2022 has arrived with a good dose of uncertainty as far as where the market is heading, what with inflation and interest rate hikes very much top of mind while COVID-19, the party guest that’s certainly worn out its welcome, remains a wildcard this year just as it was in 2021.
All the more reason to take heed of what Laurentian Bank Securities has to say about stock picking for the year ahead. LBS delivered on Wednesday its Preferred Picks 2022, covering eight sectors of the market and featuring among others Canadian software name Sylogist (Sylogist Stock Quote, Charts, News, Analysts, Financials TSX:SYZ) and aerospace company Hroux-Devtek (Hroux-Devtek Stock Quote, Charts, News, Analysts, Financials TSX:HRX).
Laurentian’s picks in 2021 underperformed the broader market, returning 9.1 per cent compared to the TSX Composite and Small Cap indices which delivered 12.9 per cent and 7.4 per cent, respectively. Laurentian said concentration and volatility over the second half tied to economic and pandemic-related news were contributing factors last year.
“While we underperformed against the S&P/TSX Composite index [in 2021] likely on a lack of oil and gas exposure, our coverage universe returned 20.3 per cent, generating a positive alpha of 3.8 per cent against the TSX Small Cap index, which speaks to the diversified nature of our portfolio,” the Laurentian report said.
“As we enter 2022 against the backdrop of an uncertain macroeconomic environment and a potential re-emergence of COVID-19, our basket of Preferred Picks focuses on companies with sound business models, healthy balance sheets and cash flow generation, and positive organic growth,” Laurentian said.
In total, Laurentian has picked Sylogist in Diversified Technology, Hroux-Devtek in Diversified, WSP Global in Industrials, Major Drilling International in Mining (Gold & Services), Pure Gold Mining in Mining (Gold), Galway Metals in Mining (Base & Precious Metals), Boardwalk REIT in Real Estate Investment Trusts and Pet Valu Holdings in Special Situations.
On the Diversified Technology sector, Laurentian analyst Nick Agostino said the pandemic has created a number of supply chain challenges and headwinds, with many of the IT companies he follows having spoken about product delays. As such, the analyst continues to recommend Kinaxis and TECSYS from the supply chain software side as standing to benefit while mdf Commerce and Descartes are also to be noted within the space.
As for IT companies, Agostino said there’s likely to be increased spending by businesses on IT in 2022 and into 2023 as some pent-up demand which has been deferred should make for above-normal growth in the IT space.
“That said, we note the strong underlying demand is being witnessed by IT providers Converge Technology (55 per cent YTD growth including M&A despite deferred sales), Softchoice (7 per cent organic growth YTD), Alithya (28 per cent LTM growth, 15 per cent organic),” Agostino wrote.
“The heightened IT (software) spending should also benefit our preferred pick, Sylogist, as well as 5N Plus, specifically in the semi-conductor materials market to supports sectors such as renewable energy, medical imaging, aerospace, security, sensing and telecommunications. We also note conglomerate Calian saw their technology-centric unit IT grow 42 per cent YoY (7 per cent organic) and Advanced Technology grow 9 per cent,” he said.
On the “stay-at-home” stocks which did well in the early days of the pandemic, Agostino noted their less stellar performance more lately while at the same time holding out promise for those names offering sought-after products.
“We believe that innovative companies that support a hybrid work environment and have a demonstrated competitive advantage will continue to be in demand as employers seek to accommodate a workforce in search of better work-life balance and mobility. At the same time, we expect companies to source cost saving technology solutions that support this new paradigm. One such company is Docebo, where YTD organic growth is >60 per cent,” Agostino said.
Finally, on the telehealth market within the tech sector, Agostino said expanding multiples for a number of names earlier on in the pandemic also led to contraction later on.
“While companies such as WELL Health, CloudMD and Dialogue have all delivered meaningful growth (including +ten per cent organic growth), we believe investor fatigue and an overcrowded marketplace overshadow solid company performances. In our view, consolidation may be a theme that plays out in 2022 to build end-to- end market leaders. We highlight CloudMD’s proposed acquisition of MindBeacon as an example. We focus investors to Savaria for a company with steady profitable growth, solid fundaments (aging population), and a rising dividend as a means for healthcare exposure,” he said.
On Sylogist, the software company with enterprise resource planning solutions for the public sector, its share price has been up and down in recent years, finishing 2021 up nine per cent. But Agostino is calling for a better 2022 and has reiterated his “Buy” rating and $16.00 target price, which at the time of publication represented a projected 12-month return of 37.6 per cent.
Agostino said Sylogist is set up for key catalysts with a robust pipeline of acquisition targets complementing its organic growth prospects across all of its market segments. Agostino thinks that with a new management team the company is aiming to trade some EBITDA margin for faster sales growth where it’s targeting high single-digit organic growth while leveraging its IP innovation and plus-20-year relationship with Microsoft.
“Historically, the company has generated low single-digit organic growth with EBITDA margins recently exceeding 50 per cent. However, with a goal of remaining a ‘Rule of 40’ company, new management aims to deliver high single-digit organic growth through a modest increase in S&M spending and augmenting growth with $20–25 million in annual M&A-derived revenue, while maintaining EBITDA margins in the 30 per cent range,” Agostino said.
“As an indication of execution, having completed one year at the helm of SYZ, CEO Bill Wood has already acquired $17.7 million of incremental M&A revenue from three separate transactions, which should benefit forward revenue growth. We believe management’s successful execution should result in a higher multiple re-rating on growing estimates to reflect the company’s growth outperformance relative to peers,” he said.
As for Hroux-Devtek, which designs, builds and services landing gear systems and components for commercial and defence customers, Agostino said key catalysts could come from M&A announcements, a faster-than-expected rebound in its Civil segment and an allocation of capital towards a dividend payout.
“We expect HRX to leverage its balance sheet for M&A growth, alongside a strong FCF ($67 million in F21, ~11 per cent yield) that should result in further de-leveraging over the coming quarters. The recent landing gear design contract with Lockheed Martin is reflective of HRX’s ability to undertake more sophisticated work, enhancing its brand and making it a more attractive acquirer,” Agostino said.
Agostino maintained his “Buy” rating and $23.00 target price for HRX, which at press time represented a projected one-year return of 36.3 per cent.