This week we will start with a discussion of Trump’s proposed tax cuts and their impact on Canada. In our Your Stock, Our Take segment we take a question from a listener about Bird Construction Inc. (BDT:TSX), a general contractor in the construction industry – we let you know if the stock is a buy or sell. Our star of the week is from KeyStone’s active coverage and was one of our top Canadian Small-Cap picks heading into 2017, International Road Dynamics Inc. (IRD:TSX), a highway traffic management technology company, which jumped 50% this week after receiving a takeover bid. Our dog of the week is perhaps the most talked about company on the TSX over the past 5-days, Home Capital Group Inc. (HCG:TSX), which ended down 58% this past week.
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.
I would like to welcome again, myhost, KeyStone’s Senior Equity analyst, father of 1, and a man has currently has each of his fingers crossed, just purchased a rabbits foot and insisted we do seminars in both Edmonton and Toronto in the hopes that some of their lottery luck will stick to him and transfer to his Canucks so they will win tonight’s NHL draft lottery, Mr. Aaron Dunn.
First-off – you will be on Money talks next week (Saturday the 6th) to chat, among other things, about our latest upcoming –
Do-It-Yourself (DIY) Stock Investment Seminar
with KeyStone Financial
Vancouver May 23rd, Kamloops May 24th, Victoria May 25th, Edmonton May 30th, Calgary May 31st & Toronto June 1st
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 in an effort 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.
Our seminar is not going to sell you insurance, help you do your taxes, provide an estate plan, show you an exotic and risk futures or options strategies – all KeyStone does research stocks.
We are equity specialists focusing on the largest and most important component of your portfolio long-term – quality stocks.
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 basic 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 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) – 291% and counting
· Exchange Income Corporation (EIF:TSX) – 250% and counting
About the Events
Join top stock pickers Ryan Irvine and Aaron Dunn from KeyStone Financial for a 2-hour workshop on how to build a simple portfolio designed to crush the market. Learn simple, proven, and powerful methods to identify which stocks to buy, which to avoid, and how to build an effective portfolio from the ground up. The seminar will focus on two key areas of your portfolio – growth and income (dividend).
We are an independent financial advisor offering specific BUY/SELL research reports to our client base across Canada and into the U.S. A unique research firm, KeyStone Financial has a proven track record of successfully uncovering undervalued small-, micro-, and mid-cap growth and value stocks with tremendous upside potential, before the broader financial arena.
2. Smart Strategies for Independent Investors
3. Small Cap Stocks for High Growth
4. Dividend Growth Stock Investing
5. Put it Together and Build a Portfolio
6. Open Questions from the Audience
How do we do it?
Two decades ago KeyStone’s founder read a quote from the most successful investor of all time, Warren Buffett.
Buffett was asked, if he were coming into the investment field today, what areas would you tell him to point himself in?
Buffett: “Well, if I were doing – if I were coming in and working with small sums of capital I’d tell him to do exactly what I did 40-odd years ago, which is to learn about every company in the United States that has publicly traded securities and that bank of knowledge will do him or her terrific good over time.”
Smith (interviewer): But there’s 27,000 public companies.
Buffett: “Well, start with the A’s.”
We took this idea to heart.
Three times each year KeyStone analysts look through the financial statements and outlook for every publicly traded stock in Canada (over 3,500) and 5,000 in the U.S.
Our efforts to leave no stone unturned helps differentiate our research within the Canadian market. It helps us uncover little anomalies in areas where others do not take the time to look.
Unique cash flowing businesses are reasonable prices which can make great long-term investments.
We look forward to having you at our very first DIY Investment Seminar, please feel free to contact us if you have any questions.
TRUMP – Discussion Notes
Dubbed the “biggest individual and business tax cut in American history,” this week’s long-anticipated U.S. tax reform statement had four strategic goals:
- Growing the us economy by creating millions of jobs.
- Simplification of the ridiculously complex U.S. tax code.
- Provide tax relief to middle-income American families.
- Lower the U.S. business tax rate from where it is now as one of the highest in the world.
The proposed tax cut itself from 35% to 15% seems “huge”, but from what we understand, given all the tax credits etc, the average affective corporate tax rate is in the range of 19%. Some companies pay more, some less. So the cut to 15% it not as huge as it seems and may not create as much of a revenue shortfall as has been stated by many of the dismal scientist out there.
The key question will remain –
Can any of these tax cuts get through Congress? It may be a tough sell. It does seem a little strange that the people voting on these cuts have the most to lose from them if government revenues (ie. taxes) go down – they will have less money for their pet projects and may have to actually make some cuts rather than keep doling out the cash to buy votes. Because that is the system we have created. It is in these politician best interests to take in as much money as possible and grow government – it is part of the reason World governments are awash in debt.
In terms of overall tax revenue – Uncle Sam keeps breaking records. Washington hauled in a record $1.08 trillion in tax revenues in the first 4-months of this current fiscal year. The Treasury is bursting at the virtual seams, and still that debt keeps growing. Tax cuts aren’t the issue, it’s the spending. It’s always been the spending.
Government in the US and up here in Canada do not have a revenue problem, they have a spending problem.
How could these potential cuts affect Canada?
In contrast to the proposed tax cuts and simplification in the US, Prime Minister Justin Trudeau is raising taxes broadly speaking in Canada.
That’s Trudeau is imposing a national carbon price on Canadians, meaning higher taxes and prices on almost all goods and services, and has already reneged on his election promise to reduce the small business tax rate. Good for the U.S., bad for Canada.
His highly-publicized “middle-class tax cut” during the election has not turned out to be “revenue neutral” as he promised.
By contrast, Trump has not only rejected carbon taxes, but also on Wednesday announced plans to slash individual, corporate and small business tax rates, while dramatically simplifying the U.S. tax code.
Lower taxes in the U.S., still by far our largest trading partner, combined with rising taxes in Canada, can only end badly for Canadians.
They will raise our cost of living while making Canadian businesses less competitive with their counterparts in the U.S.
Listener question – given the predicted infrastructure spend is Bird Construction a good buy now?
Your Penny Stock, Our Take – Penny Stock Bird Construction Inc. (BDT:TSX)
The company operates as a general contractor in the Canadian construction market with offices in St. John’s, Halifax, Saint John, Wabush, Montreal, Toronto, Winnipeg, Calgary, Edmonton, St. Albert and Vancouver. Bird has been in operation for 96 years. The company focuses primarily on projects in the industrial, commercial and institutional sectors of the general contracting industry.
According to the recently released 2016 numbers is Bird Construction undervalued fundamentally?
Net income in 2016 and 2015 was $27.7 million or $0.65 per share and $41.8 million or $0.98 (a non-GAAP measure), respectively. Adjusted net income in 2016 of $27.7 million was less than 2015 adjusted net income of $41.8 million by $14.1 million or 33.6%. The decrease is primarily a result of lower gross profit due to a shift in the mix of the work program from comparatively higher margin industrial work (Oil sands and mining business) to lower margin institutional work.
With the stock closing today at $9.53 the trailing PE is 14.66, which is below the market average PE and would make the company interesting if there was growth forecasted.
Let’s look at the backlog going forward.
New work secured through the course of the year contributed to a Backlog of $1.13 billion for the company at December 31, 2016, compared with $1.66 billion at December 31, 2015. The decline in backlog from the end of 2015 is representative of the fact that Bird did not secure a major project in 2016, as available opportunities were limited for securement in fiscal 2016. The Company has been successful in securing many smaller but strategic projects with opportunities to win additional work packages as the company looks to diversify its revenue streams into new markets and with new clients.
Management Outlook – Negative near-term.
“Bird anticipate a significant reduction in earnings in 2017 as compared to 2016”.
Management has recently stated they were encouraged by recent wins and the company’s ability to capitalize on the growing number of opportunities in the PPP market, inclusive of social, transportation and environmental infrastructure projects – this is a glimmer of hope, but for the near-term the stock is not one we want to own in this segment.
We do not that the balance sheet is excellent with $260 million or over half the company’s market cap in cash. The business will survive the earnings downturn – we just want to participate in a business with growth.
Small-Cap Star of the Week – International Road Dynamics Inc. (IRD:TSX)
Industry: Infrastructure Technology
Recommended: January 2017
Recommendation Price: $2.36
Current Price: $4.23
Jumped 50% this past week – on a takeover bid.
International Road Dynamics Inc. (IRD:TSX) is a highway traffic management technology company specializing in supplying products and systems to the global Intelligent Transportation Systems (ITS) industry. IRD is a North American company based in Saskatoon, Saskatchewan Canada with sales and service offices throughout the United States and overseas. Private corporations, transportation agencies and highway authorities around the world use IRD’s products and advanced systems to manage and protect their highway infrastructures.
The company’s operations include system design, electronics and software development, manufacturing and integration of products and systems to improve the efficiency and safety of traffic flows.
Primary products and services offered by the company include the following:
Automated Truck Weigh Stations.
Toll Road Systems and Equipment.
Traffic Management and Traffic Safety.
Integrated Traffic Control.
Permanent Weigh-in-Motion (WIM) Systems.
Portable Slow Speed Weigh-in-Motion (SSWIM) Systems.
Portable Wheel Load Scales.
Traffic Data Collection (Traffic Counters and Vehicle Classifiers).
Advanced Traffic Safety Systems.
Operations and Maintenance of Truck Weigh Station, Toll and Traffic Data Collection Systems.
First off, revenues had grown from $42 – $58 million and earnings had jumped from a loss of ($0.05) per share to $0.18 per share over the past 4-years. The stock traded at around 13 times earning and expected organic growth in the double-digit range moving forward. So, we had a stock trading well below the market average PE with above average growth prospects.
With the rather unexpected Trump Presidency win we also had some potential blue sky upside if his planned infrastructure spending came to fruition – but the key here was IRD’s technology in the ITS space – the company’s toll systems and weigh in motion machines and data analytics are essential components in intelligent highway systems and with North American trending towards Public Private Partnerships, IRD was well positioned to capitalize long-term.
Under Trump’s plan—at least as it’s written —the federal government would offer tax credits to private investors interested in funding large infrastructure projects, who would put down some of their own money up front, then borrow the rest on the private bond markets – for example. They would eventually earn their profits on the back end from usage fees, such as highway and bridge tolls. So instead of paying for their new roads at tax time, Americans would pay for them during their daily commute. And of course, all these private developers would earn a nice return at the end of the day.
IRD’s toll system and weigh in motion systems are fundamental enablers of intelligent highway systems. The company was well positioned for growth.
This past week, a large investor identified the opportunity we saw in IRD and announced that it entered into a definitive agreement to acquire all of the issued and outstanding shares of IRD for CDN $4.25 (US $3.17) per share in cash, or an equity value of approximately $63.5 million (US $47.4 million). The purchase price represents a 51% premium to IRD’s closing price on April 13, 2017, and a 35% premium to its 90-day volume- weighted average trading price.
The company, WiLAN Inc. (WIN:TSX), is making the acquisition in cash.
While we intended to BUY and HOLD IRD for 3-5 years given the attractive valuation point at recommendation and the growth path we had forecasted for the business over the next 5 years, the 80% guaranteed return is too good to ignore. We believe the $4.25 bid is more than fair near-term.
Specifically, IRD generated $65.4 million in revenue in fiscal 2016 with $4.9 million in earnings before interest, taxes, depreciation and amortization (EBITDA), $2.8 million in net income and $2.3 million of cash from operations. The EV/EBITDA multiple paid by WiLAN is in the range of 13, which is not cheap. 23 times earnings.
The 50% jump this past week and the 80% gain since our recommendation in January of this week make International Road Dynamics (IRD:TSX) our big star of the week!