Top Picks for Q3, 2021 from Echelon Capital

With the new quarter upon us, Echelon Capital Markets has a fresh crop of picks for the third quarter featuring a number of highly-touted healthcare, tech and cannabis names. In a Top Picks report on Sunday, Echelon analysts said their chosen stocks are catalyst-rich and ready for strong returns.

Echelon touted its success over recent quarters where its Top Picks Portfolio finished the first half of 2021 with a collective return of 41.1 per cent. That’s against the S&P/TSX Composite and S&P Small Cap Indices at 17.3 per cent and 19.8 per cent, respectively. Over the longer run, Echelon’s Top Picks delivered a return of 109.7 per cent between 2018 and 2020 which outperformed the S&P/TSX Composite and S&P Small Cap Indices by 91.5 per cent and 102.7 per cent, respectively.

“As we look ahead to the remainder of 2021, we find opportunities for investors to continue accumulating positions in high-quality growth companies that stand to benefit from secular growth or upcoming catalysts,” Echelon said.

“We believe this formula offers the potential for long-term outperformance in various market conditions, as demonstrated by the track record of our Top Picks Portfolio, including the outperformance generated in 2020 which was volatile for stocks,” the report said.

Here’s a quick breakdown of Echelon’s Q3 Top Picks in healthcare, technology and cannabis.

Analyst Amr Ezzat added shredding business Redishred Capital (Redishred Capital Stock Quote, Chart, News, Analysts, Financials TSXV:KUT) to his list, saying recent share price weakness presents an opportunity for investors looking for a position in a solid and profitable operation with lots of room for growth. Ezzat said the recent underperformance should be put down to the pandemic impacting operations which should dissipate with the US economy reopening. Moreover, the analyst noted that many of Redishred’s franchisees are up for renewal in the next three years and he expects management will be deploying capital for accretive tuck-ins.

“We benchmark Redishred to a set of companies in the shredding and waste management industries. KUT trades at a steep discount to the aforementioned peer groups on an NTM EBITDA basis (9.3x versus 13.4x for the peer group) despite its healthier growth profile (revenues/EBITDA expected growth rate of 16.0 per cent/26.1 per cent versus the peer group’s 5.3 per cent/9.0 per cent),” Ezzat wrote.

Ezzat asserted a “Buy” rating for KUT with a price target of $1.10 per share, which represented a projected return of 57.1 per cent. (All projected returns are at the time of publication.)

Calian Group (Calian Group Stock Quote, Chart, News, Analysts, Financials TSX:CGY) is another down on its luck stock that Ezzat has added to his Top Picks, saying that the business and technology services company has been consistently underestimated by the Street.

“Calian is a quality diversified operation with a deep bench, an underleveraged balance sheet, and a solid track record of value creation through acquisition and innovation. CGY has all the bells and whistles an investor would seek out in a quality company,” Ezzat wrote.

“The stock has tripled in the last three years, as management transitioned its philosophy and growth strategy from what was a ‘Steady Eddie’ operator with stable revenues/earnings, to one seeking to capitalize on growth in a more aggressive fashion,” he said.

Ezzat reasserted his “Buy” rating and $85.00 target for CGY, which represented a return of 43.8 per cent.

Converge Technology Solutions (Converge Technology Solutions Stock Quote, Chart, News, Analysts, Financials TSX:CTS) has been a killer of a stock to own over the past 12 months, delivering an 8x return over that period, but Echelon analyst Rob Goff sees still more upside. Goff said both organic and inorganic growth are in the cards for CTS, which the analyst sees as still suffering from a valuation gap with its peers.

“We look for CTS to move forward executing against its deep pipeline of strategic, accretive acquisitions. Our frequent positive PT moves have often coincided with accretive acquisitions where the Company’s ability to source and execute accretive deals (now 20 since Q317) has enabled it to achieve a scale where its cross-selling revenue generation, vendor advantages, and platform efficiencies support continued accretive inorganic growth,” Goff wrote.

With his update, Goff retained his “Speculative Buy” rating for Converge while raising his target from $10.50 to $12.00, representing a projected return of 17.4 per cent.

Goff is expecting sustained outperformance around double-digit organic growth from Quisitive Technology Solutions (Quisitive Technology Solutions Stock Quote, Chart, Analysts, Financials TSXV:QUIS), which is returning as a Top Pick. Goff said Quisitive looks to be on an extended run of accretive independent sales organization (ISO) acquisitions.

“We see aggressive upside about the potential for accretive ISO acquisitions where deals can be completed at 10-12x EBITDA prior to LedgerPay synergies reducing valuations from 3-5 turns. We look for IT Services to complete an additional IT Cloud Solutions acquisition building on the renewed momentum with Mizak. In addition, we look for QUIS to acquire a tuck-in ISO as it focuses on integrating LedgerPay and BankCard,” Goff wrote.

Goff has reasserted his “Speculative Buy” rating for Quisitive and $2.75 target, which represented a projected return of 71.9 per cent.

Goff also likes SaaS-based health tech solutions provider CloudMD Software & Services (CloudMD Software & Services Stock Quote, Chart, News, Analysts, Financials TSXV:DOC), returning the name to the Top Pick Portfolio and saying recent acquisitions leave the company at a whopping $140-million run-rate compared to, e.g., its first quarter 2021 revenue of $8.8 million.

The stock has popped lately on M&A news but Goff sees more upside, reasserting a “Speculative Buy” rating and $4.00 target, which represented a projected return of 78.6 per cent.

On CloudMD, Goff wrote, “Frankly, we see the potential for positive price target moves as full run-rate revenues are achieved, with further EHS wins and with accretive acquisitions.”

Another stock returning to Echelon’s Top Pick list is Skylight Health Group (Skylight Health Group Stock Quote, Chart, News, Analysts, Financials TSXV:SLHG), which also vaulted ahead over the past year. The company, which operates multi-disciplinary medical clinics in the US and owns an electronic health records business and telemedicine service, should be building momentum around its value-based care model, according to Goff.

“With the VBC model gaining attention together with SLHG’s transition into a VBC model, we look for a positive revaluation of Skylight as it builds scale through further accretive acquisitions, as results highlight its organic growth. The Company’s June 7 NASDAQ listing should facilitate the positive revaluation considering its prevailing discount,” Goff wrote.

The analyst reasserted his “Speculative Buy” rating for SLHG and $10.50 target, which represented a projected return of 108.7 per cent.

On the cannabis side, analyst Andrew Semple has returned US multi-state operator Ayr Wellness (Ayr Wellness Stock Quote, Chart, Analysts, Financials CSE:AYR.A) to the Top Pick list for a fifth consecutive quarter, having returned a cumulative 253 per cent over that period.

Semple said the valuation gap between Ayr Wellness and its peers is getting harder to justify.

“Ayr continues to have one of the most compelling valuations in the cannabis sector. It trades at 7.3x EV/2022E EBITDA based on our estimates compared to an average 11.5x EV/2022E EBITDA multiple for the large cap US cannabis peer group (ex. Ayr). We see dwindling reasons for the Company to trade at such a steep discount. Ayr has closed most of its announced M&A transactions, delivered solid financial results, and secured the debt/equity capital needed to execute on its organic and acquisitive growth plans,” Semple said.

The analyst has kept his “Buy” rating and $74.00 target, which represented a projected return of 109.5 per cent.

Semple also likes Columbia Care (Columbia Care Stock Quote, Chart, News, Analysts, Financials CSE:CCHW) in the US cannabis market, saying a surprising share price decline of 28 per cent over the first quarter 2021 came despite strong fundamentals from the company.

“We stand by our call and believe the stage is set for Columbia Care to significantly outperform peers in Q321,” Semple wrote.

Semple has reiterated his “Buy” rating and Top Pick status along with his $14.00 target, representing a projected return of 141.8 per cent.

Finally, Semple has added US MSO Verano Holdings (Verano Holdings Stock Quote, Chart, News, Analysts, Financials CSE:VRNO) to Echelon’s list, a cannabis company with a footprint across 14 states and vertical integration in almost every key market in the US.

Semple said the recent pullback on the stock represents an excellent entry point for new investors.

“We believe Verano is not yet receiving the full attention it deserves from investors. It is the fifth largest cannabis company as measured by consensus estimates for 2021 cannabis revenues, and the 3rd largest as measured by 2021 consensus EBITDA estimates. The Company’s key markets are growing at remarkable rates, highlighted by the transition to adult-use cannabis sales in Arizona and the same soon in New Jersey, unrelenting medical patient demand in Florida, and a strong base business in Illinois and Maryland, among other highly attractive limited license markets,” Semple wrote.

The analyst reiterated his “Buy” and $40.00 target, which represented a projected return of 98.7 per cent.

Analyst Stefan Quenneville stuck with healthcare tech company DIAGNOS (DIAGNOS Stock Quote, Chart, News, Analysts, Financials TSXV:ADK) as a Top Pick, saying a recent deal with New Look Vision, Canada’s largest optical retailer, points the path to further adoption of ADK’s AI diagnostic platform.

“We view the New Look deal as validation of the AI-based platform’s detailed output, low cost, and ease of implementation,” Quenneville said. “The technology is clearly ready for broader commercial acceptance, particularly in the optical retail segment, and the Company appears poised to secure increasingly large agreements with optical retailers, networks of healthcare facilities, private and public payors, and strategic partners like pharma and equipment manufacturers.”

Quenneville reasserted his “Speculative Buy” rating and $0.95 target, which represented a projected return of 73 per cent.

Finally, Quenneville is keeping as a Top Pick US-operating in-home monitoring and disease management services provider Quipt Home Medical (Quipt Home Medical Stock Quote, Chart, News, Analysts, Financials TSXV:QIPT), which has also done extremely well over the past year. Quenneville said he likes the long-term tailwinds in the home care-focused durable medical equipment industry along with Quipt’s positioning in an M&A sweet spot.

“While the fragmented DME market provides ample opportunity for accretive acquisitions, the Company has achieved a regional scale that would make it an attractive target for one of the handful of larger national players,” Quenneville said.

The analyst reiterated his “Buy” rating and $10.60 target, which represented a projected return of 35 per cent.