Six Top Picks for your stock portfolio from iA Capital

It’s been a rough first half of the year but steely-eyed investors on the lookout for good ideas have a friend in iA Capital Markets which just released its Top Picks for the 12 months ahead, with a number of technology-related stocks featured in the mix.

iA Capital’s Head of Research Neil Linsdell said their 2022 Top Picks landed in negative territory by the time the latter half of the second quarter came around, yet the list still managed to outperform the TSX Composite by 318 basis points since January. Last year, iA Capital’s Top Picks for 2021 came out with a return of 34 per cent compared to the TSX Composite at 22 per cent.

“With the extremely dynamic environment so far in 2022 and some changes in our analyst roster, we are again providing an updated list to start Q3,” said Linsdell in the Tuesday report.

In the Diversified Industries sector, Linsdell went with specialty foods company Premium Brands Holdings and janitorial services name GDI Integrated Facility Services. The analyst also named three “notable names to watch” in envelope maker Supremex but also EnWave Corp (EnWave Stock Quote, Charts, News, Analysts, Financials TSXV:ENW) and DIRTT Environmental (DIRTT Environmental Stock Quote, Charts, News, Analysts, Financials TSX:DRT).

On EnWave, which has proprietary dehydration technology for the food, cannabis and Pharma sectors, Linsdell said the stock has been hampered by volatile results from its vacuum-microwave drying technology unit sales and from its snack product division. But with some restructuring and realignment now behind it, the company has opportunities for its snack products along with increasing acceptance of its tech in the US cannabis space. Linsdell also noted a new opportunity to refine previously wasted fruit material with Dole. 

“The stars definitely look like they could be aligning for EnWave through the end of 2022 and into 2023,” Linsdell wrote.

As for DIRTT Environmental, which makes customizable interiors for offices, iA Capital has gone from a Sell recommendation after a run-up in 2019 to a Hold and then to a Buy in 2020, then back to Sell from 2020 to February 2022. Now, however, after some management shuffling and a restructuring, Linsdell said the line-of-sight back to growth and profitability is coming into focus for DRT.

“The completion of a drawn-out proxy battle, house cleaning and restructuring and a new permanent CEO starting just last week promise to breath fresh life into a company that is well positioned to address the interior construction space over the next few years,” Linsdell wrote.

EnWave Corp

Rating: Buy

Target Price: $1.65

Expected Return: 166.1 per cent

DIRTT Environmental

Rating: Buy

Target Price: $1.85

Expected Return: 9.5 per cent

In the Healthcare & Biotechnology sector, analyst Chelsea Stellick said a negative macroeconomic environment involving inflation has made for monetary tightening that’s been tough on capital-dependent biotech and other growth-oriented health tech companies. Markets may be slow to price in increases in intrinsic value for these companies, meaning there’s likely a “turbocharged” rebound on the other side, according to Stellick.

“The last four quarters have brought creative destruction for healthcare stocks, which provides an opportunity to benefit on a relative basis, despite the declining sector, from critical analysis of business models and underlying science. Thanks to our in-depth methodology, our carefully curated coverage universe has meaningfully outperformed healthcare and biotech indices,” Stellick wrote.

“We do not foresee an immediate rebound as we enter Q3/22, rather we continue to view 2022 as a year where steadfast value investors can gradually scale into positions in key healthcare names. Acquiring the right healthcare exposure will be well rewarded once the sector emerges out the other side of this macro-environment and market participants rush to capture healthcare’s strong underlying fundamentals,” she said.

Stellick nominated as her Top Picks open-ended Pharma and biotech trust company DRI Healthcare Trust (DRI Healthcare Trust Stock Quote, Charts, News, Analysts, Financials TSX:DHT.U) and US-based in-home medical monitoring business Quipt Home Medical (Quipt Home Medical Stock Quote, Charts, News, Analysts, Financials TSX:QIPT).

Stellick said DRI has a number of pros to it, starting with the fact that it has capital to deploy during the tighter climate which will allow it to take advantage of favourable M&A conditions. The company also has no exposure to inflationary cost pressures given its flow-through royalty business model, Stellick said, while its product line is mostly of medically-necessary pharmaceuticals, which help make its top line recession-resistant. 

“The Trust pays a quarterly dividend well-covered by cash flow from existing assets and remaining cash flow is reinvested,” Stellick said.

On Quipt, Stellick said it recently posted another solid quarter while completing three additional tuck-in deals which expanded its network into new markets across the US. The analyst noted that Quipt will likely begin accessing debt to continue its M&A program but that it won’t be a problem given its plus-$30 million adjusted EBITDA run rate. Stellick estimates QIPT to be currently trading at a significant discount to its peers at about 5x 2022 EV/EBITDA versus 10x for its peer group, a gap which the analyst sees as unwarranted given management’s strong track record on profitability and a superb demographic and regulatory environment.

“Significantly more acquisitions are expected in H2/C22, given that QIPT recently reiterated its guidance of US$180-190 million run-rate revenue with US$38-43 million run-rate adjusted EBITDA at calendar year end,” she wrote.

DRI Healthcare Trust

Rating: Buy

Target Price: $13.00

Expected Return: 70.4 per cent

Quipt Home Medical

Rating: Buy

Target Price: $14.00

Expected Return: 129.5 per cent

Finally, in the Technology sector, analyst Neehal Upadhyaya has picked Vancouver-based mobile game developer East Side Gaming (East Side Gaming Stock Quote, Charts, News, Analysts, Financials TSX:EAGR). Upadhyaya commented that gone are the good old days when investors were willing to pay large multiples on revenue, with today’s less aggressive stance featuring a shift from high-growth stories to balanced positions on revenue growth, positive earnings and strong free cash flow. The analyst said that high-growth tech equities without a proven path to profitability are likely to remain at depressed levels over upcoming quarters, but the significant cool-down that has occurred can also be seen as presenting a lucrative set of entry points for investors. 

“We also expect companies that have more frequent upcoming catalysts to perform better as constant news will help ease investor concerns about their overall investment thesis,” Upadhyaya wrote.

On East Side Games, which makes casual, niche-oriented games along with having a proprietary game development platform, Upadhyaya said the company is expecting to see impressive growth in the near future with a catalyst-rich third quarter featuring the release of Star Trek and Dr. Who titles.

“EAGR is currently significantly undervalued, trading at just 0.8x our 2023 revenue estimates, well below its North American Gaming & Platform peers at 3.9x and its overall peer group of 3.3x. The Company currently boasts a superior growth profile compared to its comps with our forecasts estimating a 39% YoY 2023 growth rate, higher than its peer group average of 28 per cent,” Upadhyaya wrote.

The analyst also gave a “one to watch” nod to cybersecurity company Plurilock Security (Plurilock Security Stock Quote, Charts, News, Analysts, Financials TSXV:PLUR), saying Plurilock has plenty of catalysts in its pipeline along with significant cross-selling potential to its 200-plus customers. The stock is also undervalued, according to Upadhyaya, trading at just 0.2x 2023 revenue compared to its Value-Added Reseller peers at 0.6x and its Cybersecurity comps at 7.7x.

East Side Games

Rating: Buy

Target Price: $5.00

Expected Return: 163.2 per cent

Plurilock Security

Rating: Buy

Target Price: $0.65

Expected Return: 306.3 per cent