Mar 22, 2017

Stephen Takacsy's Top Picks: March 22, 2017

BNN Bloomberg

Stephen Takacsy , BNN

Stephen Takacsy, chief investment officer and portfolio manager at Lester Asset Management

Focus: Canadian equities
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MARKET OUTLOOK
Valuations of most North American equities have become stretched on the hopes of corporate tax cuts and massive stimulus spending in the U.S. The “Trump bump” will soon become the “Trump slump” as the post-election honeymoon subsides and reality sets in about what the new administration is able to accomplish or not. We don’t believe that U.S. economic growth can be increased much on a sustainable basis, particularly as the Fed is on a path of normalizing interest rates to the upside. The U.S. election hasn’t changed the fact that we live in a slow-growth, highly-indebted, deflationary world with aging developed populations and excess capacity. There is also much uncertainty created by Trump’s protectionist rhetoric, which could have devastating effects on what little global growth there is, not to mention the potential negative effects from anti-globalization events overseas such as Brexit and upcoming European elections. Our focus has and continues to be been on Canadian companies, many of them small/mid-cap, that have local businesses including operations in the U.S., that will benefit from infrastructure and other spending, and/or from a stronger U.S. dollar. We are also holding over 15 per cent in cash waiting for better valuations before redeploying excess funds.

TOP PICKS

NAPEC (NPC.TO) – New position purchased late in 2016 at under $1 during new equity issue

Quebec-based leading provider of construction and maintenance services to electrical and gas utilities
Nearly 80 per cent of revenues are now from the U.S.
New management team has cleaned-up corporate structure and has a new strategic plan to aggressively grow core business and improve margins
Large capex programs underway in the U.S. to replace aging gas and electrical distribution systems
Opportunities could grow with further boost in U.S. infrastructure spending
Recently completed what should prove to be a very accretive acquisition in the NYC area. Pro-forma revenues of $400 million and backlog of nearly $800 million
Stock is very cheap at under 6x forward EBITDA versus U.S. comparable companies which have rallied since U.S. elections
Target price $2.50 within a few years

CORUS ENTERTAINMENT (CJRb.TO) – Core long-term holding

Leading Canadian specialty TV broadcaster of women and children’s content, generating strong margins and free cash flow
Will benefit from significant cost and revenue synergies from its acquisition of Shaw Media last year including strong targeted dynamic national advertising and bundling of local radio and conventional TV ads
We expect the company to surprise on the upside as subscriber revenues rise from new Disney and other channels, and advertising revenues resume growing as ad agency contracts are renewed on more favourable terms and some advertising dollars migrate back from digital platforms
New CRTC “skinny basic” and “Pick & Pay” rules have had a negligible impact. We also expect proprietary productions to ramp-up at Nelvana
Corus is focused on paying down debt and maintaining its attractive dividend yield of 8.8 per cent
Best value large-cap stock on the TSX trading around 12x forward P/E

VERESEN (VSN.TO) – Core long-term holding

One of the cheapest energy infrastructure stocks on the TSX
Leading pure play mid-stream liquids natural gas (LNG) pipeline and processor
Recently announced the sale of its power assets at a very attractive valuation of $1.2 billion (12x EBITDA) which will allow it to pay down debt and fund growth projects
Also looking to increase capacity on Alliance pipeline co-owned 50/50 with Enbridge
Free option of up to $6 per share on Jordan Cove LNG project
Very attractive and sustainable dividend yield of 7.2 per cent, with potential to increase the dividend within a few years

DISCLOSURE	PERSONAL	FAMILY	PORTFOLIO/FUND
NPC	Y	Y	Y
CJRb	Y	Y	Y
VSN	Y	Y	Y

PAST PICKS: MARCH 22, 2016

ANDREW PELLER (ADWa.TO) – Core long-term holding

Leading Canadian-owned, Ontario-based wine producer and marketer
Strong management
Has been successfully launching new products and reducing costs through efficiencies
Should earn over $1.60 per share in 2016, up from $1 per share a few years ago
Trading at a P/E of around 18x which is a large discount to comparable companies such as Corby’s and Constellation Brands
New regulations in Ontario allow wine to be sold in supermarkets, thus expanding distribution for local producers like Peller
Company also owns over 100 retail outlets
Holds undervalued real estate in Port Moody, B.C. worth several dollars per share
Increases dividend yearly
Company is worth over $16 on a take-out at 2x sales (Vincor)
No analyst coverage

Then: $9.01
Now: $10.49
Return: +16.38%
TR: +18.21%

LOGISTEC (LGTb.TO) – Core long-term holding

Leading Montreal-based maritime cargo handler and environmental services company
Owns stevedoring infrastructure and marine terminals in over 30 ports in Eastern Canada and the U.S.
Environmental division provides site remediation and trenchless water pipe repairs (Aquapipe)
Strong management
Recently doubled capacity at its Montreal container terminal, so costs have gone up without equivalent volume increase
Also suffered in 2016 from a serious fire at one of their U.S. terminals
Just reported strong fourth quarter results, as well as a few small acquisitions and a large new iron ore contract
We expect the company to resume growth in 2017
Trading at a reasonable 16x estimated forward P/E
Regularly increases dividend and buys back stock
No analyst coverage

Then: $38.94
Now: $35.04
Return: -10.01%
TR: -9.24%

TEN PEAKS (TPK.TO) – Owned since mid-2015

World’s only third-party processor of 100 per cent chemical-free, organic decaffeinated coffee, using the branded Swiss Water trademark, based in Burnaby, B.C.
Also provides green coffee storage and handling logistics services
Processes for and sells to large chains like Tim Horton’s and McDonald’s (only has 20 per cent of its U.S. business), specialty roasters (Third Wave specialty coffee shops), and global importers
Current plant is running at near full capacity, so recently raised funds at $8.80 to build a second plant in the Vancouver area
Strong growth in the U.S. and internationally where majority of the decaf market is still chemical-based (chemicals banned in Japan)
Just reported strong fourth quarter results
We are expecting sales volume growth to resume in 2017
The stock is cheap at under 14x trailing P/E for a high-barriers-to-entry, global-growth, free-cash-flow generating business
Bought more shares in $6s and now own over six per cent of the company
Also pays a 3.8 per cent dividend

Then: $9.00
Now: $6.35
Return: -29.44%
TR: -27.12%

TOTAL RETURN AVERAGE: -6.05%