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Every month we publish Mike’s Buy List for our DSR members. Get our best US and Canadian dividend stock ideas. On the first Friday of every month you will receive our top 10 investment ideas for growth and top 10 retirement (return over 4% +).

Today we’re going to discuss two of the Canadian ideas on the list: Tecsys (TCS.YO) and Atco (ACO.X.TO).

Growth perspective: Tecsys (TCS.TO)

Source: Tecsys website

Business model

Tecsys develops and sells enterprise supply chain management software for distribution, warehouse, transport logistics, point-of-use and order management systems. It also offers appropriate advice, education and support services. TCS serves healthcare systems, service parts, third party logistics, retail and general wholesale distribution industries. Geographically, it derives most of its revenue from the United States and has a presence in Canada and other countries. The only operating segment is the development and marketing of company-wide sales software and related services.

What’s the matter

I personally bought shares in Tecsys in December 2020. The stock rose to $ 65 and fell to the low of $ 40. The quarterly results disappointed the market, which may have raised the bar too high. TCS continues to focus on recurring revenue and had a robust quarter. SaaS revenue increased 89% to $ 4.7 million in the third quarter of 2021. Cloud, maintenance, and subscription revenue increased 26% to $ 13.4 million. The service was mainly carried by SaaS. Annual recurring income increased 20% as of January 31, 2021. This shows strong and steady growth across the company

Investment thesis

This small-cap market capitalization (USD 700 million market capitalization) has a high potential for capital gains. TCS offers important software for every e-commerce company: supply chain management software! With shipping costs and fierce retail competition, optimizing your supply chain is a key element of any business shipping. Tecsys also helps major customers in complex distribution centers or in the healthcare sector. With only 13% of the healthcare market share, there appears to be great growth potential. With over 1,000 customers and around half of its sales from recurring contracts, TCS creates a strong basis for its future growth.

I also covered Tecsys and two other SaaS stocks that I like in the video below.

Possible risks

The growth potential is obvious and TCS shareholders are delighted with the hype. However, you should always proceed with caution when using a small cap that can skyrocket in price. When you look at the company’s PE quota, you have to hope that Tecsys will grow its profits pretty quickly. Turnover is part of the business when you invest in such a company. Expect more volatility in stock prices with this company. We like that TCS doesn’t have a lot of long-term debt ($ 10 million), but it doesn’t matter if the company has to fight giants in the tech industry. Being a little fish in the ocean of technology could be dangerous.

Retirement perspective: Atco (ACO.X.TO)

Source: Atco website

Business model

Atco Ltd is a Canadian holding company that provides gas, electricity and infrastructure solutions. The company’s largest subsidiaries are Canadian utilities that operate natural gas, electricity, and logistics services. Atco’s main segments include power (generation, transmission and distribution), pipelines and liquids, neltume ports and structures and logistics. The company operates primarily in Canada and Australia, as well as the US, UK and Mexico.

What’s the matter

It seems our entire game with utilities is paying off. Atco and ED, XEL and EMA.TO performed well in March, posting double-digit returns. It is simply the market that realizes that it has overreacted to rate hikes again. There was no significant news about Atco in March.

On February 25ththAtco published its quarterly results. The company did well with adjusted earnings up 22%. Results were supported by stronger results at ATCO Frontec due to additional customer work requests, Neltume Ports due to higher freight volumes and margins, and Canadian Utilities due to cost efficiency, asset base growth and ongoing transition work related to the long-term contract for the power transmission and distribution system of the Operate Puerto Rico. During the quarter, Atco acquired the remaining 50% stake in the joint venture partnership ATCO Sabinco SA. With this strategic investment, ATCO Structures gained full ownership and control of its Chilean business.

Investment thesis

Atco is known among Canadian dividend investors for its outstanding dividend growth. After selling its fossil fuel-based power business in 2019, Atco is now focused on expanding its renewable energy business (natural gas 185 MW, hydropower 59 MW and solar 3 MW). The company has a CAPEX plan of $ 3.2 billion through 2023. Atco can count on a stable business model with 95% of its revenue coming from regulated utilities. It is also expanding outside of Alberta, where its core business was. They announced their 40% stake in the acquisition of Neltume Ports in South America for $ 450 million. We welcome Atco’s plan to expand its business outside of Alberta. We think it is a great step to diversify your business model. You can sleep well at night as your dividend is safe.

Possible risks

Atco has grown rapidly over the past ten years through various projects and acquisitions. The problem is that their debts have taken a similar path. ACO now has over $ 9 billion in debt but maintains an A- credit rating due to its stable business and ability to generate cash flow. The economic slowdown in Alberta will affect the company’s growth in the years to come. Since Atco is investing heavily in many projects at the same time, it will be interesting to see how management stays in control. Also, the market seems concerned that all projects are not as profitable as expected. As Atco shoots in all directions with multiple businesses and new acquisitions, the risk of making mistakes increases.

Why a buy list?

Having a buy or potential replacement list ready is great for taking action. It’s a lot easier to sell when you feel the excitement for a better hold.

Scoring your inventory against a simple but efficient set of metrics also solves your buying and selling dilemma. You automatically identify the strong and weak companies in your portfolio. I discussed my ranking system on my YouTube channel. Combined with a buy list, this system can help you avoid paralysis through analysis.

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