Takeover potential is often on David Barr's mind when he goes bargain-hunting for stocks to fill his Pender Small Cap Opportunities Fund.
"We've had a total of 128 companies in the mutual fund [since its launch], and 43 have been acquired," says the 43-year-old president and portfolio manager at Vancouver-based PenderFund Capital Management Ltd.
"We try to find businesses that we know and understand," said the stock-picker who leans toward technology plays. "We try to get into the mindset of potential buyers and figure out what they would pay … When the price is suitably cheap, we look to buy. That is what we think really drives our returns long term."
Stock ideas can come from meeting with company executives, which "may lead us to look at one of their competitors, suppliers or customers," he said. Newspapers can also give leads on firms or industries that may have short-term troubles.
"Initial public offerings tend to be too expensive for us, but we'll follow the company" and buy its stock when the opportunity seems right, or its shares suffer a pullback due to a misstep, Mr. Barr added.
For instance, he began following Vancouver-based bill-payment processor Tio Networks Corp. in the early 2000s. "Their original business was selling kiosks to corner stores where people could go in and pay their bills in real time," he said. "That was really a high capital-expenditure business, which can be very risky."
He liked its management, but only started buying Tio shares after the company transitioned into a multi-channel payment processor so that bills could also be paid through retail point-of-sale terminals, mobile apps or through a website.
Tio has become one his fund's biggest wins. San Jose, Calif.-based PayPal Holdings Ltd. struck a $304-millon deal in February to buy the company, and the transaction is set to close later this year. "We bought a lot of our position in the low 20-cent range, and now it is getting acquired for $3.35 a share," he said.
Nearly half of his $160-million Canadian small-cap fund is in technology names, such as Sandvine Corp., Terago Inc. and Absolute Software Corp. "I spent the first eight years of my career looking exclusively at technology and life sciences businesses, so I have built out a large network in the space," Mr. Barr said.
Born in Montreal and raised in Prince George, B.C., he earned an MBA from York University's Schulich School of Business. He obtained a science degree earlier from the University of British Columbia where he formed an investment club with friends. Between degrees, he was also involved in a company that assembled personal computers to be sold to university students.
He was able to combine his passion for investing and technology when he was hired to run a fund at a venture capital firm. He joined PenderFund after it bought the management contract for that fund in 2003. Mr. Barr still oversees the fund, which was renamed Pender Growth and is listed on the TSX Venture Exchange.
His small-cap fund, which he has run since 2009, has enjoyed robust returns. Over the five years ending March 31, it has posted an average annual return of 22.8 per cent after charging a 2.50-per-cent fee for the Class A units. It also won Lipper Fund awards in 2015 and 2016 for generating strong returns with lower risk than peers in the Canadian small-cap space. The honour is given by U.S.-based fund research firm Lipper Inc., a unit of Thomson Reuters Corp.
A fan of the Warren Buffett style of value investing, Mr. Barr tries to buy stocks trading at a discount to what they are worth. Because of concerns that size could reduce the ability to be nimble when buying and selling stocks, his small-cap fund has been closed to all investors since 2015.
He has had his share of losers, too. One was a 2015 investment in Loyalist Group Ltd., an operator of English-as-a-second-language schools. (CIBT later bought the distressed assets and rebranded them under a new name - Sprott Shaw Language College.) "We bought it on the back of a profitable quarter, but the business deteriorated dramatically," he recalled. "We sold our stock as fast as we could."
On the investment horizon, Mr. Barr expects merger-and-acquisition activity to ramp up. "We see a lot of willing and able buyers in the market today – both private equity and strategic buyers," he said. "There is a lot of private equity capital out there looking at technology companies, in particular."
Among strategic buyers, a lot of tech companies also have lots of cash on their balance sheets, and access to the debt market, he added. "When we've had a bullish environment, that is when M&A starts to heat up."
Two stock picks from David Barr
ProntoForms Corp.: The Ottawa-based software developer's main product is an app that lets workers collect, send and analyze data using mobile devices, says Mr. Barr. The provider of electronic forms is attractive because its offering is more cost-effective than competitors, he said. Despite an annualized growth rate of about 30 per cent over the past five years, ProntoForms is not yet profitable because it is investing heavily in sales and marketing. With $12-million in sales in 2016, its high growth and customer-retention rate make it a potential takeover target, he added.
GreenSpace Brands Inc.: The Toronto-based seller of natural and organic foods is a consolidator in an industry that is "growing quite dramatically," says Mr. Barr. More recently, it bought Love Child (Brands) Inc., a maker of organic baby food, and Central Roast Inc., a supplier of nut and seed snacks. It's hard for smaller players to get shelf space with big grocers, but GreenSpace can help them grow quicker by bringing them into its distribution network, he said. It is a potential takeover candidate, but not in the short term, he added. "There's so much runway for these guys."