian-listed stock. Dividend yield of nearly 3 per cent. 

PAST PICKS: September 22, 2020

MDF Commerce (MDF TSX)  

• Then: $7.87
• Now: $6.60
• Return: -16%
• Total Return: -16%

Blackberry (BB TSX) 

• Then: $6.57
• Now: $12.45
• Return: +89%
• Total Return: +89%

Sienna Senior Living (SIA TSX) 

• Then: $11.48
• Now: $15.08
• Return: +31%
• Total Return: +40%

Total Return Average: +38%