Stephen Takacsy, president, chief executive officer and chief investment officer, Lester Asset Management

FOCUS: Canadian stocks  

MARKET OUTLOOK:

Volatility continues to rule stock and bond markets as investors try to anticipate an end to the aggressive central bank interest rate hikes. Rising rates have slowed down parts of the economy such as residential real estate and big-ticket consumer discretionary spending. Canada and the U.S. should be able to engineer a “soft landing” as their economies are coming from a strong place with low unemployment, high personal savings and strong currencies. We believe that inflation is already showing signs of easing as supply and demand come more into balance, and supply chain disruptions normalize. The strong rebound in stock and bond markets is evidence that investors are starting to sniff out a possible end to the tightening cycle as some inflation data is starting to soften. Central banks are toning down hawkish rhetoric in order to give some time for the hikes to take effect. Investor sentiment has been extremely bearish which is a great contrarian signal.

As we said in early November when sentiment starts to turn positive, markets usually rise sharply which has indeed been the case since the lows of mid-October, six weeks ago (the S&P 500 has risen +14 per cent since).

We have stayed invested in equities but well diversified in recession resistant businesses that have pricing power such as telecoms, pipelines and utilities. These safe high dividend-yielding sectors look particularly attractive having corrected significantly over the past few months. We also own companies benefitting from strong tailwinds such as the transition to clean energy (renewable power producers like Boralex and Northland Power). Other long-term investment themes include aging demographics (Savaria, Park Lawn, Neighbourly), digitization and automation (CGI, MDF Commerce, ATS) and infrastructure (Stella Jones, AG Growth, Logistec). We took advantage of volatility this year to add high-quality companies to our portfolio at more reasonable valuations as share prices came down, such as WSP Global, CCL, Cargojet, Richelieu Hardware, Jamieson Wellness, and Neighbourly Pharmacies.

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TOP PICKS:

NEO PERFORMANCE MATERIALS (NEO TSX)

Neo Materials is a really unique company. It is the global leader in the manufacture of magnetic powders and magnets used in micro-motors and a global leader in the processing of rare earths to make highly engineered industrial materials. Its customers are mainly in the automotive, electronics and semiconductors as well as specialty chemicals industries.

It is a global leader in supplying magnets used in micro-motors and materials used in catalytic converters in the automotive industry, with a huge market opportunity to supply materials in the electric vehicles market for traction motors. It has 10 manufacturing facilities in Asia, Europe and North America, and recently announced the construction of a new plant in Europe to supply the European EV market supported by EU grants and contracts with European car manufacturers. A strategic buyer, Hastings Technology Metals, recently acquired 20 per cent of the company for $15 per share and the stock is trading at just over $10.

Neo is a very profitable cash generating-company with no debt trading at only 4X EBITDA with huge growth potential. Neo also pays a dividend yielding nearly four per cent. This is a safe way to gain exposure to rare earths and the EV industry and a likely takeover candidate down the road just as it was previously acquired for $1.3 billion by Molycorp in 2012 before going public again in 2018.

TECSYS (TCS TSX)

Tecsys is a Montreal-based company that develops and sells supply chain management software solutions. So, it’s really in a “sweet spot” right now. Its main clients are healthcare networks in the U.S., so hospitals and clinics are a segment it dominates, as well as complex distribution businesses like auto parts and omnichannel retailers. Its solutions are end-to-end from purchase order management and fulfillment, to inventory and warehousing, to accounting and analytics.

We recommended Tecsys at $15 back in 2019 and it was one of the 30 best-performing stocks on the TSX over the next three years reaching over $60. However, its share price has pulled back as a result of the sell-off in the tech sector, even though Tecsys is generating record sales and has a record backlog and a robust pipeline.

Tecsys is also profitable and pays a dividend. Its peer group is trading at significantly higher multiples, so the pull-back presents a great buying opportunity for a high-quality tech company. We think Tecsys could be a $100 stock within a few years and a likely takeover candidate down the road.

NORTHLAND POWER (NPI TSX)

One of Canada’s leading renewable power producers and a global leader in offshore wind. NPI has significant operations in Europe and will benefit from the acceleration of Europe’s transition to clean energy as part of its plan to lower its dependence on Russian gas. NPI also has significant growth projects in Taiwan, Poland and Germany. It expects to quadruple its power production in the next seven years.

 The utility sector has been hammered on rising rates dragging down fast-growing renewable power producers like NPI. The stock is now trading at the low end of its historic valuation range on negative sentiment about European power price caps and retroactive repayments. However, this worry is grossly overblown as NPI has already reaffirmed guidance to reflect any new EU legislation with EBITDA growing significantly from last year. The market also wants to see NPI sell down a stake in its offshore wind project in Taiwan which would act as a positive catalyst for the stock to move higher. Great long-term investment in the transition to clean energy. NPI also pays a three per cent dividend.