Lester Asset Management CEO Stephen Takacsy argues that the risk-to-reward ratio is best among emerging stocks, a description that fits both of his ‘best buy’ picks, manufacturing stock Grande West Transportation Group Inc. and consumer goods stock Diamond Estates Wines & Spirits Inc.
Considering its close cultural, economic and physical ties to Canada, not to mention its colourful leader, it is hardly surprising United States-related trade worries have dominated recent business headlines. However, Stephen Takacsy, president and chief executive officer at Lester Asset Management in Montreal, suggests that investors would do well to pay attention to other potential hotspots that could set the global economy ablaze.
Asked if there are any upcoming events that are very likely to drive future market movements, especially ones investors may be ignoring, he replies that Europe and China are the greatest concern.
European and Chinese debt a big concern
“Things in Europe were flaring up over and over and over. I still think that’s a big risk out there. There’s a lot of debt,” he says. “If that thing blows up, watch out.” Mr. Takacsy notes that populist parties opposed to the European Union have continued to gain ground on the continent. Meanwhile, he adds, German Chancellor and pro-European co-operation stalwart Angela Merkel is “on thin ice” as she navigates coalition rule in her fourth term.
The analyst also points to concerns about the degree of debt borne by the official banking and shadow banking systems in China. “You’ve really got to wonder how bad is the credit system in China and that obviously can have ripple effects.”
By contrast, he largely downplays the impact of other, more prominent disputes, such as that between the United States and North Korea. Nevertheless, Mr. Takacsy says that US President Donald Trump’s tough talk on trade and foreign relations required a response from Lester “as soon as Trump was elected”.
Thankfully for his clients, he explains, “we don’t have a lot of pure manufacturers or pure exporters of basic goods, so there was very little we had to do with the portfolio” to adjust.
When he joined Lester Asset Management as chief investment officer in 2006, Mr. Takacsy implemented an “extremely long-term”, value-oriented investment strategy. “The secret in this business is you don’t want to overpay for stuff. We also tend to avoid resource stocks . . . anything to do with development, exploration. Those types of companies just consume way too much capital . . . although we do like the energy infrastructure space. Anything that requires infrastructure renewal or aging demographic is positive.”
Generally speaking, he urges caution and careful stock picking in light of rising interest rates and widespread protectionist sentiments, along with high share prices across the market. “That’s a big unknown, a big potential risk out there for investors. We just find it very expensive. Every year we’ve got to exercise more and more caution.”
He adds that the fastest-moving stocks have their own disadvantages. Much as investors must pay a “liquidity premium” because the companies trade quickly, those with less-robust trading volume offer an “illiquidity discount”.
Following these principles, Lester has consistently beat the S&P/TSX Composite Index for the last dozen years. In the five years up to March 2018, the firm boasted an annualized return of 9.9 per cent compared to 6.9 per cent for the index.
Finding the best risk-to-reward ratio
Mr. Takacsy argues that the risk-to-reward ratio is best among emerging stocks, a description that fits both of his ‘best buy’ picks, manufacturing stock Grande West Transportation Group Inc. (TSXV—BUS) and consumer goods stock Diamond Estates Wines & Spirits Inc. (TSXV—DWS).
Grande West’s claim to fame (and hopefully fortune) is: “They’ve developed this bus with the BC Transit authority that’s a bit smaller (models mainly range from 30 feet to 35 feet) than most buses and longer-lasting.” Made of a single shell, they are also less expensive to buy and more fuel efficient than competitors. “They started selling very well in Canada outside BC and they started to sell in the US,” says the analyst. To accommodate sales in the US and qualify for ‘buy local’ rules, the company has set up an office in Atlanta.
Mr. Takacsy predicts that Atlanta’s right-sizing transit policy will spur a trend of replacing longer buses with shorter ones to make routes more efficient. Grande West has between 40 and 50 proposals in the works at present, with an order backlog of 240 buses.
Diamond Estates’ core business is wine. However, its exposure to grape growing is limited, since its operations are oriented around wine production, marketing, and distribution. “They’re not taking the big risk of running a vineyard and all that,” says Mr. Takacsy. “You don’t want to be a grape grower necessarily. You want to be the company with the brands.” Some of its brands include Lakeview Cellars, 20 Bees, and Dan Aykroyd wines.
Diamond, itself cobbled together from many smaller firms, intends to further consolidate the industry. Mr. Takacsy predicts its sales, and share price, will quickly grow as Ontario expands beer sales in grocery stores, where Ontario winemakers such as Diamond receive premium shelf space.
(Disclosure: Lester owns about 10 per cent of Diamond’s total market capitalization.)
This is an edited version of an article that was originally published for subscribers in the July 20, 2018, issue of Investor’s Digest of Canada. You can profit from the award-winning advice subscribers receive regularly in Investor’s Digest of Canada.
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