KeyStone’s Stock Talk Podcast Episode 144

This week, we start by looking at a tweet on Microsoft (MSFT: NASDAQ), which led to some interesting debates about market psychology and valuations.

Our Star of the Week is no stranger to KeyStone Clients, Photon Control (PHO:TSX), having been a Focus Buy recommendation for the past 7-years. On Monday, the company, which is the leading manufacturer of fiber optic measurement solutions, announced it will be acquired for $3.60. The stock is now up over 680% since our original recommendation.

Our Dog of the week is Village Farms International (VFF: TSX), one of the largest greenhouse growers in North American with total sales of over $170 million in 2020. The company grows tomatoes, cucumbers, and cannabis.

Finally, in our Your Stock Our Take Section we answer a question on Cielo Waste Solutions Corp. (CMC:CSE), a Canadian company engaged in the business of refining municipal and construction waste into high-grade renewable fuels. The stock has been a highflyer this year but is the share appreciation justifiable – we will give you, our thoughts.

I came across an interesting tweet over the weekend – which can lead to some interesting talking points.


Star of the Week

Photon Control Inc. (PHO:TSX): a leading manufacturer of fiber optic measurement solutions.

Recommended: December 2014

Recommendation Price: $0.46

Re-recommended at $0.88 in March/April 2020.

Today’s News: Photon Control announced that it has entered into an agreement with MKS Instruments Inc. (NASDAQ: MKSI), a global provider of instruments, systems, subsystems and process control solutions based in Andover, Massachusetts, pursuant to which MKS will acquire Photon Control for $3.60 per common share in an all-cash transaction valued at approximately $387 million.

682% gain from our original recommendation.

It is cool to point out that, at the original recommendation, the company’s market cap was around $46 million. Today, the company has around $50 million in net cash in the bank – more cash than its total market cap 7 years ago.


After the stock had gained 217% in one year since our re-recommendation at $0.88 we advised to sell half our original position and will now likely advise taking the offer and selling the remaining position. The valuations, while not entirely expensive on a trailing and current year basis at 24 times earnings and with an EV/EBITDA of 12, we must remember the company serves a very volatile (historically) semi-conductor market and can have volatile quarterly numbers. The numbers are more attractive now as 2020 was an up year – on a normalized basis, the $3.60 per share offer seems fair.

Photon Control has been an excellent investment and really serves as a strong example of how buying cash-rich, cash-producing small-cap businesses can be extremely rewarding over time. Businesses with this type of profile are often very attractive buyout candidates and this can be the ultimate exit strategy. We have seen in many, many times as our clients have benefitted from takeovers transaction with companies like Photon Control, Sandvine, International Road Dynamics, Janna Systems, and many more.

While we had no way of knowing when Photon Control was going to be acquired, I was not surprised to see it happen today.

 Your Stock, Our Take


 Cielo Waste Solutions Corp. (CMC:CSE)

Current Price: $0.88

Market Cap: $342 Million

 What does the company do?

Cielo Waste Solutions is a Canadian company engaged in the business of refining municipal and construction waste into high-grade renewable fuels. Its technologies are focused on materials recovery, renewable diesel and landfill reduction, and its business operations are carried out in Canada.


  • Its primary facility right now is called the Aldersyde, which sits at about 1,000 liters per hour, and they anticipate doubling capacity to 2,000+ liters per hour by the end of 2021.
  • Plus, they are currently working on a JV facility in Edmonton which is expected to be completed at the end of 2022.

Now quickly looking at the stock performance:

CMC has had a stellar 2021 so far, with the stock beginning the year at $0.075 and now trading around $0.88, providing a return of over 1,000% in just 5 months.

What is Propelling the Stock Higher?

The stock is being driven by two parts:

  • The Green Trade – Cielo is taking part in the Green or Environmentally Friendly trade rush as the company turns waste into biofuel – which is very attractive as a business proposition.
  • Revenue Anticipation – Cielo’s management indicated in their investor presentation that they would begin ramping up production and selling diesel in 2021. Selling approximately $1.5 million worth of diesel in early 2021.

Most Recent Financial Results (Q3, 2020) ended January 31, 2021

  • The company had no revenue since it sold the $1.5 million diesel after the quarter ended.
  • Net Loss for the last 9 months was -$4.8 million and FFO over the same period was a loss of -$2.8 million.
  • Cielo had a net debt balance of $8.3 million on January 31, 2021, but I believe this total would actually be higher now as the company announced it closed another $10 million convertible debenture on May 3rd, 2021.

Does the valuation and where its trading make sense?

  • Now let’s make a hypothetical scenario that the Aldersyde facility is currently running at 2,000 L/per hour and is able to run at full capacity (24-hour workdays) for a full year. Now that would equate to 48,000 Liters per day, or 17.5 million liters per year. Using $1.67 per liter (which they sold their previous diesel for), that would equate to annual revenue of $29.25 million…. (which in my opinion is the best-case scenario. Because the company isn’t expecting to reach the 2,000 LPH with the Aldersyde facility until the end of 2021 and will unlikely be running at full capacity for every single hour in a given year.)
  • So, considering my very generous estimate the stock is still trading at 12x forward revenue. So given this, I believe the stock is very expensive right now. And again, I want to reiterate that these revenue estimates are very generous, as I highly doubt the company will be able to produce 48,000 Liters every day for the next year. From my understanding, the Aldersyde facility is still far from producing diesel fuel every day.

Other Red Flags?

  • In the months of March and April 2021, the CEO sold 3.75 million shares in the price range of $1.30-$0.90.
  • Additionally, I have been getting served an ad online to invest in Cielo, which says:
    • “Now is the best opportunity to invest in the future of the planet!”
    • “Don’t Miss the Boat!”
    • “Invest in one of the fastest rising stocks in the market”
  • The company has 388 million shares outstanding, which is not a very nice float. Especially considering the company will have to raise additional cash to expand and pay of its debt since it is still far from profitability.


I think this is pretty straight forward that Cielo is far from meeting our investment criteria as the stock is extremely pricey (even considering my generous forward estimates), has a highly levered balance sheet, is far from profitability, while the company has been pumping up the stock with advertising saying “Don’t miss the Boat” all while the CEO has been dumping millions of shares.

If perhaps the company can get its facilities online, down the road it may be a good stock to look at. But considering my analysis right now, I would avoid it.


Weekly Dog


 Village Farms International (VFF: TSX)


Current Price: $10.10

Market Cap: $820 Million

 What does the company do?

Village Farms is one of the largest greenhouse growers in North American with total sales of over $170 million in 2020. The company grows tomatoes, cucumbers, and cannabis.

Key Points:

We talked about Village Farms in various reports we put out on the cannabis sector over the past few years. The company operated as a hydroponic grower of produce for many years and then in 2018 decided to refocus a portion of its growing assets to cannabis.

The hydroponic produce market was not a very profitable place to operate and the company’s share price really didn’t so much for a very long period of time. Entering the cannabis space initially resulted in a major step up in the company’s values but we’ve seen a massive amount of volatility, especially lately.

Today alone, the company’s share price dropped 25% after the release of the Q1 financial results, earlier in the day. The shares are down almost 55% since achieving a high of around $22 in February.

Q1 2021 Financial Results Review:

  • Q1 sales were up 63% to $52 million. This was driven by an additional $17 million in revenue was a result of cannabis sales and a 9% increase, or about $2 million of additional revenue from the produce business.
  • Adjusted EBITDA, on the other hand, was down 63% from $1.1 million last year to $0.4 million in the first quarter of 2021. Both Produce and Cannabis EBITDA contributed to the decline.
  • Last year, in 2020, the company reported about $7.4 million in adjusted EBITDA. Its important to note the produce business has not been profitable.


Village Farms is one of the few cannabis produces in Canada to report positive EBITDA. It was an advantage for the company to have the existing hydroponic infrastructure and personal when they entered the market.

Becoming a cannabis company has resulted in a wild ride for the share price. Very shortly after the company announced entering into the cannabis market, in 2017, the share price shot from less than $2 to over $20, very quickly fell back down to the $5 level to eventually get back to $22 in February and now it has been cut in half back down to $10.

I really see Village Farm’s as being driven more by speculation than substance in the financials. The company has succeeded in generating positive operating earnings from its cannabis segment but these are still relatively tiny compared to the near billion market cap of the company.

We personally don’t see any value in the produce business which has always been very low margin and today drags down the result of the cannabis segment.

The company is talking a lot about the growth opportunity in CBD, converting more production from produce to cannabis, and international expansion. The cannabis sector overall, in Canada, has made a lot of promises about the growth that have not come to fruition and I think it’s a smart move for investors to be very cautious when listening to cannabis stock growth forecasts many years out. The company does face a rather limited market in Canada with regulations that make it difficult to compete with the black market. Both inside and outside of Canada, Village Farms also faces a serious level of competition.

Over the past year, we have been able to identify cannabis stock with far better profitability and that also offer substantial growth potential both in the United States and Canada. Village Farms is not one of our favored cannabis stocks today.

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