Buy or Sell the Markets in 2018 Volatility, KeyStone’s March DIY RRSP/TFSA Seminars, Your Stock Our Take – Covalon (COV:TSX-V), and Patient Home Monitoring Corp. (PHM:TSX-V) is our Dog of the Week – year-to-date, the stock is down 63%.
We have another busy show for you this week. We preview our upcoming 7-city DIY Stock Investment Seminar tour. Highlight current market valuations from a broad perspective in light of the run-up to start 2018 and susequent mini-correction. In our Your Stock, Our Take segment we look at Covalon Technologies Ltd (COV:TSX), a healthcare technologies development company which we have highlighted a number of times in our Breakthrough Report over the past several years. The stock has surged over 500% in the past two years but, along with the market generally, has experienced a volatile start to 2018. A listener asks whether we would BUY, SELL, or HOLD at present. Finally, our dog of the week is a stock we have been telling clients to actively avoid for the past 2-years, Patient Home Monitoring Corp. (PHM:TSX-V) – year-to-date, the stock is down 63%.
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 2, and a man so inspired by Canada’s early success in the Luge competition at the Pyoncheng Olympics he has vowed to become more of a complete luger himself, Mr. Aaron Dunn.
Very excited to announced we have put the final touches on our Upcoming DIY Seminar Series.
Building a Winning Stock Portfolio Inside or Outside Your RRSP/TFSA – One Stock at a Time
All you need to know to effectively structure a winning stock portfolio and, most importantly, the right stocks to put in it.
Spring Workshop Dates
Toronto March 1st @ Sheraton Centre Toronto Hotel
Calgary March 6th @ Sheraton Cavalier Calgary Hotel
Edmonton March 7th @ Varscona Hotel on Whyte
Kelowna March 8th @ Coast Capri Hotel
Victoria March 13th @ Coast Victoria Hotel & Marina by APA
Langley March 14th @ Sandman Signatures Hotel
Vancouver March 15th @ UBC Robson Square
Tickets – $29.95
- Investing 101 & KeyStone’s Strategy
- What is investing / what is a stock?
- Anatomy of a successful stock investment.
- Case Studies – Including Boyd Group Income Fund (BYD.UN:TSX): September 2008 BUY at $2.30, Current Price $100.15 – gain over 4,500%.
- Growth at a Reasonable Price (GARP) Investing Basics.
- TFSA and RRSP Basics
- What is a registered account?
- TFSA basic info.
- RRSP basic info.
- Choosing between a TFSA and RRSP.
- Setting up a low cost “Self-Directed RRSP/TFSA or Regular Trading Account” – buy and sell shares for less than $10 – low number of individual stock purchases & long-term buys creates very low fees!
- Building Portfolios – Simple Tips
- Discount Brokerage – quick review & which to choose.
- Individual Asset Allocation.
- Focused Diversification – our simple strategy – quality stocks, less stocks, less fees, easy to manage.
- Building portfolios over time.
- Layering into positions.
- Structuring a single Canadian growth stock, Canadian income (dividend), or US growth & dividend stock portfolio or a combination of the three;
- How many stocks?
- Risk Tolerance.
- Review and rebalance your portfolio.
- Areas of Focus
- Why Dividend Growth Stocks?
- Plus 2 to 3 stock selections – BUY ratings and why.
- Why Small-Caps Growth Stocks?
- Plus 2 to 3 stock selections – BUY ratings and why.
- Why U.S. Growth & Dividend Stocks?
- Plus 1 to 2 stock selections – BUY ratings and why.
- Why Dividend Growth Stocks?
- Final Portfolio thoughts.
- Current market conditions.
- Both Aaron Dunn and Ryan Irvine take your questions on any topics covered in the seminar. The session typically lasts from 30 to 90 additional minutes and we talk the seminar, individual stocks inside and outside our coverage. It is truly interactive and gives the audience one-one-one access to KeyStone’s experienced team of analysts. We often get great questions, share insights and opinions candidly and it is a great deal of fun!
2018 Volatility _ Markets are Historical Pricy
Broadly speaking, the markets are pricy.
In fact, this past weekend I talked to over one thousand investors and tried to drive home that very point. I did not like valuations on the broader market and would not buy “the market” at current prices – Investors optimism, often a contrarian indicator, had reached a fever pitch.
In the past two weeks I have been asked in casual conversation about 6 new stocks just purchased by people I know. Included in this list are my hairdresser, my drycleaner, three guys I used to play hockey with (who have no business near the market), my dentist, and, I kid you not, an Uber driver from California who I regrettably gave my business card. Not surprisingly, the stocks in questions were all involved in one of three businesses – Cannabis, Cryptocurrencies, and BlockChain.
When individual stocks are coming up far too often in casual conversation, it is often a contrarian sign.
More significant than investor optimism is market valuations which remain lofty from a historical perspective.
Many of you have heard of the PE (price/earnings) ratio used to value a stock. Is the ratio for valuing a company that measures its current share price relative to its per-share earnings. If a company were currently trading at a multiple (P/E) of 20, the interpretation is that an investor is willing to pay $20 for $1 of current earnings.
It has its limitations, but can be useful when valuing a stock. We can also use an overall market PE to value a broad index such as the S&P 500 – the largest 500 stocks in the US.
For context of where the market is generally, we like to look at the Shiller PE. Developed by Yale Professor Robert Shiller, the Schiller P/E is a more reasonable market valuation indicator than the P/E ratio because it eliminates fluctuation of the ratio caused by the variation of profit margins during business cycles.
The Shiller PE is calculated by using the annual earnings of the S&P 500 companies over the past 10 years. There are a few other calculations in the mix, but for the purposes of a quick commentary, we do not want to get too complicated.
Regular PE Distorts
Currently, based on the last 12-months of earnings the Regular US PE is 26 (just last week it was briefly 28) – at 26, it is well above the mean of 16, but well below some of its highs.
The highest peak for the regular P/E was 123 in the first quarter of 2009. By then the S&P 500 had crashed more than 50 per cent from its peak in 2007 (financial crisis). The P/E was high because earnings were depressed (not due to high historical valuations). With the P/E at 123 in the first quarter of 2009, much higher than the historical mean of 15 – it looked like a time to SELL. In fact, it was the best time in recent history to buy stocks. On the other hand, the Shiller P/E was at 13.3, its lowest level in decades, correctly indicating a better time to buy stocks.
Therefore, we look to it today – for a better broader context take on market valuations.
So where are we today?
Currently the Shiller P/E is 33 or 96.4 per cent higher than the historical mean of 16.8. It is currently far closer to its historical high of 44.2 hit in the “Dot Com” boom, than its historical low of 4.8.
We do know that even if stocks stay in their same range the new tax regime will cut PE ratios next year (as would negative the price action on the S&P 500). But US markets are certainly at the high end of valuations.
In what has been is a frothy market, our best advice is to find good unique companies and buy them with patience over a 12 to 18-month period. It is prudent to layer into positions – buy 25% or 50% of your full position to start and add over time.
One of the worse things you can do is buy your full portfolio at once. By spreading out your purchases it prevents you from buying at an annual peak in the markets. Investors should also refrain from jumping on a stock without doing proper due diligence, no matter how “blue-sky” its prospects may appear.
To be frank, I cannot tell you 10 screaming buy right now, but if you give me a year I will find them.
A correction, if that is what we are seeing in the markets is difficult to stomach but likely necessary given the broader valuations and could be healthier long-term. If it continues, we may finally start to see value more reasonable valuations surface and the bonus is our clients would likely see more recommendations moving forward.
Your Stock, Our Take
Covalon Technologies Ltd (COV:TSX)
A company we have highlighted in both our annual Breakthrough and Cash Rich Small-Cap Reports.
The company has seen its share price surge over 500% in the past 2-years – but has been volatile at the start of 2017 after surging well above $7.00, it dropped last week to the $5.50 range after its Q1 2018 results.
What Does Covalon Do?
Covalon Technologies Ltd. researches, develops and commercializes new healthcare technologies. Covalon’s patented technologies, products and services address the advanced healthcare needs of medical device companies, healthcare providers and individual consumers. Covalon’s technologies are used to prevent, detect and manage medical conditions in specialty areas such as wound care, tissue repair, infection control, disease management, medical device coatings and biocompatibility.
Primary growth in – IV Clear vascular access dressings and our ColActive Plus advanced wound care dressings.
What has been driving the share price?
The company announced significant competitive tender awards or contracts in Saudi Arabia this past year and in Q1 2018 an increase in international and U.S. sales. Mangement has not provided any specific guidance for 2018 but is looking for strong double digit growth – this is a wide range by the direction is the right one.
Huge revenue growth in 2017 – revenues jumped to $27 million up from $6.5 million in 2016.
Total revenue rose to $6,404,705 compared to $5,608,994 for the same period of the prior year.
Net income for the three months ended December 31, 2017, was $523,345 or $0.02 per share, on a diluted basis, compared to a net income of $543,110 or $0.03 per share for the three months ended December 31, 2016.
The stock trades at over 60 times trailing earnings and, while we expect growth in the business in 2018, it is currently pricing in huge growth and likely very smart and accretive acquisitions. We do like the management group and see both revenue growth and accretive acquisitions as a very strong possibility over the next year – you are being asked to pay a large premium for those possibilities at present. The stock is on the higher end of the valuation scale at present and while we like the team and the business we are not buyers at present.
Dog of the Week
Patient Home Monitoring Corp. (PHM:TSX-V)
- The dog I picked for the week is Patient Home Monitoring (PHM).
- I’m picking this company because it’s a good example why it’s important to stay disciplined with strategy.
- The company was highly touted in the retail investment community in 2014/2015.
- It was a growth by acquisition stock; a consolidator in the healthcare space.
- They had robust revenue growth for several years straight but they never were able to transition into profitability.
- I remember the company was announcing acquisitions almost on a monthly basis.
- The market loved these deals but they tended to muddy the waters and make it difficult to see the underlying profitability of the business.
- Ryan you’ll remember that we got calls and questions on them all the time.
- The stock price went from $0.90 to $2.00 in only a couple of months where it peaked.
- At the time it looked like a great stock and it did tick a lot of the boxes of our fundamental criteria.
- Growth, positive outlook, management team with a big stake….so it was tempting to buy into the hype.
- But it did not tick our most important box which is profitability.
- We’ve always said that profit is the lifeblood of a business and companies without profits are speculations and not investments.
- Well the stock never got profitability; it peaked at around $2.00 and it has been a steady destruction of capital ever since.
- I just looked at the share price today and it is about 11 cents.
- They did a split into 2 companies so a better comparison would be to say the stock is at about 20 cents today.
- But still a complete destruction of capital.
- Just like we got questions on the company when it was soaring up we have continued to get questions about them as they’ve been tumbling down.
- We would not buy it here today; it has never been profitable in spite of meaningful revenue and we don’t see any clear path to profitability in the future.
- I decided to talk about this company because it’s a good cautionary tale in relation to what is going on in the markets today.
- We’ve seen a huge increase in risk appetite from investors I would say over the last 6 months.
- People are choosing to pile back into speculative areas where companies are not even close to generating profits and many not even revenues.
- It always seems like a great idea when market is soaring up but when the party ends it is quick and catastrophic.
- Most investors end up losing most or all of their money.