In a research report titled So, You’re a Generalist Investor in 2024…, Eight Capital analyst Ty Collin named two top picks for the year ahead from his Consumer/Diversified coverage universe.
They are:
* Decisive Dividend Corp. (DE-X) with a “buy” rating and $11 target. The average is $10.50.
“Decisive Dividend acquires profitable, private manufacturing businesses with enterprise values up to $25-million that are going through a succession,” he said. “This is a transaction size band with relatively light competition, and the Company’s good reputation makes it an acquirer of choice for legacy-minded exiting business owners. The pipeline of opportunities is rich as Baby Boomers retire en masse over the next two decades, affording the Company a high degree of selectivity in the acquisition process. DE creates value twofold: by acquiring attractive businesses at reasonable valuations and reinvigorating their growth under its ownership. It has been a quiet few months for DE since their last acquisition on July 20, 2023, but we expect an active start to the year that could include multiple acquisitions, supported by recent additions to their headcount. Acquisitions have been a catalyst for the stock, which on average has traded up 5 per cent/9 per cent one/three months after an announcement, or up 10 per cent/36 per cent excluding April’s equity financing. On top of M&A, we expect that DE will soon announce a key debt syndication that brings bigger lenders into the cap table, validating its strategy and adding borrowing power to support growth.”
“While the Company has recently begun to attract some institutional investors, we believe its size still keeps it under the radar for many – though not for long if it continues to execute on deals, in our view. DE was the best performing stock in our diversified coverage universe last year at 59 per cent, and we expect that per-share earnings growth from accretive M&A and organic growth can drive further outperformance in 2024.”
* Pet Valu Holdings Ltd. (PET-T) with a “buy” rating and $47 target (a high on the Street). Average: $36.22.
“Despite stacking solid comp growth on top of two pandemic boom years, PET stock had a ‘ruff’ 2023 (sorry) as growth expectations reset to more normal levels and concerns festered over softness in consumer discretionary spending and the entry of Chewy (CHWY) into the Canadian market,” he said. “Now, PET begins 2024 trading at just 10.5 times 2024E EBITDA, a significant discount to other Franchisors at 14 times and its average since the IPO of 13 times. While the current valuation implies a very cautious outlook on PET’s growth, we note that the pet industry has not seen a year of declining sales in data going back to the early 1980s, and PET will likely grow its store count by 6 per cent next year (40 – 50 units), while cycling easier comps than in 2023. Additionally, our channel checks indicate that U.S. online competitor, Chewy, is taking a gradual approach to the Canadian market and, in any case, targets a different core customer than PET. This leads us to believe that the bad news is priced in, and sentiment might already have bottomed. The stock has rallied 30 per cent since hitting a low of $23.75 on October 5 (outperforming Canadian consumer discretionary peers by 22 per cent) and reacted 6 per cent to a small top-line miss in Q3. Early indications suggest that Canadian consumer spending surprised to the upside over the critical holiday period, potentially setting up retailers like PET to outperform expectations when they report Q4 results in March.”