Echelon Capital Markets has delivered its Top Picks Portfolio for the first quarter, and innovation sector stocks are featured prominently. The list, which came to clients on Wednesday, calls for repeat outperformance from a number of names in technology, healthcare and cannabis.
Investment bankers Echelon Capital has done amazingly with its Top Picks recently, especially through its focus on the small cap space. Last quarter, Echelon’s Top Picks delivered a return of 40.1 per cent versus the S&P/TSX Composite return of 9.0 per cent, the S&P/TSX Small Cap Index gains of 23.5 per cent and even the US Small Cap Index Russell 2000’s return of 31.4 per cent.
More broadly, Echelon’s Top Picks 2020 full-year return was 74.0 per cent, which was above the S&P/TSX Composite and its Small Cap Index by 68.4 per cent and 61.1 per cent, respectively, while over the past three- and five-year periods for Echelon’s Top Picks were 109.7 per cent and 431.2 per cent, respectively, effectively crushing the S&P/TSX Composite at 18.2 per cent and 56.2 per cent, respectively, and their Small Cap Index at 7.0 per cent and 52.2 per cent, respectively.
Echelon advised investors to look for stocks with plenty of upcoming catalysts as well as those set to benefit from continuing secular growth, with eight of its 13 Q1 Picks standing as repeat performers, showing analysts’ confidence in their continuing strength.
“We continue to present our Top Picks Portfolio as an aggressive, catalyst-rich portfolio of high-growth, entrepreneurial companies. We have benefitted from positive catalysts with take-outs, product launch, mine development/resource enhancement, and regulatory approvals all common events. We specifically strive to select stocks that are catalyst-rich supported by proven execution, positioned for high growth, and backed by strong economics,” Echelon said.
Among the returning names are two IT services picks, starting with Converge Technology Solutions (Converge Technology Solutions Stock Quote, Chart, News, Analysts, Financials TSX:CTS), which engages in combining accelerators and foundational infrastructure solutions. Echelon analyst Rob Goff reiterated his “Speculative Buy” rating and raised his target price from $4.90 to $6.25 in a January 4 update, with the target representing at press time a projected one-year return of 25 per cent.
Goff said after two small but accretive acquisitions to round out 2020, he is looking for a lasting, positive response to the company’s $32-million acquisition of Vicom Computer Services, which puts Converge back on the path of larger acquisitions.
Converge was a big winner last quarter, where it returned 128 per cent for the quarter and it’s starting 2021 where it left off, vaulting ahead by a further 27 per cent since the start of January.
Goff projects Converge will continue on its path of solid acquisitions that bring with them cost synergies.
“We see many companies with profiles like its latest acquisition, Unique Digital (Oct.1/20), where they are challenged to properly service client demands for cloud services and where they lack the scale to realize full vendor savings. We believe the Company stands to build further shareholder value given the positive momentum of cross-selling its product suite for organic growth while key vendor relationships bring efficiencies, referrals, and acquisition candidates. We are bullish towards the Company’s ability to maintain its acquisition and organic growth momentum,” Goff wrote.
Another information tech company, Quisitive Technology Solutions (Quisitive Technology Solutions Stock Quote, Chart, News, Analysts, Financials TSXV:QUIS), delivered solidly in the Q4 with a return of 38.0 per cent, and Goff stays bullish on the cloud adoption trend in a market expected to grow by a 18-19-per-cent CAGR from 2020 all the way to 2027. Goff said Quisitive’s partnership with Microsoft is significant from the perspective of signing new deals and adding new capabilities.
“We view Quisitive’s IT Services as a solid contributor offering double-digit organic growth together with prospects of accretive acquisitions,” Goff said. “We look to LedgerPay as a potential company redefining asset where investors are afforded aggressive leverage to its upside. Double-digit private market benchmarks for IT Services providers would derive a value of ~$0.70+ per share for QUIS’s IT Services. We believe investors at current levels should view LedgerPay as a heavily discounted option where successful execution would support valuations well in excess of our value at C$1.40+ per share.”
Goff reiterated his “Speculative Buy” rating on QUIS on January 13 while lifting his target from $1.50 to $1.60, which translated to a projected return of 60.0 per cent.
Another returning Top Pick is CloudMD Software & Services (CloudMD Software & Services Stock Quote, Chart, News, Analysts, TSXV:DOC), with Goff saying now is an attractive entry point for investors as the stock has had some recent decline in the absence of further deal announcements.
Goff said the company’s December announcement of a US$14.8-million acquisition in IDYA4 is a positive advance for CloudMD, while private client contract announcements and revenue momentum from acquisitions SnapClarity and Humanacare should be positive catalysts for 2021.
“We remain resolutely bullish toward the telehealth industry and those companies leveraging differentiated technology, efficient distribution, and comprehensive service capabilities to provide integrated healthcare services. We support primary, ongoing care ahead of episodic care models. We see the integration of acquisitions made to date together with those in its pipeline adding both scale and clarity to its strategic deployment,” Goff said.
The analyst delivered a January 12 update where he reiterated his “Speculative Buy” rating and $3.25 target, which at press time represented a projected one-year return of 41.3 per cent.
Skylight Health Group (Skylight Health Group Stock Quote, Chart, News, Analysts, Financials TSXV:SHG) became a first-time Top Pick member, with Goff saying the healthcare services and tech company, which has primary care, sub-specialty, allied health, lab and diagnostic testing and telemedicine businesses, should do well as a consolidator in a fragmented US healthcare industry.
“We believe current healthcare needs together with provider challenges in a fragmented industry present the opportunity for significant and sustained shareholder value creation. Returns rest squarely upon the execution of the Company’s transition to primary care and its acquisition capabilities. With a clearly defined market opportunity, our bullish stance reflects confidence in management and the Board’s ability to successfully execute,” Goff wrote.
Goff gave Skylight a “Speculative Buy” rating in a January 7 update while lifting his target from $1.45 to $1.85, which represented a projected return of 41.0 per cent.
Echelon analyst Amr Ezzat reiterated his Top Pick status for mdf commerce (mdf commerce Stock Quote, Chart, News, Analysts, Financials TSX:MDF), a Quebec-based SaaS company providing e-commerce and strategic solutions, with Ezzat described the company’s change from a ‘steady eddy’ operation with anemic growth to one delivering healthy growth rates under new management and the divestment of its underperforming consumer platforms segment
“Now that this segment is divested, mdf’s growth rates are considerably higher,” Ezzat said. “Namely, FQ221 numbers came ahead of our estimates (we were the Street high) with the top line growing 14.0 per cent year-over-year and 1.1 per cent sequentially.”
Ezzat reiterated his “Buy” rating and $17.00 target for mdf, which at press time representing a projected return of 30.4 per cent.
Optical sensors company Photon Control (Photon Control Stock Quote, Chart, News, Analysts, Financials TSX:PHO) did very well over the fourth quarter 2020, moving up 43.3 per cent, but Ezzat is staying bullish on the company’s short- and long-term outlook. Ezzat expects PHO to continue riding sectoral tailwinds in e-commerce, gaming, video streaming, AI, cloud computing, IoT and 5G deployment, all of which should drive additional data centre capacity requirements, to Photon Control’s benefit.
“We believe Photon’s balance sheet strength together with its leverage to an economic up-cycle constitute attractive risk-reward characteristics. Despite the strong stock performance since our late 2015 initiation, valuation remains exceptionally attractive with earnings growth keeping pace with stock performance,” Ezzat said.
The analyst reaffirmed his “Buy” rating and $3.00 target, which translated to a projected return of 49.3 per cent.
On the cannabis front, Echelon analyst Andrew Semple reaffirmed both Ayr Strategies (Ayr Strategies Stock Quote, Chart, News, Analysts, Financials CSE:AYR.A) and Green Thumb Industries (Green Thumb Industries Stock Quote, Chart, News, Analysts, Financials CSE:GTII) as Top Picks for the first quarter 2021.
Ayr, which has cannabis operations in Nevada and Massachusetts, has already more than tripled since Semple first nominated it as a Top Pick in July 2020, but the analyst believes the stock is still heavily discounted to its peers, with plenty of catalysts in 2021 to help close the gap. Ayr has five pending M&A transactions to complete and should see continued growth in its financials, while on the regulatory front, tailwinds are blowing in the US at the federal level.
“In addition to multiple expansion, we see ample room for further upside to our estimates and DCF valuation parameters if Ayr is successful in quickly integrating pending acquisitions and realizing growth opportunities, supporting additional upside beyond what we have so far incorporated,” Semple wrote.
Semple gave a January 8 update on Ayr where he reiterated his “Buy” rating and C$58.00 target, which at press time represented a return of 55.1 per cent.
One of the larger MSOs in the US, Green Thumb (Green Thumb Stock Quote, Chart, News, Analysts, Financials CSE:GTII) also got the nod as a returning Top Pick, even as the stock returned 144 per cent last year. Semple praised the company’s balance sheet, which allows room for more M&A announcements in the near term, while the company should be a prime beneficiary of cannabis reform at the federal level.
A January 8 update had Semple reaffirming his “Buy” rating and C$38.00 target for GTI, which at press time represented a return of 8.0 per cent.
Semple added Canadian cannabis retailer, distributor and e-commerce company High Tide (High Tide Stock Quote, Chart, News, Analysts, Financials TSXV:HITI) to his Top Pick list, saying despite a return of 74.0 per cent in 2020 the shares currently trade at an unjustly low valuation, which “does not account for High Tide’s long-term growth potential and significant progress made in 2020 to de-risk the company and its balance sheet.”
HITI received a maintained “Speculative Buy” rating and $0.60 per share target in a January 8 update from Semple, which represented at press time a return of 126 per cent.
Finally, analyst Stefan Quenneville nominated US-based in-home monitoring and chronic disease management services company Protech Home Medical (Protech Home Medical Stock Quote, Chart, News, Analysts, Financials TSXV:PTQ) to Echelon’s Top Pick list, saying he’s staying bullish on the home care-focused durable medical equipment industry.
Quenneville said Protech is in “an M&A sweet spot where it is able to make accretive acquisitions of the many smaller players in this fragmented market, while it has achieved a regional scale that would make it an attractive target for one of the handful of larger national players.”
The analyst’s January 13 update gave Protech a “Buy” rating and $2.30 target, which at press time represented a projected return of 31 per cent.
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