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Financial Post - On Lester's Fund Finding Torque in Tech Names

Although Stephen Takacsy has amassed a strong base of dividend-paying stocks in the Lester Canadian Equity Fund, the portfolio manager is finding torque in technology names.

The fund’s 12% weighting in the technology sector includes big gainers such as Open Text Corp., Redknee Solutions Inc., Tecsys Inc., QHR Corp., NeuLion Inc. and BSM Technologies Inc.

The chief investment officer at Montreal-based Lester Asset Management continues to look for value in smaller companies that are followed by few analysts at small shops. “A lot of people bailed out of BlackBerry and are looking for new technology names. So this group has benefited from fund flows; certainly Open Text has.”

But Takacsy is also finding opportunity in beaten-up high-yield stocks, which he believes were unfairly thrown out with the bathwater.

“Any time there is a big correction in yield stocks, which there have been two of in the past six months, they’ve bounced back quite nicely,” Takacsy said. “Those have been good buying opportunities in areas like pipelines and power companies.”

The fund has a 23% weighting in utilities, which includes power, energy infrastructure and renewable energy companies. “They aren’t just yield stocks, some of them provide good growth as well,” Takacsy said.

For example, Pembina Pipeline Corp. and Emera Inc. have large projects underway, and Algonquin Power & Utilities Corp. and Innergex Renewable Energy Inc. are expected to significantly grow production capacity and dividends in the next few years.

“The risk is in securities that are hyper-sensitive to rising yields, such as most REITs and bonds. But if you own companies like BCE Inc., Telus Corp., Fortis Inc. or TransCanada Corp. that are able to grow their dividends — sometimes twice a year — you don’t have much to worry about,” the manager said. “They may not be cheap by traditional measures, but they are not that expensive given where rates are today.”



The position: Recently added to long-term holding

Why do you like it? Wi-Lan shares came under pressure after the patent-licensing company lost a trial against Apple Inc. Takacsy expects the company to vigorously appeal the verdict, but the market will be focused on its strategic review.

“At the current share price, we see very limited downside and 50% upside,” the manager said, adding he expects the company will be sold in the next six months. “It’s worth at least $5 per share to a strategic partner and yields 4.7%, so you’re paid to wait.”

He noted Wi-LAN has $1.20 in cash per share and renewable licensing deals signed for the next four years, which means the company’s discounted net present value is at least $3.30 per share, Takacsy estimates.

Biggest risks: A deal fails to materialize; Apple appeal is disallowed.


The position: Recently added to holding first purchased in March 2013

Why do you like it? This owner and operator of shopping centres and strip malls, primarily in the Maritimes and Quebec, is converting into a REIT on Jan. 1, 2014.

“It’s a real estate developer with tremendous growth, whose main tenant is Shoppers Drug Mart, providing safety.” Takacsy said. “The company is focused on increasing AFFO per share and consistently raises its dividend, which will cause the company to be revalued.”

Plazacorp also acquired Key REIT earlier in 2013, giving it “lots of undervalued real estate that it will either develop or monetize,” Takacsy added.

Biggest risk: Rising bond yields.


The position: Long-term holding

Why do you like it? This industrial waste recycling and services company has become one of the largest players in the North American market.

“They’ve migrated their business model from one-off site cleanups towards setting up on-premise facilities with long-term contracts, so more and more of their revenues are recurring,” Takacsy said. “They have very good margins, made huge investments to grow the business and regularly increase their dividend while still trading at a very reasonable valuation. Also, stricter environmental regulations provide good tailwinds.”

Biggest risk: A substantial decline in oil prices and drilling activity.


Shoppers Drug Mart Corp. (SC/TSX)

The position: Long-term holding sold in October

Why don’t you like it? Shoppers used to be one of the fund’s largest positions, but Takacsy does not want to own the shares of Loblaw Cos. Ltd. that are being offered as part of its takeover price.

“We love the pharmacy business, but we don’t like food retailing, which is under increasing competitive pressure right now,” he said. “The sector is expensive and margins are already razor thin.”

Potential positive: Better-than-expected synergies when combining Loblaw and Shoppers.