In the world of stock markets dominated by large banks and investment companies, KeyStone’s independent Research Services offer a unique and completely independent perspective designed to help savvy investors make informed portfolio decisions.
We base our analysis on extensive theoretical background of fundamental equity research. It’s been around for over 75 years and has delivered results for our clients for well over a decade and helped Warren Buffett become the richest investor on the planet.
We buy profitable businesses, not just stock symbols.
We are Investors not “Traders
We do not recommend a great deal of buying and selling (too many fees) and frankly, we find trying to guess the top and bottom a risky game we don’t want to play. When you buy a focussed portfolio of profitable companies at great prices, it is about the “time in the market,” not timing the market. The overwhelming majority of individuals looking to become successful in the market long term need to become “investors” with a focussed and realistic long-term strategy. This is the way to beat the market and become independently wealthy. It will not happen by sitting at a computer terminal in an ill conceived attempt at becoming a “professional trader” – many of whom also lose money over time. After all, you have a real job of your own and should focus on that. Allow us to help you uncover profitable, undervalued, and underfollowed stocks and build you a focussed growth or income portfolio for long-term success. We tell you what to BUY, when to HOLD, and when to SELL based on the fundamentals of the underlying business.
Within our Small-Cap and Income Stock recommended portfolios, we advocate a strategy of Focused Diversification buying 8-12 stocks from a variety of industries allows us prudent diversification, but not over-diversification. We do our research and focus our buy recommendations on the companies we like best. By investing with conviction and with a realistic time horizon, our strategy allows our winning recommendations to truly affect the value of your portfolio over time.
Nimble Non-Sector Specific Research
We are not married to one specific sector, be it resource (gold or silver) , technology, oil & gas etc. We follow the growth and value in any sector where profitable, strong, cash-rich businesses are flourishing and select the best stocks based on these fundamental factors married with sector specific strength. Our research covers stocks in the resource (precious & base metals), oil & gas, technology, REIT, health care, financial, manufacturing, agricultural, retail, and infrastructure sectors, plus many more – essentially anywhere there is growth and value.
GARP (Growth at a Reasonable Price)
More specifically, our strategy is called GARP (Growth at a Reasonable Price). This means that we will recommend a stock because we believe the company to be a strong business that will grow over time and because we believe we are buying this company at a price that is significantly below its real or ‘intrinsic’ value (undervalued). The paragraphs below provide descriptions of a few of the attributes to which we pay very close attention.
Resilient Business Model
One thing we look at very closely is the resilience of a company’s business model. The business model is the plan that a company uses to convert whatever it does (product or service) into positive cash flow. There are a multitude of different types of business models out there; some of which are highly risky and some of which don’t make sense at all (a common criticism of technology companies during the dot com boom). We look for business models that make sense and provide their respective companies with a great chance of growing during strong markets and at the very least, surviving during challenging markets. A resilient business model provides a unique or even essential product or service to customers that can easily afford to pay for it.
An excellent example of this style of recommendation from KeyStone is Boyd Group Income Fund (BYD.UN:TSX). It’s one of the best performing stocks on the S&P/TSX over the past decade. Boyd’s market cap grew from $25 million to $1.8 billion, and today, it is the largest operator of collision repair centres in North America. The company serves as an excellent example of a resilient business that has produced tremendous long-term results – just the type of businesses we like to uncover for our clients, but that most investors never even hear about.
KeyStone recommended Boyd in November 2008 at $2.30/share and today it trades in the $100.00 range (it has paid over $3.00/share in dividends) and returned over 4,375%. That’s a 40+ bagger! ($1 investment turns into $40+). The company remains in our Focus BUY Portfolio today and continues to produce strong gains for our clients.
Profitability and Earnings Growth
As fundamental investors, first and foremost, we require that a company we research already be profitable and, at the very least, provide strong potential for earnings growth. The earnings growth is what will drive the stock over the long term and provide the company with flexibility to grow their dividends. There are numerous companies in the market that are not profitable (may never have been profitable), but will attract themselves to investors under the promise of future profitability. The problem is that until these companies have achieved profitability, they will be entirely dependent on the market for raising funds to finance their survival (pay wages, pay bills, and invest in the business). If the markets,or that company’s particular industry, encounter any kind of danger, the very survival of the unprofitable company will be in serious jeopardy, as they will be unable to raise money or will be forced to raise money at terms injurious to the current shareholders. So for us, the unprofitable company presents too much risk.
Acceptable Level of Financial Risk – Healthy Balance Sheet
Financial risk refers primarily to the level of debt a company has incurred. All things equal, more debt means more financial risk and a higher likelihood of financial distress. A good deal of this risk is captured in the company’s balance sheet, which lists assets and liabilities. Ideally,we are looking for companies with large cash balances and little or no debt. Some companies that we research do maintain a debt balance; however, we believe this balance to reasonable respective to the company’s financial position. We look at the total debt balance, the regular interest payments, and the required principal payments and ascertain whether or not the company will have problems meeting its obligations. If debt is too high, the company is at high risk of suffering financial distress should the market enter a downturn. We therefore look for companies with acceptable levels of financial risk.
Strong Management Teams
Everyone has heard that they should invest in companies with strong management teams, but what exactly does that mean? What constitutes a strong management team? Analyzing management can be one of the more difficult steps in the research process. It means more than just getting along with the CEO. For us, we look not at what management is saying but what they are doing and what they have done. Analyzing management involves looking back as far as you can and tracking the correlation of what they have said they were going to do with what they have actually done. Have they made targets and met them? Have they managed the company prudently? Do they have a demonstrated track record of providing value to shareholders? Perhaps most importantly, do they hold significant shares in their own company – aligning their interests with our as shareholders.
Value – What We Pay For is What We Get
Value is the final ingredient in our investment equation. Understanding the value is important because “a good company is not necessarily a good stock.” What makes a good company a good stock is the price you pay for it. As a rule, we are looking for companies that we can buy at a significant discount. To ascertain this, we use a variety of tools including: ratios such as dividend yield, price-to-earnings, price-to-cash flow, and price-to-tangible book value. If our research tells us that we are getting a great deal on a stock, then we may buy it. Conversely, if we own the stock and our research tells us that it is becoming overpriced, then we may sell it.