Top Tech Picks for Q1 2022 from Echelon Capital Markets

The fourth quarter 2021 brought a lot of potentially unwanted surprises, but investors now have some quality growth names to choose from in Q1 2022, according to Echelon Capital Markets, which released on Wednesday its Top Picks Portfolio for the first quarter, featuring a number of stocks in cannabis and technology.

Echelon’s Top Picks Portfolio (TPP) fared not so well over the Q4, decreasing 4.3 per cent in value compared to the S&P/TSX Composite and S&P/TSX Small Cap Indices which delivered 6.5 per cent and 3.0 per cent, respectively. For perspective, the Russell 2000 Index returned 2.1 per cent for the quarter versus the larger cap S&P 500 which returned a full 11.0 per cent.

As well, Echelon’s TPP finished the year with a return of 19.4 per cent, which was under the S&P/TSX Composite and S&P/TSX Small Cap Indices at 25.1 per cent and 20.3 per cent, respectively. Echelon said the portfolio’s lack of exposure to oil and gas was a factor, as that sector was a big winner last year. 

At the same time, the TPP’s 19.4 per cent was better than the broader TSX Venture Composite Index which returned just 7.3 per cent, and the longer-term picture still looks good for the TPP, sitting at three- and five-year gains of 207.3 per cent and 330.8 per cent, respectively, compared to the S&P/TSX and S&P/TSX Small Cap Indices at 145.0 per cent/269.2 per cent and 150.1 per cent/299.2 per cent, respectively.

“The outperformance of large cap stocks in the second half of the year has hindered the Top Picks Portfolio, which tends to favour catalyst-rich, small-to-mid capitalization companies where growth is a clear focus,” Echelon said in the report. “While the small cap outperformance has reversed in H221, we look for investors to remain focused on high-quality small cap names with specific catalysts or underlying secular growth trends in an environment where low real interest rates are expected to persist.”

Of the TPP’s 15 stocks, three are in the Cannabis space (Ayr Wellness, Columbia Care and Verano Holdings), four are in Technology & Special Situations (Calian Group, Converge Technology Solutions, Quisitive Technology Solution and Redishred Capital), three are in Precious Metals (Silver X Mining, Osino Resources and Pan Global Resources), two are in Healthcare & Biotechnology (DIAGNOS Inc and Quipt Home Medical), two are in Real Estate (BSR REIT and Killam Apartment REIT) and one is in ESG & Energy Transition (E3 Metals Corp). Below are summarized comments from Echelon on the tech, healthcare and life sciences names from the Q1 2022 TPP.

Ayr Wellness (Ayr Wellness Stock Quote, Charts, News, Analysts, Financials CSE:AYR.A)

• Echelon rating: Buy
• Target price: $75.00
• Projected one-year return: 299 per cent (all returns are listed as of publication date of each respective report)

US vertically integrated US cannabis company Ayr Wellness gets its seventh consecutive quarter on Echelon’s TPP. Although shares were down significantly over the fourth quarter 2021, Echelon analyst Andrew Semple thinks Ayr is one of the most attractive names in the cannabis sector, trading below its market peer average at 5.9x EV/2022EBITDA versus 9.5x for the US large cap cannabis group. 

“We do not see convincing reasons for the Company to trade at such a steep discount. Ayr has closed its most significant announced M&A transactions, continues to deliver solid financial results, and is adequately funded to execute on its organic and acquisitive growth plans,” Semple wrote in a December 31 report.

Columbia Care (Columbia Care Stock Quote, Charts, News, Analysts, Financials CSE:CCHW)

• Echelon rating: Buy
• Target price: $14.00
• Projected one-year return: 279 per cent

Columbia Care also dropped over the fourth quarter as did much of the sector, but Semple sees catalysts on the company’s horizon along with improving fundamentals. In a December 31 report, Semple said adult-use sales starting up in New Jersey will be of substantial benefit to CCHW, along with the recently-allowed dried flower sales in Virginia and New York. 

“We expect the Company’s aggressive capex spending to bear fruit in 2022, as new facilities including a planned additional 800,000 SFT of canopy capacity come online. Contribution from investments in the high growth states of New Jersey, New York, and Virginia to be seen in 2022 should result in a rerating by investors,” Semple wrote.

Verano Holdings (Verano Holdings Stock Quote, Charts, News, Analysts, Financials CSE:VRNO)

• Echelon rating: Buy
• Target price: $40.00
• Projected one-year return: 153.2 per cent

The third US multi-state operator, Verano was an outlier in the sector over the fourth quarter in generating a positive return of ten per cent. Semple said Verano has moved past the share liquidity challenges of the third quarter 2021 and reported solid Q3 results while raising non-diluted debt at an attractive rate and announcing the acquisition of three companies in Connecticut to become vertically integrated in the state.

“Verano continues to have ample catalysts for outperformance in 2022 and Q122. We believe the Company is exceptionally well-positioned to be a leading business in the upcoming New Jersey and Connecticut adult-use markets. First adult-use sales in each state are expected to begin in 2022, with New Jersey (expected Q222) the most imminent opportunity. New M&A, Q421 results, and operational milestones (e.g., completion of production facility expansions, new dispensaries, etc.) also offer to be catalyst events,” Semple wrote in a December 31 report.

Calian Group (Calian Group Stock Quote, Charts, News, Analysts, Financials TSX:CGY)

• Echelon rating: Buy
• Target price: $85.00
• Projected one-year return: 40.0 per cent

Calian Group is headquartered in Ottawa and provide business and tech services in health, IT, learning and advanced technologies. The stock has tripled over the last three years but Echelon analyst Amr Ezzat sees more upside based on Calian’s solid track record of value creation through acquisition and innovation, saying CGY “has all the bells and whistles an investor would seek out in a quality company.” Ezzat said the Street has consistently underestimated Calian by failing to recognize the accretion potential of M&A on both Calian’s earnings and valuation.

“We continue to see the recent share price weakness (down ~ten per cent from its 52-week high) as an opportunity to consolidate a position in a quality operator with a solid track record of value creation. Calian’s FQ421 results showcase continued strong earnings momentum and stellar free cash flow,” Ezzat wrote in a January 4 report.

Converge Technology Solutions (Converge Technology Solutions Stock Quote, Charts, News, Analysts, Financials TSX:CTS)

• Echelon rating: Speculative Buy
• Target price: $14.50
• Projected one-year return: 33.4 per cent

Converge was a strong performer in 2021, delivering a 119 per cent return while expanding its presence in the North American and now also European and UK IT solutions sectors. Echelon analyst Rob Goff delivered a report on Converge on January 4 where he said that supply chain constraints negatively impacted CTS’ third quarter financials but the company’s well-proven M&A approach in recent years (Converge completed 25 acquisitions over the past three years) should keep Converge growing.

“We are fully confident that CTS will emerge stronger from the supply chain pains, where its scale strengthens its organic prospects given the prospects for ongoing supply concerns with customers where CTS’s supplier contracts represent a competitive advantage and where CTS can arguably leverage its position to complete acquisitions where prospective acquisitions have been impacted to a greater degree by supply constraints. We would look for one deal in Q122 to kickstart the calendar year, with a robust pipeline to follow,” Goff wrote.

Quisitive Technology Solutions (Quisitive Technology Solutions Stock Quote, Charts, News, Analysts, Financials TSXV:QUIS)

• Echelon rating: Speculative Buy
• Target price: $2.75
• Projected one-year return: 135.0 per cent

A provider of Microsoft professional services, digital consulting company Quisitive comes into 2022 with prospective catalysts concerning the commercialization of its LedgerPay platform along with potential accretive acquisitions to leverage LedgerPay’s capabilities in payments and IT Services. That’s according to Goff, who is looking for organic revenue growth to exceed expectations over the new year.

“Expectations for a transformative 2022 are led by LedgerPay commercialization and accretive ISO acquisitions, where migration of ISO merchants onto the LedgerPay platform has the potential to reduce pro forma valuations by 3- 5 turns. IT Services-related acquisitions are expected to add revenue synergies in addition to scale efficiencies over the longer-term horizon,” Goff wrote in a January 4 update.

“We look for further IT Services contracts to facilitate QUIS gaining scale and leverage as an inner circle Microsoft partner and continue to see QUIS acquiring ISOs at 10x EV/EBITDA or 6-7x adjusted for migration-related recapture,” he said.

DIAGNOS Inc (DIAGNOS Inc Stock Quote, Charts, News, Analysts, Financials TSXV:ADK)

• Echelon rating: Speculative Buy
• Target price: $1.55
• Projected one-year return: 356 per cent

Echelon analyst Stefan Quenneville is expecting big things in 2022 out of DIAGNOS, which is commercializing its image enhancement and AI analysis platform for the early detection, triage and monitoring of diabetic retinopathy (DR), the leading cause of blindness. The company is awaiting the finalizing of an MOU with EssilorLuxottica/GrandVision, the world’s largest eye care company.

“We view the EssilorLuxottica MoU, along with the previously announced deal with New Look Vision, as validation of the AI-based platform’s detailed output, low cost, and ease of implementation. The technology, which is currently being rolled out across New Look Vision locations in Quebec, is clearly ready for broad commercial acceptance, particularly in the optical retail segment,” said Quenneville in a January 4 report.

“While the timeline and scale of a potential deal remain uncertain for now, concluding a deal with EssilorLuxottica would be a game-changer for ADK given the sizeable financial opportunity and the industry validation of its technology platform,” he said.

Quipt Home Medical (Quipt Home Medical Stock Quote, Charts, News, Analysts, Financials TSXV:QIPT)

• Echelon rating: Buy
• Target price: $11.25
• Projected one-year return: 59 per cent

Quipt Home Medical, which provides in-home monitoring and chronic disease management services in the US, is staying on Echelon’s TPP, with Quenneville saying he likes the company’s positioning in “an M&A sweet spot” in the fragmented Durable Medical Equipment market in the US. At the same time, the analyst said QIPT’s regional scale would make it an attractive take-out target for one of the larger national players.

“The US home care and DME markets are expected to grow at CAGRs of seven per cent and six per cent, respectively, through 2028 due primarily to the demographics of the ageing population. Quipt is well-positioned at the intersection of these two markets, both of which provide cost savings to payors (e.g., insurance companies, Medicare) and convenience to patients,” Quenneville wrote in a January 4 report.