Discovery Commnications, which is behind cable TV channels such as Animal Planet, HGTV and the Food Network, launched a streaming service last year and trades at about 9 times forward earnings.Amanda Edwards/Getty Images
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Value stocks – wallflowers for over a decade – are turning heads again.
They’re garnering attention as high-priced growth names, particularly in the technology sector, are being hit hard amid expectations of rising interest rates and persistent inflation.
Although value names are cheap or underappreciated stocks that can offer a margin of safety, investors still need to watch out for “value traps.” Some stocks are cheap for good reason and will underperform.
Still, some growth stocks can end up trading inexpensively, so it’s like getting the best of both worlds. Given that small-cap names are often underfollowed, buying opportunities can often surface in this space too.
We asked three value-oriented portfolio managers for their top picks.
Alex Sasso, chief executive officer and portfolio manager, NCM Asset Management Ltd.
His fund: NCM Small Companies Class
The pick: Major Drilling Group Inc. MDI-T
52-week range: $6.41 to $11.34 a share
Major Drilling, which is emerging from a decade-long cyclical downturn, is poised to benefit from rising demand for its services by the gold and copper industries, Mr. Sasso says.
The Moncton, N.B.-based firm, which has more than 600 rigs, is getting higher prices for drilling while utilization rates are improving, he adds. Getting skilled crews has been a challenge, but “we expect the back half of calendar 2022 to be quite strong.” With reserves for large-cap gold companies down an average of 35 per cent from their peak in 2012, they’re motivated to spend on exploration, he says.
Copper demand is rising from the growth in electric vehicles, while producers are also looking for safer jurisdictions to mine due to political uncertainty in South American countries tied to this industry. Falling commodity prices are a risk, but that’s lower now, he adds. Major Drilling’s stock, which trades at 7.5 times cash flow, is “definitely a bargain.”
The pick: Mullen Group Ltd. MTL-T
52-week range: $10.14 to $14.48 a share
Mullen Group, a major Canadian transportation company, is expected to benefit from price increases for its services plus additional revenue from tuck-in acquisitions, Mr. Sasso says.
The Calgary-based firm, which also provides logistic services, has projected revenue of between $1.6 and $1.7-billion, and operating earnings of $260-million in its 2022 business plan. Trucking prices in Canada in the past had been lower than in the U.S., but that’s changing as the COVID-19 pandemic has caused a driver shortage in both countries, he notes. “In Canada, those prices are still stubbornly low, and we think that is going to change as we move through 2022.”
Mullen’s shares, which also have a 5-per-cent dividend yield, trade cheaply at 5.5 times cash flow and 14 times 2022 earnings, he says. The variability in Mullen’s earnings numbers can be a risk, but that’s lower now that “we are in a tight market.”
Stephen Takacsy, CEO, chief investment officer and lead portfolio manager, Lester Asset Management Inc.
His fund: LAM Canadian Equity Fund
The pick: Logistec Corp. LGT-B-T
52-week range: $36.05 to $47.07 a share
Logistec, a provider of marine-cargo handling services, is a compelling investment because its business is booming amid supply-chain disruptions, while its stock trades at a deep discount to its value, Mr. Takacsy says.
Montreal-based Logistec is part-owner of the city’s largest container terminal and serves more than 54 North American ports. It also has a fast-growing environmental business focused on water infrastructure repairs and soil remediation. Its stock trades at 7.5 times earnings before interest, taxes, depreciation, and amortization (EBITDA) and 12 times forward earnings, partly because it has no analyst coverage, he says. It’s also “not the most liquid stock” given that the Paquin family controls 45 per cent of the equity.
Using a sum-of-the parts valuation, the stock should trade at $70 to $80 a share, he says. There is little risk in this stock because Logistec is well-run, has never lost money and has always raised its dividend, he adds.
The pick: Carerx Corp. CRRX-T
52-week range: $4.50 to $6.94 a share
Carerx, which is Canada’s largest institutional pharmacy serving retirement and nursing homes, is a consolidation play with an aging population tailwind and shares that are currently “really cheap,” Mr. Takacsy says.
The Toronto-based firm, which has 23 per cent of its market niche and $400-million in annual sales, should soon get a full year’s impact from 2021′s two major acquisitions, he adds. Carerx, which gets cost synergies from closing duplicate fulfillment centres, is also automating the process of fulfilling prescriptions that should improve margins, he adds. It has launched a Pharmacy At Your Door service for seniors living at home, a telehealth service for seniors’ facilities, and has begun selling medical supplies to seniors’ homes.
The stock trades at about 7 times EBITDA, which is inexpensive for a predictable, stable business with good growth ahead, he says. The risk stems from any new government regulation limiting profitability.
Martin Cobb, senior vice-president, equities, and portfolio manager, Lorne Steinberg Wealth Management Inc.
His funds: Steinberg Canadian Dividend Growth Fund and Steinberg Global Value Equity Fund
The pick: Fairfax Financial Holdings Ltd. FFH-T
52-week range: $493 to $700 a share
Shares of Fairfax, a specialty insurance company, have been rebounding from its 2020 lows, but are still compelling given that they trade well below book value, Mr. Cobb says.
The Toronto-based holding company, which focuses on property and casualty insurance as well as reinsurance, became a more interesting play after communicating several years ago that it would stop issuing more shares for acquisitions and focus on running existing businesses, he says. Fairfax’s share count, which rose to a high of 28-million from a low of 14-million, are now back down to 24-million, he notes. It has investments that include Sporting Life group, a retail subsidiary, and a stake in restaurant chain operator Recipe Unlimited Corp.
Fairfax shares could trade around $1,100 in five years – equivalent to a 14-per-cent annualized return, including dividends, from today’s share price, he says. The big risk is Fairfax not allocating capital that’s most beneficial to shareholders.
The pick: Discovery Communications Inc. DISCA-Q
52-week range: US$21.66 to US$78.14 a share
Shares of Discovery Communications, which expects to close a deal this year to merge with AT&T Inc.’s WarnerMedia division, are trading at a very attractive valuation, Mr. Cobb says.
The New York-based firm, which is behind cable TV channels such as Animal Planet, HGTV and the Food Network, launched a streaming service last year and trades at about 9 times forward earnings, he adds. Its shares suffered a pullback last year after Achegos Capital Management LP was forced to liquidate its positions, including Discovery. When combined with WarnerMedia, which is home to HBO Max and Warner Bros. studios, the merger will create the third-largest streaming powerhouse after Netflix Inc. and Walt Disney Co., he says.
Still, Discovery shareholders, which will receive 29 per cent of the combined shares and take on proportionately more debt, will be somewhat diluted, he notes. A risk stems from competition in the streaming space.
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