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

FOCUS: Canadian stocks  

MARKET OUTLOOK:

Stock markets have pulled back on fears of further rate hikes, recession and the recent failure of a few small regional banks which we believe are isolated cases. Bond markets continue to be very volatile and credit spreads have widened unnecessarily despite the economy being very strong. We believe that this volatility has presented some excellent buying opportunities in both stocks and bonds. In particular, corporate bonds are yielding “equity-like” returns of between six per cent and eight per cent, which investors should take advantage of since this won’t last. Inflation is coming down as supply chain issues ease and demand softens, and the rate hiking cycle is ending (it already has in Canada). If there is a pronounced recession or more turmoil in the banking sector, central banks might even cut rates which would cause a rally in both stocks and bonds.

We believe that in Canada and the U.S., there will be a “soft landing” as those economies are strong with low unemployment. Investor sentiment has been extremely bearish which is a great contrarian signal and as we know when sentiment starts to turn positive, markets usually rise sharply. This is why it’s important to stay the course. We remain nearly fully invested, but well diversified in recession-resistant businesses that are generating record profits. We also own many safe, high dividend-yielding companies like telecoms, pipelines, utilities and now banks which continue to look very attractive. We also own companies benefiting from long-term trends such as aging demographics (Savaria, Park Lawn, Neighbourly), digitization and automation (CGI, Tecsys, MDF, and ATS) as well as infrastructure (Stella Jones, AG Growth, Logistec). We also continue to take advantage of volatility to add high-quality companies at more reasonable valuations as share prices come down such as WSP, Colliers, and CCL).

• Sign up for the Market Call Top Picks newsletter at bnnbloomberg.ca/subscribe
• Listen to the Market Call podcast on iHeart, or wherever you get your podcasts

TOP PICKS:

HIGH LINER FOODS (HLF TSX)

High Liner is a 120-year-old company that’s one of North America’s leading brands and processors of frozen value-added seafood to both food retailers and the food service sector. High Liner is the number one value-added player in Canada in the retail sector and the number one supplier in the U.S. in the food service sector. The industry is benefiting from healthier eating habits as more consumers add seafood to their diets, although per capita consumption in the U.S. is still very low.

Sales and EBITDA have been growing steadily over the past few years, and the company recently announced record sales and profits. It also just raised its dividend by 30 per cent (yields 3.5 per cent) which is a strong vote of confidence in the future. It expects to grow sales and EBITDA again in 2023 and generate significant free cash flow to pay down debt. Insiders own 40 per cent of the company, so have plenty of skin in the game. The stock is dirt cheap trading at around 7X earnings. 

LOGISTEC (LGT.B TSX)

Logistec provides marine cargo handling services in 60 ports across North America including the largest container terminal in Montreal (load/unload cargo from ships). Business is booming in North American ports and they just announced its largest and most strategic acquisition yet giving them a strong presence in the Great Lakes. Logistec also has a fast-growing environmental business that provides soil and water remediation services and repairs water pipes and entered 2023 with a record backlog. The company just announced record profits of over $4 a share and is trading at a P/E of around 10X earnings and 6.5X EBITDA. The stock has rarely ever been this cheap. Multiples in the marine infrastructure and environmental businesses are significantly higher, and on a comparable basis, Logistec’s shares should be trading at around $80. The Paquin family owns a significant stake in the company and we would expect them to find ways of getting its share price to better reflect the company’s true value through aggressive buybacks and other means.

DEFINITY FINANCIAL (DFY TSX)

DFY is Canada’s sixth-largest property and casualty insurance company. Roughly 70 per cent of its policies are personal (auto, property and pet insurance) and 30 per cent commercial, mainly in Ontario. Roughly 60 per cent of its personal insurance is auto and it is looking to add more home and other types of insurance. It demutualized around 18 months ago by listing on the TSX, so it is not very well known compared to Intact Financial which is the number one player in Canada and also listed on the TSX. Despite growing faster than Intact and releasing strong results, its stock only trades at 14X earnings. It also trades at around 1.5X book value, a significant discount to Intact at 2.2X. Now that it is demutualized, it’s allowed to use its balance sheet to do mergers and acquisitions. With the recent pull-back, this is a great entry point to buy a fast-growing well-managed P&C company. 

PAST PICKS: March 29, 2022

POLLARD BANKNOTE (PBL TSX)

• Then: $26.25
• Now: $21.10
• Return: -20%
• Total Return: -19%

AG GROWTH (AFN TSX)

• Then: $44.05
• Now: $59.84
• Return: 36%
• Total Return: 38%

STELLA-JONES (SJ TSX)

• Then: $37.72
• Now: $50.11
• Return: 33%
• Total Return: 36%

Total Return Average: 18%