Health care and consumer staples continue to be among the best-performing sectors on North American equity markets, with both established names and emerging companies getting love from investors. But all that attention creates high valuations, raising concerns about the potential upside for future returns and what might happen if sentiment takes a turn for the worse.
There are still plenty of opportunities in often-sexy sub-sectors such as biotech and healthy food alternatives, but the best values are often found in smaller companies, which is where Stephen Takacsy, chief investment officer at Montreal-based Lester Asset Management, is looking.
Approximately 30 per cent of the Lester Canadian Equity Fund is in large-cap dividend payers such as BCE Inc., Emera Inc. and Algonquin Power & Utilities Corp., but the rest of the portfolio is concentrated on smaller companies that often don’t get much attention from analysts.
“That’s where we continue to find the best value in what was otherwise an expensive market,” Takacsy said. “The indexes have been going up since the financial crisis, and they are primarily made up of large-cap companies.”
As investors continue to plow into exchange-traded funds, which typically have to hold the biggest and most liquid stocks, smaller, lesser-known companies offer much more attractive long-term prospects in segments that already have the market’s attention.
For example, Takacsy is optimistic about the health-care space, but isn’t finding a lot to choose from in Canada given the strong run-up in shares of Valeant Pharmaceuticals International Inc. and Concordia Healthcare Corp., and the risk of a bubble bursting in biotech.
Instead, Takacsy has positions in Prism Medical Ltd. (PM/TSX-V) and Savaria Corp. (SIS/TSX), both of which manufacture and distribute mobility solutions such as stair lifts.
“Health care has been a hot, but over-hyped and now overvalued sector,” he said. “These are more buyable names with more tangible businesses that are easier to understand and value.”
Savaria is twice the size of Prism, but the latter is much less expensive and is getting its growth from the U.S. market.
“It’s got great earnings growth in the U.S., plus you get the currency lift,” Takacsy said. “They are a sitting duck to be acquired at some point and are waiting for the right offer. Both companies would be a great fit together.”
A different way to play the aging demographics theme, he said, is through Park Lawn Corp. (PLC/TSX-V), Canada’s only publicly traded funeral home and cemetery operator.
Another market segment getting a lot of attention from investors is food, whether it’s sold at grocery stores, health-focused outlets or restaurants.
In an effort to gain more exposure to companies that are non-correlated to the market, somewhat recession proof, and generating more U.S. dollar revenue, Takacsy purchased Ten Peaks Coffee Co. Inc. (TPK/TSX).
This former income trust is the only company to have branded the Swiss Water trademark and process for extracting caffeine from coffee without using chemicals. It supplies Tim Hortons, McDonald’s Canada and many specialty coffee retailers.
“Customers insist on having chemical free, organic decaf — that’s where the market is going,” Takacsy said. “The traditional method of extracting caffeine uses chemicals that are harmful to your health, and they’ve also perfected the technique so you can’t tell the difference by taste.”
Ten Peaks also handles decaf coffee for third parties, but it is not yet able to resell the caffeine, as others do, to the energy drink market. If it is ever able to do this, Takacsy said it would provide another boost that is not factored into his analysis.
Another small-cap name in the portfolio is Asian Television Network International Ltd. (SAT/TSX-V), a specialty channel provider catering to a wide range of viewers, including the Chinese and Indian communities.
Takacsy noted that as an independent broadcaster, Asian Television will be a big beneficiary of new Canadian regulations that require the likes of Rogers Communications Inc. and BCE Inc. to match their own channel offerings with independent channels.
“They’ll definitely be a favoured supplier under the new regime,” he said. “Now that consumers have the option of a ‘skinny basic’ TV package, they’ll have extra money to buy additional specialty channels from Asian Television.”
In addition to paying a healthy dividend that produces a yield of almost four per cent, no debt and tons of cash, this company also fits the theme of being under most investors’ radar as it has no analyst coverage.