Featuring a growing but historically unprofitable small-cap, a NASDAQ listed small-cap auto parts stock, and Canadian-based athletic fashion LULU
This week, I will briefly chat about KeyStone’s upcoming DIY Seminar Series in Vancouver & Calgary. In our Your Stock, Our Take segment we take a question from a listener about TearLab Corporation (TLB:TSX), a growing optical health related small-cap – is a buy or sell. Our star of the week is, SORL Auto Parts Inc. (SORL:NASDAQ), little known auto-parts supplier in the Chinese market. Our dog of the week is former market darling Lululemon Athletica Inc. (NASDAQ:LULU), which dropped almost 20% this past week on a weak near-term outlook – is it time to be a buyer?
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 PennyStocks streaming radio station Pennystocks.fm for coverage of US and Canadian Small-Cap stocks.
Regrettably, I am flying solo this week as my far more handsome colleague, Mr. Aaron Dunn is hard at work prepping for our DIY Investment Seminar scheduled for this coming week in Vancouver and the following week in Calgary.
Never fear, you will hear his sultry voice on these airwaves in just one week’s time. Speaking of our DIY Seminars – we have been very pleased with the response. In fact, the Vancouver April 4th date sold out the 100 seats in about 24 hours, so we opened a second date and are happy to report it has now sold out. To accommodate the demand in Vancouver, we opened moved to a larger room which can hold up to 175 – so we still have a few tickets available for the upcoming Tuesday, April the 4th date. Check out www.keystocks.comfor details.
The Calgary April 11th Seminar is sold out, but we are considering opening a second date – you can join the waiting list on our website for an new Calgary show.
As for the seminar itself…
Do-It- Yourself (DIY) Stock Investment Seminar
with KeyStone Financial
Vancouver April 4th & Calgary April 11th.
We are inviting new potential clients to – Learn to Build a Simple Stock Portfolio to Crush the Market
Dissatisfied with high fees and meager returns from traditional big bank mutual fund and ETF investing? You are not alone.
There is a powerful movement across the country – we see it every day as we add more new clients. Canadians are taking charge of their financial future and looking for simple alternatives to help them build long-term wealth.
For the past 18-years KeyStone has been helping thousands of Canadians build simple 10-12 stock portfolios composed of cash generating and underfollowed stocks. We stress quality stocks over quantity to beat the market long-term.
In our DIY Investment Seminar, we share our strategies as well as a couple of recent stock selections to get you started on your path towards financial independence.
Highlighted Topics
How many stocks should I own?
One of the more important decisions you will make is the structure of your equity (stock) portfolio. Diversification can be your friend but it can also be your enemy. To beat the market, you cannot just be the market. Our strategy stresses quality over quantity and will give simple and effective number of great stocks to help you build two critical equity portfolios – growth and income. In the end, these two mini-portfolios will help you build a winning formula for your overall DIY stock portfolio.
What stocks to buy?
The most critical element in equity investing is knowing which individual stocks to buy and which to avoid. In this segment, we will focus on the fundamental criteria we use to look at any stock as a potential investment. From revenue, earnings, cash flow, and balance sheet considerations to the industry, near and long-term growth catalysts, valuations to management – we cover our successful strategies.
When to buy?
Our DIY portfolio strategy involved staggered purchases over a 12 to 18-month period. We help you build a concentrated portfolio of high quality growth and income (dividend paying) stocks. Purchasing 1-2 stocks each month over a year will help prevent you from purchasing your shares at a near-term market top.
Perhaps most importantly, when to sell?
Investing is not just knowing what stocks to buy, it is also about knowing when to sell. We take your through our sell process included the primary valuation considerations, outlook and the nature of the stocks business (cyclical vs. non-cyclical). We also review the strategy of selling partial positions – SELL HALF for example. The decision to sell can also become more difficult when you are dealing with a good company. To illustrate, we take you through a couple recent SELL examples from stocks in our active coverage.
Insight into our Methodology
We introduce you the methodology that has allowed us to uncover both unknown growth and dividend stocks that have produces tremendous returns including;
Canadian & US Growth Stocks
The Boyd Group Income Fund (BYD.UN:TSX) – up over 3,700% and still a BUY.
WaterFurnace Renewable Energy Inc. (WFI:TSX) – SOLD for a 2,561% gain.
Enghouse Systems Ltd. (ENGH:TSX) – up 600% and still a BUY.
Janna Systems Inc. (JAN:TSX) – taken over for a 4,185% gain.
Recent (Past Year)
Photon Control Inc. (PHO:TSX-V) – 221% gain and counting.
Applied Optoelectronics Inc. (AAOI:NASD) – 222% gain and counting.
Canadian Income (Dividend) Stocks
Brookfield Infrastructure Partners L.P. (BIP.UN:TSX) – 221% gain and counting.
Exchange Income Corporation (EIF:TSX) – 250% gain and counting.
Your Stock, Our Take – TearLab Corporation (TLB:TSX)
The company is a diagnostic company based in San Diego, California. TearLab has commercialized a proprietary tear testing platform, the TearLab® Osmolarity System that enables eye care practitioners to test for highly sensitive and specific biomarkers using nanoliters of tear film at the point-of-care. The company’s first product measures tear film osmolarity for the diagnosis of Dry Eye Disease or DED.
This year TearLab posted roughly $28 million in revenues, up from $25 million. But it continued to lose money – gobs of it – $19.9 million. On the bright side, that was down from $33.2 million in 2015. Wait a minute, is that a bright side?
How far has the company come? Revenue has grown from roughly $4 million in 2012 to $28 million this past year – which is a positive, but the company is not even close to profitability losing $19.9 million on that $28 million mark in sales. Perhaps it has good technology, perhaps the company will continue to grow revenues at an above average rate, but at some point TearLab has to demonstrate it can actually make money with its great tech.
To date, all TearLab has shown is that it is a great destroyer of capital. In fact, the company has historical accumulated deficit of $512 million. This, for a company which the market currently values at just over $20 million, is an astonishing deficit.
Our Take: Frankly, we are not surprised to TearLab down 10% on Friday alone and over 38% year-to-date. At present, it is uninvestable from our perspective.
Penny Stock Star of the Week – SORL Auto Parts Inc. (SORL:NASDAQ)
As a global tier one supplier of brake and control systems to the commercial vehicle industry, SORL Auto Parts, Inc. is the market leader for commercial vehicles brake systems, such as trucks and buses in China. The company distributes products both within China and internationally under the SORL trademark. SORL is listed among the top 100 auto component suppliers in China, with a product range that includes 65 categories with over 2000 specifications in brake systems and others.
This past week the company announced its financial results for the fourth quarter of 2016 and the year ended December 31, 2016.
The stock jumped 18% on Friday alone and was up over 25% on the week and has jumped 116% in the past year.
What is driving the stock – strong reported earnings growth.
Fourth Quarter 2016 Financial Highlights
· Net sales for the 2016 fourth quarter rose 45.7% to $82.9 million from $56.9 million;
· Operating margin was 12.9% as compared to 10.8% in the fourth quarter of 2015;
· Net Income attributable to stockholders was $8.3 million, or $0.43 per diluted share, compared with $5.9 million, or $0.31 per diluted share in the fourth quarter of 2015.
2016 Full Year Highlights
· Net sales increased 24.5% to a record $272.1 million from $218.7 million in 2015;
· Gross margin was 26.8% as compared with 27.2% a year ago;
· Net income attributable to stockholders for fiscal 2016 increased 44.4% to $19.2 million, or $1.00 per diluted share compared with $13.3 million, or $0.69 per diluted share, in 2015
Balance Sheet
As of December 31, 2016, the company had cash, cash equivalents, and short-term investments of $8.1 million compared to $91.2 million on December 31, 2015. Inventory was $65.8 million compared to $73.7 million on December 31, 2015. Short-term bank loans were $27.4 million compared to $23.4 million on December 31, 2015. Total equity was $162.4 million at December 31, 2015 compared with $222.4 million at December 31, 2015. The reduction in equity was due to a transaction between SORL entities under common control and represented the difference between the carrying value of assets received, assets transferred and total cash consideration paid which was recognized as distribution to the owners. On December 31, 2016, working capital was $100.3 million with a current ratio of 1.7 to 1. Net cash flow from operating activities was $5.4 million compared with $39.3 million in 2015.
Business Outlook
For the fiscal year 2017, management expects net sales to be approximately $300 million and net income attributable to stockholders to be approximately $21.0 million. These targets are based on the Company’s current views on the operating and market conditions, which are subject to change.
Our Take: On paper, the numbers look strong. Hell with $1.00 per share in earning in 2016 and the stock trading at $3.80 and change, the PE or price-to-earnings multiple is 3.8 – compare this to the market average multiple of 19 and something does not add up. It is true that growth is projected to slow in 2017 – but the company is looking for above average growth nonetheless. Our issue, and likely why the market is applying such a low multiple to the stated earnings of SORL is not company specific. It deals generally with North American listed China-based stocks.
SORL Auto Parts, Inc. is a Delaware corporation operating in China through its 90% ownership of what is known as a Sino-Foreign joint venture. Again, the numbers look great but we are not comfortable with the accounting and auditing standards of Sino- Foreign joint ventures as the track record of these operations have a checkered past. We are certain that some are run by good people and keep great accounts, but the risk levels are too high to justify an investment despite the tempting valuations on paper.
SORL Auto Parts is our star of the week, but we would steer clear of the stock.
Dog of the Week – Lululemon Athletica Inc. (NASDAQ:LULU)
Lululemon Athletica Inc. (NASDAQ:LULU) delivered its fourth-quarter earnings following the market close on March 30th.
The sportswear maker’s shares lost more than fifth of their value, slumping to US$51.79 on negative reaction to the earnings update. The problem did not rest in the fourth quarter numbers, which were decent. It was the company’s outlook heading into Q1 2017 that spooked the market.
Net revenue in the fourth quarter was up 12% to US$789.9 million from US$704.3 million the year before, but US$6.3 million lower than the consensus Street estimate.
Adjusted earnings per share clocked in at $1.00, up from $0.85 the year before, and just $0.01 below the US$1.01 the market had been expecting. For the first quarter of fiscal 2017, the company expects net revenue to be in the range of US$510 million to US$515 million based on a total LFL sales decrease in the low-single digits on a constant currency basis.
Diluted earnings per share are expected to be in the range of US$0.25 to US$0.27 for the quarter. Both these numbers are significantly below what was expected.
The bears argue that Lululemon’s growth is slowing, making its stock expensive even at 25 times earnings; the bulls will argue that Lululemon is operating in a retail environment that’s incredibly fragile, and setbacks like the first-quarter outlook are part of the business — it’s a bit like two steps forward (Q3 2016) and one step back (Q1 2017).
The company’s stock had double-digit price swings in seven out of the last eight quarters – both up and down. So expect continued volatility.
Our Take: Earnings grew 17% in the last quarter and growth is expected to slow in the near-term in a tough retail environment. The stock remains trading at a premium multiples or around 25 times earning with a near-term growth profile that is slowing. We would remain on the sidelines at present.
The stock is off around 10% this past week and is down over 38% over the past 5-years. A great product for the most part, but it has not been a great investment for quite some time now. This earns Lulu Lemon the not so coveted status of our dog of the week.
