Stephen Takacsy, president, CEO and CIO, Lester Asset Management

FOCUS: Canadian stocks 

MARKET OUTLOOK:

Equity and fixed-income markets have been volatile so far in 2023 on fears of high inflation, further rate hikes and an economic slowdown. We believe that this volatility has presented some excellent buying opportunities in both stocks and bonds. In equity markets, a handful of tech stocks have been responsible for most of the rise of the S&P 500 Index, with the rest of the market lagging, despite a strong economy and generally good earnings. Small-mid cap stocks in particular provide compelling valuations trading well below intrinsic value. In fixed-income markets, higher-yielding corporate bonds are very attractive, providing “equity-like” returns of six to eight per cent. Investors should take advantage of this unique opportunity since high rates won’t last with inflation coming down fast toward the two per cent Bank of Canada target. This is a result of supply chain issues easing, demand softening and input costs like commodity prices coming down. We believe that the rate hiking cycle has come to an end in Canada and the U.S., although central banks will continue to talk tough to get inflation permanently back down to two per cent.

We believe that in Canada and the U.S., there will be a “soft landing” as their economies will remain strong with low unemployment. Investor sentiment has been very bearish which is a great contrarian signal. As a consequence, we have seen stock markets rally strongly since Jamie Dimon said the market would decline another 20 per cent last October. This is why it’s important to stay the course and not listen to wild predictions. We remain well diversified in recession-resistant businesses that are generating record profits. We also own many safe high dividend-yielding stocks like telecoms, pipelines, utilities, and banks which look particularly very attractive at the moment. We also own companies benefiting from long-term trends such as aging demographics (Savaria, Park Lawn, Neighbourly), digitization and automation (CGI, Tecsys, and ATS), as well as infrastructure (Stella Jones, AG Growth, Logistec). We continue to take advantage of volatility to add high-quality companies at more reasonable valuations as share prices come down to attractive levels, such as Richelieu Hardware, Colliers International, Altus Group, and CCL.

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TOP PICKS

LAURENTIAN BANK  (LB TSX)

Laurentian Bank is Canada’s ninth biggest bank with $50 billion in assets and has announced that it is looking to maximize shareholder value which means it has put itself up for sale. Since banks don’t come around for sale very often this is a unique opportunity for competitors to gain market share, particularly in Quebec. Also, LB had unionized employees, but the union was de-certified in 2021, making it a more attractive acquisition today. It should be easy for any of the traditional banks to improve LB’s return on equity by cutting corporate overhead and lowering funding costs, and we doubt the regulators would object. We see TD, Scotia, CIBC, National Bank, and Desjardins as the likeliest suitors, as well as outliers like Power Corp/Wealth Simple and possibly a U.S. bank, as Royal is busy acquiring HSBC Canada and BMO is still digesting Bank of the West. Note that LB’s CEO Rania Llewellyn was at Scotia for 26 years. LB’s Book Value is around $60 versus $43 where it is trading today. We think that a realistic price is in the $54 to $60 range, so we see 25 per cent to 40 per cent upside. Dividend yield is 5.5 per cent (payout ratio of 40 per cent) so you get well paid while you wait for the sales process to play out.

JAMIESON WELLNESS (JWEL TSX)

JWEL is Canada’s number one consumer health brand in vitamin and minerals supplements (VMS) with a 25 per cent market share. It has been growing both sales and profits organically since its IPO six years ago, by gaining market share in Canada, growing its export sales, and launching new products. JWEL’s growth is accelerating due to a recent acquisition in the U.S. giving it a sales and manufacturing platform there, as well as expanding its presence in China, the second-largest VNS market in the world after the U.S., by setting up its own direct distribution in partnership with one of China’s largest Private Equity firms. Jamieson is guiding for strong growth this year: $700 million in sales, $140 million in EBITDA, and over $1.60 in EPS. The stock used to be very expensive, but the valuation has come down significantly to around 11X 2023 EBITDA and 18x 2023 earnings, providing a great entry point in this unique high-quality growth company. Publicly listed comparable VNS companies trade at much higher multiples, and Blackmores, a similar sized but less profitable company in Australia, was recently acquired for 23X LTM EBITDA which would value Jamieson at around $60 per share, double what it trades at.

SECURE ENERGY SERVICES (SES TSX)

SECURE is a Calgary-based environmental services company that processes wastewater for energy producers, operates industrial landfills and recycles metals, as well as operates midstream processing and storage facilities, crude oil and water pipelines, and crude by rail terminals. The company generates highly attractive EBITDA margins of 35 per cent to 40 per cent, strong free cash flow, and a return on equity in the mid-teens. Secure merged with Tervita, one of its key competitors, last year, and the stock dropped after the Competition Tribunal ruled that the company would need to divest 29 out of 103 facilities it acquired from Tervita, which Secure is now appealing. The shares are dirt cheap trading at five times EBITDA and nine times earnings, and have a six per cent dividend yield with a low payout ratio. The company is constantly buying back shares and insiders have been buying as well. We see this as a deep value stock that has strong upside from being re-rated as an environmental services and infrastructure company, rather than just oil services, and from winning its appeal which we believe they have a good chance of doing. Our target is in the $8 to $10 range.

PAST PICKS: July 14, 2022

MDF COMMERCE (MDF TSX)

• Then: $1.65
• Now: $3.58
• Return: 117%
• Total Return: 117%

PARK LAWN (PLC TSX) 

• Then: $33.45
• Now: $24.06
• Return: -28%
• Total Return: -27%

GUARDIAN CAPITAL (GCG.A TSX)

• increases (3.4% yield).
• Then: $29.19
• Now: $40.50
• Return: 39%
• Total Return: 43%

Total Return Average: 44%