President, CEO and portfolio manager, Penderfund Capital Management Ltd., Vancouver
David Barr relishes finding bargains and compelling growth stocks among mainly small-cap Canadian companies. It’s even better if the companies become acquisition targets with juicy premiums. Over a decade, he has seen 55 takeovers in his $155-million Pender Small Cap Opportunities Fund. With nearly half its holdings in technology and 20 per cent in U.S. stocks, his fund has also outpaced the S&P/TSX Composite Total Return Index. We asked the 46-year-old manager how he looks for potential takeover candidates, and why he likes liquor and cannabis retailer Alcanna.
Why do you like to play in the technology sandbox?
I have been involved in technology for my whole investment career. In 2000, I started in venture capital, basically investing in growth-stage companies, and over the years, I followed them into the public markets. It’s a sector where companies can grow at a really nice clip, particularly when addressing an emerging market.
Legal software provider Dye & Durham is one of your top holdings. What’s fuelling the Canadian tech IPO market?
The wonderful track records of Shopify and Lightspeed have led the way. Dye & Durham and electronic payment processor Nuvei have gone public recently, and we are talking to lots of companies that are considering doing the same. Unlike the past, we are now seeing companies price their IPOs fairly to attract long-term fundamental shareholders. If they take the highest price possible, they are probably going to get more short-term investors who sell their stock [quickly].
Takeover targets are key to your strategy. What do you look for?
It’s important right now because small-cap stocks have lagged large caps, so the market isn’t helping us generate returns. If you focus on higher-quality businesses, particularly in the early innings as we do in technology, you get more takeovers. If a company is solving a big problem and outcompeting an incumbent, a lot of companies will be interested in buying it. We look at founders and controlling shareholders nearing retirement, companies in which activist shareholders are agitating, and industries with lots of mergers and acquisitions.
How has the COVID-19 pandemic affected M&A activity?
It caused a dramatic halt in takeover activity earlier this year. However, we expect it to pick up again in the next couple of quarters. Some companies have also seen revenue reduced substantially year over year, and if they have debt on the balance sheet, they are no longer going to be a going concern. When you get turmoil like this, it increases the number of willing sellers.
What are your best takeover wins and potential targets in your fund?
Big takeovers for us include QHR, an electronic medical records company acquired in 2016 by Loblaw Cos., and TIO Networks, a bill payment processor bought by PayPal Holdings in 2017. Hamed Shahbazi, former chief executive officer of TIO Networks, is now CEO of Well Health Technologies, whose stock we also own. He’s a mid-40s CEO who wants to build a significant health care company, so we don’t think it will be sold any time soon. But MAV Beauty Brands, Sangoma Technologies, ProntoForms and GreenSpace Brands [an organic and natural foods company] have takeover potential for different reasons.
When Aurora Cannabis unloaded its 23% stake in Alcanna, why did you snap up the battered shares of the liquor and cannabis retailer?
When a big block is up for sale, there is uncertainty, so the stock usually goes down until it is sold. We bought 9% of Alcanna in June because it was a COVID-19 opportunity. With tighter restrictions on bars and restaurants, we saw beer and wine sales [to consumers] increasing, so that business has a nice tailwind. It is still in the early stages of building out its Nova cannabis stores.
You tweeted this fall that you reread 100 Baggers: Stocks that Return 100-to-1 and How to Find Them by Chris Mayer, saying investors could learn from it. What’s the wisdom?
In the small- and micro-cap space, some companies can go up a hundredfold over a long period of time. The challenge is holding on. I have sold some winners before they became bigger winners. We sold software provider Enghouse Systems and Descartes Systems Group way too early. Now we just trim the position and continue to hold it if the business is strong.