Stephen Takacsy, president and CEO, and chief investment officer of Lester Asset Management
Focus: Canadian stocks
MARKET OUTLOOK:
We continue to see a positive environment for both stocks and bonds in Canada. Inflation has come down quickly in the past year and has now reached the two per cent target in Canada and the Bank of Canada is cutting rates now. The Canadian economy has been quite resilient despite previous aggressive rate hikes, but the job market has slowed down from the lag effects of those hikes which the Bank of Canada is gauging carefully. We always believed in the soft landing for the economy and that’s what we’ve experienced so far in Canada. With respect to stock and bond markets, last time on BNN Bloomberg I mentioned a “goldilocks” scenario. This is where disinflation occurs alongside a still-growing economy, which when combined with interest rate cuts, is like rocket fuel for stocks and bonds, and that’s what we’ve seen in those markets recently.
In the fixed income market, while the Canadian bond index is only up around 5.5 per cent this year, we’ve seen a massive rally in shorter term corporate bonds and preferred shares, which is why our Canadian Fixed Income Fund is up over 11 per cent this year. In equities, while there’s been a broad-based rally, one still needs to be very selective as the consumer and the global economy are slowing down, and we now have the threat of Trump tariffs. We think his bark is bigger than his bite, as it was the last time he was elected, and that he is really going after cheap Chinese exports again, whereas in Canada and Mexico he really wants the borders tightened. In any case, we think U.S. tariffs would have minimal impact on our CAD Equity Fund since we have little exposure to resources or exporters to the U.S. Additionally most of our companies are either domestic or have manufacturing facilities in the U.S. or sell products that are exempt from tariffs like FDA approved ones or are in services businesses.
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TOP PICKS:
SAVARIA (SIS – TSX): Strong Long-Term Tailwinds
Savaria is a global leader in home accessibility and patient handling products. It manufactures and sells home stairlifts and home elevators, as well as mattresses and ceiling lifts for long term care facilities. Earnings before interest, taxes, depreciation, and amortization (EBITDA) margins in 2024 have improved significantly to over 18 per cent. This is thanks to its Savaria One program aimed at helping achieve 20 per cent EBITDA margins by next year though supply chain and operational improvements and $1 billion in sales through cross-selling opportunities. The stock is down 15 per cent on the threat of Trump tariffs which is a gross overreaction and has created a good buying opportunity. Savaria’s patient handling business is all made in the U.S. and most of their home accessibility business is FDA approved, meaning that its products, whether from Canada, Mexico, or China, would be exempt from tariffs. The Bourrassa family has built a great global company that is benefiting from powerful tailwinds of aging demographics and the desire to live at home longer. The stock is now trading at under 10 times forward EBITDA and we see it reaching $30 by the end of next year if the company meets it targets which it seems on track to achieve.
JAMIESON WELLNESS (JWEL – TSX): Accelerating Global Growth
JWEL is Canada’s number one brand in vitamin and minerals supplements (VMS) with 25 per cent market share. This business does 25 per cent EBITDA margins and generates tons of cash that is funding an aggressive international expansion: in the U.S. with the acquisition of Youth Theory and in China in partnership with one of China’s largest Private Equity firms. Jamieson is guiding for strong growth this year driven by double digit growth in Canada and the U.S., and 80 per cent growth in China. Guidance is around $750 million in sales, $140 million in EBITDA, and $1.60 in earning per share (EPS). The stock used to be very expensive, but the valuation has come down significantly to under 11 times forward EBITDA and 17 times forward earnings, providing a great entry point in this unique high-quality growth company. Publicly listed comparable VMS companies trade at much higher multiples, and takeovers in the VMS industry have taken place at over 20 times EBITDA which would value Jamieson at over $60 per share. We think that within a few years, a large global player will be interested in acquiring Jamieson.
STELLA JONES (SJ - TSX): - Defensive Growth at a Reasonable Price
Leading North American producer of railway ties and utility poles. The railway tie industry is a duopoly and enjoys re-occurring sales from the replacement of railway ties. The utility poles business is growing at double digits from the replacement of older poles, the expansion of the electric power grid, and the launch of new fire-resistant poles. It also has a residential lumber business through Home Depot which benefitted from the renovation boom. Balance sheet is strong allowing the company to continue consolidating the utility pole sector. The company also generates lots of free cash flow and is returning massive amounts capital to shareholders through aggressive share buy-backs and regular dividend hikes. The stock is down 25 per cent from its highs due to a rare quarterly miss from a slowdown in pole sales to utilities presenting a great entry point. This a high-quality defensive growth stock that is now trading at under 12 times earnings.
| DISCLOSURE | PERSONAL | FAMILY | PORTFOLIO/FUND |
|---|---|---|---|
| SIS | Y | Y | Y |
| JWEL | Y | Y | Y |
| SJ | Y | Y | Y |
PAST PICKS: January 23, 2024
TECSYS INC. (TCS – TSX): High-Quality Small Cap Tech Stock
- Then: $33.17
- Now: $45.04
- Return: 36%
- Total Return: 37%
PARK LAWN CORP. (PLC – TSX): Acquired by Private Equity
- Then: $19.43
- Now: $26.48
- Return: 36%
- Total Return: 37%
QUEBECOR (QBR.B – TSX): High Margin Wireless Growth on a Silver Platter
- Then: $32.88
- Now: $32.56
- Return: 1%
- Total Return: 3%
Total Return Average: 26%
| DISCLOSURE | PERSONAL | FAMILY | PORTFOLIO/FUND |
|---|---|---|---|
| TCS | Y | Y | Y |
| PLC | Y | Y | Y |
| QBR.B | Y | Y | Y |