KeyStone’s Stock Talk Podcast – Canadian Small-Cap Stock Sandvine Corp.  (SVC:TSX), Is the Canadian Economy in a Precarious Position, Quarterhill Inc. (WIN:TSX) is this Penny Stock a BUY/SELL/HOLD?, US Small-Cap Applied Optoelectronics Inc. (AAOI:NASD) is Our Star & CRH Medical Corp (CRH:TSX) is our DOG


We have another busy show for you this week. We start off by updating what has become an ongoing bidding war for small-cap networking equipment company Sandvine Corp.  (SVC:TSX) – this seems to be a weekly segment. We also question if the Canadian economy is in a precarious position at present. In our Your Stock, Our Take segment we take a question from a listener about Canadian small-cap, Quarterhill Inc. (WIN:TSX) a company which recently “pivoted” its business model and with a huge cash war chest is focussed on acquiring technology companies in the Industrial Internet of Things (IIoT) – we see if the new strategy makes it an attractive buy candidate? Our star of the week is now no stranger to this segment, Applied Optoelectronics Inc. (AAOI:NASD), a company from our US Focus BUY List which develops and manufacturers advanced optical products. The stock jumped over 25% to new all-time highs after preannouncing strong Q2 2017 results. Finally our dog of the week is CRH Medical Corp (CRH:TSX), which dropped 12% today and is off 55% since April.


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 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 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, in honour of the 45th president of the United States this past week has been simply telling everyone at KeyStone headquarters that they are in “such great shape”, Mr. Aaron Dunn.



Sandvine Corp.  (SVC:TSX)

One of KeyStone’s Top Canadian Stock Picks for 2017


Industry: Communications – Software & Hardware

Recommended: December 2014

Recommendation Price: $3.02

Current Price: $4.49


What does Sandvine do?


Sandvine Incorporated is a networking equipment company based in Waterloo, Ontario, Canada. Sandvine’s network policy control products are designed to implement broad network policies, ranging from service creation, billing, congestion management, and security.


Why are we discussing the company again today – for those unaware the company has been on our Focus BUY list for a couple of years and recently jumped 22% when it announced it received a bid to be acquired at $3.80 by Vector Capital – a private equity firm. From this point the anti has been upped to $4.15 by competing private equity Francisco Partners, then matched by Vector was bested again 5 days ago by a $4.40 offer from Francisco Partners. It has been a wild ride and it may not be over as Vector Capital’s 5-day matching period ends today (Friday the 14th) and complicating matters, a vote on the Vector offer ends today.


I shared my beefs with management and the initial deal last week, so I will not get into it hear again this week. But I did read a National Post article from this morning about the ridiculous timing of the upcoming proxy vote on the Vector deal.


Here’s the timing dilemma: Sandvine notified Vector last Friday (after Francisco lobbed in its $4.40 a share offer) that it had five business days to match Francisco’s offer. That five day window ends at 5 p.m. Friday (today). But the deadline for the proxies is Friday at 11 a.m. To make matter more complicated, on the proxy, there is no way to vote on the new Francisco Partners $4.40 bid.

In the end, the Vector offer should be voted down (it is far lower) and another vote should be called when the final bidding has been completed – we are just saying that the company is not making it simple for the average shareholder.


Once again, the company could do a far better job communicating with shareholders and the market generally. Put out a release perhaps – other than stating you still support the Vector deal.


The Financial Post column stated, “To gain some idea into what Sandvine may be thinking, we sent emails to the company, specifically to the head of investor relations and the head of media communications. The former didn’t return the email while the latter is out of office until Monday.”


When you have the most important vote in company history facing you over the next 2-days and go radio silent and decide to take a vacation – give your head a shake.


Topic 2 – Is the Canadian Economy in a Precarious Situation?


Those who are predicting impeding Canadian doom will say;

·      Government regulatory changes to the mortgage markets in the fourth quarter of 2016 and again recently have significantly tightened credit and mortgage availability, which could lead to a national housing correction, increasing foreclosures, and a recession;

·      In fact, some will say it has already started.

o   Home Capital, the largest publicly traded “subprime” lender in Canada recently suffered a run on the bank in what will likely prove to be a harbinger for the coming crash (of course, the lender how been given a huge lifeline);

o   Canadian interest rates spiked as the Bank of Canada has taken a more hawkish stance amidst a backdrop of apparently coordinated central bank tightening talk;

o   the Toronto housing market—the lynchpin for the Canadian economy—has apparently finally cracked;

o   the Vancouver housing market, while bifurcated, generally continues to be soft (except for condos) as a result of the foreigner tax and Chinese capital controls;

o   the recent coalition between the NDP and the Greens in B.C. likely bodes ill for housing in the region; and

o   continued weakness in oil should result in another leg down in Alberta.

o   In short, this is the perfect storm for the Canadian housing market and economy.


GDP growth looks solid, but a slowing housing market and further energy price declines or just the status quo in energy prices could see a halt to the growth – which is really quite unimpressive at present historically.


Your Stock Our Take


Recent Listing – Small-Cap Penny Stock


Quarterhill Inc. (WIN:TSX) (formerly know as WiLAN)


Current Price: $1.89

Market Cap: $221.73 million


This week our question comes from a long-time client who is looking to deploy some of the capital he made on a company he purchased on a KeyStone recommendation at the start of this year – International Road Dynamics (IRD:TSX) – IRD was purchased by another Canadian publicly listed company WiLAN and our client asks if it would be a good idea to purchase shares in WiLAN to continue to participate in the anticipated growth of IRD.


It is a great question and sounds like a potentially solid strategy. We were asked this question back in late April following WiLAN’s acquisition of IRD and while we really liked IRD’s business, we advised clients to take the cash as we looked unfavourable on WiLAN’s business and did not feel the leadership group had shown any ability to create shareholder value. At that time WiLAN’s shares traded at $2.75. Today, the shares trade lower by a third in the $1.85 range and we are not surprised.


So what does Quarterhill/WiLAN do?


WiLAN historically has operated as an intellectual property licensing company. The company’s patent licenses cover a variety of markets and relate to diverse technologies, but essentially the company acquires patents then negotiates, through litigation or other means, with companies settlements for them to license their IP.


On April 17, 2017, the company announced it would change its name from WiLAN to Quarterhill – I am not sure what to make of the name but it sounds like the are about 25% up a hill of some sort. Anyways, the new growth strategy of “Quarterhill” will focus on acquiring technology companies in the Industrial Internet of Things (“IIoT”) segment across multiple verticals. For a company that has already “pivoted” its business strategy twice in the past 4-years, attaching itself to the Internet of Things appears a bit desperate like the company is trying to attach itself to a hot buzzword of the day. In the end, it all will come down to how affectively the company deploys what was a $150 million war chest of cash.


On April 17, 2017, as part of its new strategy, the company also announced its intention to acquire all the outstanding shares of IRD and stated it was its first foray into the Industrial Internet of Things market. A good company, but we have interviewed management a number of times and looked at all of the company’s most recent quarterly reports and not once did the management team refer to itself as an Internet of Things play? At first glance we applaud WiLAN for identifying a great company with strong growth prospects. However, to profit long-term you have to buy great companies are great to good prices.


IRD was acquired for $63.5 million. IRD posted $2.10 million in earnings over the last 12-months – so WiLAN paid over 30 times earnings. We were happy to take the huge payday on our shares, but WiLAN did not buy the company on the cheap. While we expect IRD to continue to growth and see strong potential, we do not believe WiLAN had to pay such a steep price.


Quarterhill has now completed two acquisitions since announcing its new strategy. On May 4, 2017, the Company acquired VIZIYA Corp. (VIZIYA), a privately-held software and services provider to multi-national companies, for around $40 million.   VIZIYA helps their customers optimize the performance of their capital assets. As a result, effective today, Quarterhill now has three wholly-owned subsidiaries: IRD, VIZIYA and WiLAN.


The company has stated VIZIYA posted around normalized EBITDA of $4.3 million for the year ended July 31, 2016. We also know that VIZIYA was all ready to go public as what is known as a “Qualifying Transaction” for a TSX-Venture listed capital pool for a more reasonable price – but Quarterhill swooped in, offered more, and purchased the company.


Is Quarterhill a Buy?


We see what the company is trying to do and the idea of creating a growing, cash producing business is a great concept. For shareholders to be rewarded, the purchases must be made a smart prices.


By spending about $104 million Quarterhill has acquired about $8.4 million in adjusted EBITDA  or it has affectively added $0.07 in EBITDA per share of the company. Put a 12-14 times multiple on this figure and the value of the acquired businesses amounts to $0.85-$1.00 in value at present.


Prior to the acquisition the existing business was being valued in the range of $1.15 with the cash balance removed. Subsequent to this, the WiLAN patent business posted a terrible first quarter – and when I say terrible, I mean god awfull. It appears like the type of quarter that management saw coming and rushed two acquisitions over the finish line to prevent complete share price carnage, but I digress. The quarter unto itself could have cost the business half to a third of its value. It is therefore not surprising to see the new “Quarterhill” trading right where it is.


Perhaps some lumpy income windfalls from its patent business will allow the company to purchase more good businesses, and overtime the company will grow a stable of consistent cash producing businesses.


All we see at present is a management group that has paid far too much for its assets and will take a number of years to see any rewards from those assets.


We like the two purchased business, just not the price tags. We will monitor it, but do not see it as too cheap given the track record of management.


This Week’s Dog


CRH Medical Corp (CRH:TSX)


•                CRH Medical Corporation is a North American company focused on providing gastroenterologists throughout the United States with innovative services and products for the treatment of gastrointestinal diseases.

•                In 2014, CRH acquired Gastroenterology Anesthesia Associates, LLC (“GAA”), a full-service gastroenterology anesthesia company that provides anesthesia services for patients undergoing endoscopic procedures. Since then, CRH has incorporated ten additional acquisitions to its anesthesia business. CRH Anesthesia now services 27 ambulatory surgical centers in seven states and performs approximately 185,000 procedures annually.

•                The stock is down more than 50% from its high of over $12 in April and down more than 15% just this morning.

•                Yesterday, the Centres for Medicare/Medicaid (CMS) announced changes to Anesthesia reimbursement rates and this appears to be the reason that the stock has fallen so much today.

•                The company’s exposure to Medicare and Medicaid in the US may be not justifying the big drop on this news and certainly something is going on with the company that has resulted in such poor share price performance since April.

•                We did take a look at the company recently and one thing that we did notice is that is spite of what seemed to be a very strong Q1 financial report, it is really unclear as to what is being produced for actual shareholders of the company and what does to non-controlling interests.

•                For example, in the Q1 report, the company generated $3.3 million in net income up from $3 million the year before.

•                But only $1.5 million the earnings this earning is attributable to shareholders of the company while $1.7 million goes to non-controlling interests.

•                This is compared to nearly all of the net income going to shareholders in the first quarter of last year.

•                So while revenue was up 60% in the quarter and operating income was up 26%, earnings to shareholders was down by nearly 50%.

•                It is really difficult to get a handle on a company that is structured like this and to understand the portion of earnings that will below to shareholders in the future.



The Star


Applied Optoelectronics Inc.   (AAOI:NASD)


AAOI is a developer and manufacturer of advanced optical products, including components, modules and equipment. The company’s products are the building blocks for broadband fiber access networks around the world, where they are used in the internet datacenter, CATV broadband and fiber-to-the-home markets.


Industry: Optical Manufacturing

BUY Recommended: April 2016

Recommendation Price: $15.99

Current Price: $81.58

Market Cap: $1.63 million

Fully Diluted: 20,400,000




July 13, 2017, AAOI announced certain preliminary unaudited financial results for its second quarter ended June 30, 2017.  The non-GAAP earnings per share numbers were 18% higher than the mid-point of its guidance for the second quarter. The company’s shares rose 7% on the day and are not up 25% over the past 5-days and 233% year-to-date.


IMPACT: Positive




Second Quarter 2017 Preliminary Unaudited Financial Results


·      Revenue of approximately $117.3 million, above the prior outlook of $106.0 million to $112.0 million.

·      GAAP and non-GAAP gross margin in the range of 45.0% to 45.4%, above the prior non-GAAP outlook of 41.0% to 42.5%.

·      GAAP net income in the range from $28.0 million to $29.0 million and non-GAAP net income after tax in the range from $26.6 million to $27.6 million, above the prior non-GAAP outlook of $22.2 million to $24.3 million.

·      GAAP fully diluted earnings per share in the range of $1.37 to $1.42 and non-GAAP fully diluted earnings per share in the range of $1.31 to $1.36, using a weighted-average fully diluted share count of approximately 20.4 million shares. This is above the prior non-GAAP outlook of $1.09 to $1.19 per share, using approximately 20.4 million shares.




The preliminary release was low on details as to what is driving the growth, but we expect that story is similar to what we have seen in the last four quarters.  Management stated results were driven by improvement in our manufacturing costs, capacity expansion and solid execution by the company’s production team.


The fundamental growth story for AAOI supports a continuation of this operational out-performance trend. Hyperscale data center demand is booming and should continue into the second half of 2017. As major cloud players like Amazon and Microsoft continue to allocate large capex dollars into growing their cloud data centers, AAOI revenue growth should continue to produce strong year-over-year growth.


Our Take


The preliminary earnings beat was a result of accelerated demand for the company’s market-leading datacenter products as well as increased capacity. Additionally, AAOI continued to drive manufacturing efficiencies, which contributed to a strong gross margin.


Following our initial recommendation in the $15.99 range, the company initially disappointed the market as it revised guidance lower in the immediate quarter and the stock suffered, trading briefly below the $9.00 range. The stock has recovered tremendously well to trade today just above $78.04 and is now up over 388% since our April 2016 recommendation. AAOI is one of the top 5 stocks in terms of returns year-to-date on the entire NASDAQ exchange.


The consensus earnings estimate for AAOI has rocketed forward to $5.55 which gives the company a forward looking PE of 14, below the market average PE, despite very strong growth. In our last update, with the company’s shares trading at $65.45, we upgraded our rating to BUY HALF, stating the company had 30% upside from the point.  The stock has now added 20% from this point and it is prudent to point out it has gained over 388% since our recommendation just over a year ago. The stock likely has further upside from here, but we are shifting our rating to HOLD given the gains. We believe another positive outlook coming out of the Q2 results could lead to further gains, but are not adding to positions at present.


The gains this week, give the company the coveted status of our Star of the week!

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