KeyStone’s Stock Talk Podcast – The US Federal Reserve Rate Decision, a Sell-Off in Big Tech, a Small-Cap Stock Takeover, and a Penny Stock Marijuana Stock
This week we will start by discussing a mixed bag of topics included the US Federal Reserves’ likely decision to raise rates this coming week and this Friday’s sell-off in big tech. In our Your Stock, Our Take segment we take a question from a listener about micro-cap stock, Medical Marijuana Inc. (MJNA:OTC-PINK), which is building a portfolio of investments in companies involved with the much hyped marijuana sector – is it a BUY at present? Our star of the week is from KeyStone’s active coverage, Sandvine Corp. (SVC:TSX), a networking equipment company, which jumped 23% this past week after it was subject to a takeover bid. Our dog of the week is New York Stock Exchange listed IDT Corporation (IDT:NYSE), which lost 21% in one day this past week after the company reported revenues grow but the business swung to a loss in its Q3 results which were hit by a charge for a legal settlement.
If this is your first time listening, then thanks for stopping by. This podcast is produced every week for your enjoyment and show notes are found at www.keystocks.com. Come back often and feel free to add the podcast to your favorite RSS feed or on iTunes. You can also follow us on Twitter @KeyStocks and on Facebook. Or listen to us on our 24-hour Penny-Stocks streaming radio station Pennystocks.fm for coverage of US and Canadian Small-Cap stocks.
Now, let’s dig into the show.
I would like to welcome again, myhost, KeyStone’s Senior Equity analyst, father of 1, and a man who was inspired by the proposed NDP/Green minority government in BC that he has partnered with the racoon that lives behind KeyStone’s head office in an effort to form a leadership group to run KeyStone itself – unfortunately, his agenda will now be dictated by said raccoon, Mr. Aaron Dunn.
First-off – we would like to say we were so pleased with the sold-out crowds we saw over the past two weeks at our Do-It-Yourself (DIY) Stock Investment Seminar’s in Vancouver May 23rd, Kamloops May 24th, Victoria May 25th, Edmonton May 30th, Calgary May 31st & Toronto June 1st.
We are putting together follow-up seminars for the fall in and around mid-to late September – topics include affective strategies for Canadian investors looking to buy US stocks and what type of US stocks to BUY. Any topics listeners would like us to discuss, feel free to tweet email of Facebook us your suggestions.
US Federal Reserve to Raise Rates & Big Tech Declines Friday.
Stock market volatility could pick up in the week ahead, as traders await the Federal Reserve and watch to see whether the shakeout in tech and momentum stocks continues.
The Fed begins its two-day meeting Tuesday and is expected to raise the range for the fed funds target rate by a quarter point Wednesday afternoon.
Fed officials should also give a nod to the fact that inflation is weaker but that they remain confident about the economy. Fed Chair Janet Yellen is also expected to talk more about how the Fed could move ahead to pare back its massive $4.5 trillion balance sheet later this year.
The stock market had a relatively quiet week until Friday — when big-cap tech and other high-flying momentum names plummeted, taking the Nasdaq down 1.8 percent. The Dow closed at a new high on the same day. The selective selling came as investors put fresh funds to work in financials and energy.
Big-cap tech names were hard hit after leading the market higher for weeks. Goldman Sachs, in a report on valuations, said Facebook , Apple, Amazon.com , Microsoft and Alphabet [Google’s parent] are equal to 13 percent of the S&P 500 but provided 40% of the gains so far this year. Goldman analysts questioned the group’s valuations and said the volatility in those stocks had become so low that they were less volatile than safe-haven plays, such as utilities. Even with a 3.2 percent loss Friday, Facebook was still up 30 percent for the year.
Alphabet Inc. (GOOG:NASDAQ) – Year-to-date: 23.06%
$949.83 -$33.58 (-3.41%)
Apple Inc. (AAPL:NASDAQ) – Year-to-date: 28.63%
$148.98 -$6.01 (-3.88%)
Facebook Inc. (FB:NASDAQ) – Year-to-date: 30%
$49.63 -$5.08 (-3.28%)
With gains like this, and lower volatility than the market overall, a pullback was in order and should be expected. In fact, 3% should not even be considered anything close to a significant pullback, so a 10% correction should not be unexpected and would in some respects be healthy.
Of the 3, Apple is the only one with a PE below the market average.
Your Penny Stock, Our Take – Medical Marijuana Inc. (MJNA:OTC-PINK)
As the name implies MJNA is in the cannabis and industrial hemp space and it is based out of California.
The company did put out its first quarter results on Monday.
Revenue growth was great. $3.6 million, more than double from the $1.6 million reported in the first quarter of last year.
Gross profit $2.5 million compared to only $800 K last year.
But from here the results start to deteriorate.
The company reported a net loss of $2.2 million in the first quarter. Still an improvement from the $11 million net loss reported last year.
They also burnt through almost $7 million in operating cash flow during the first quarter.
The balance sheet is not in greatest shape with $14 million in debt and minimal cash.
It looks to me like this company is going to have to raise some money at some point.
So we like the revenue and gross profit but this is still a speculative company financially with negative earnings and cash flow.
But there are a few other things we noticed as well that up the risk level for us.
One is that it is listed on the Pink Sheets. For those not familiar with the Pink sheets it is an over the counter exchange in the US with the most minimal reporting requirements. My understanding is that they are not required to report financial disclosures while they are listed on the Pink sheets.
This is a $300 million market cap company and we would be very wary about there being minimal disclosure requirements.
Also the share count….
Small-Cap Star of the Week – Sandvine Corp. (SVC:TSX)
Industry: Communications – Software & Hardware
Recommended: December 2014
Recommendation Price: $3.02
Current Price: $3.86
Market Cap: $501,657,906
Shares Outstanding: 129,627,366
Fully Diluted: 132,640,704
What does Sandvine do?
Sandvine Incorporated is a networking equipment company based in Waterloo, Ontario, Canada. Sandvine network policy control products are designed to implement broad network policies, ranging from service creation, billing, congestion management, and security.
Shares jumped 22% to $3.86 last week, after it announced it received a bid to be acquired at $3.80 by Vector Capital. Vector Capital is a global private equity firm specializing in transformational investments in established technology businesses. Under the Arrangement Agreement, and with support from Sandvine’s Board of Directors, an affiliate of Vector Capital, Scalar will acquire all of the issued and outstanding shares of Sandvine, other than certain shares held by members of management, for CDN$3.80 in cash per share.
Discussing the deal
Given the discount Sandvine trades at relative to comparable companies, it’s very strong balance sheet (cash net of debt), and the questionable growth execution from management, it is not a surprise the company is subject to a takeover. We are happy to see that value is being recognized once again, but there remains a case to be made that the current offer is opportunistic and on the low side.
In fact, both the National Bank and TD (who now cover the stock) chimed in this regard earlier today. For its part, National raised its target on Sandvine to $4.50. The report stated, “(W)e would not rule out the potential to have SVC reach C$5 per share. According to our analysis, at C$5 per share (13.8x EV/EBITDA on our F2017 estimates), we estimate that would generate a levered IRR of over 25% over a five-year investment horizon.”
TD also raised its target on Sandvine to $4.50. Its report stated that, “A strategic buyer could offer significantly more than C$3.80. We estimate that if a buyer can reduce Sandvine’s F2018 OPEX by only 10%, it could offer ~C$4.50 per share using the same multiple as Vector’s offer.”
Both reports hold valid analysis and conclude an offer in the range of $4.50 would appear not to be out of the question. A multiple in the range of 13.8 times EV to Fiscal 2017 EBITDA is not unreasonable, although it remains uncertain as to whether Sandvine can hit National’s 2017 EBITDA target. Having said this, we have seen software/hardware entities in the past purchased for higher multiples than 13.8 times EV/EBITDA. We will have to wait and see whether another realistic bidder moves forward. To hit the $4.50 target, a new bidder would have to pony up in the range of $600 million (although with $160 million in cash, the actual net figure would be closer to $440 million). While by no means a certainty, a better offer is a possibility. As such, it remains prudent to continue to hold Sandvine. Long-term patient shareholders of will see a solid return either via the current Vector bid or from a superior bid over the next 42 days.
Recommendation: HOLD (Potential Superior Bid)
THE DOG – IDT Corporation (IDT NYSE: Price: 14.50)
IDT provides telecommunications and payment services to individuals and businesses primarily through its flagship BOSS Revolution® and net2phone® brands. IDT Telecom’s wholesale business is a leading global carrier of international long distance calls. The stock is down 16% this week making it the biggest decliner on the NYSE.
Earlier this week IDT released financial results for the third quarter of fiscal 2017. Revenues for the quarter were up 4% but GAAP earnings went from $0.19 per share in the third quarter of last year to a loss of $0.21 per share. Non-GAAP earnings for the quarter were $0.28 per share down 26% compared to the previous year.
There wasn’t really any clear explanation on the press release about why earnings have declined and what needs to be done to turn growth positive.
Looking at historical performance the general trend has been lower revenues over the past several years.
They do pay a nice dividend that has been growing and trade at fairly attractive value relative to earnings.
However, there aren’t any clear catalysts or growth plans that we can see and with declining financial performance there is no clear reason to invest in the stock.