KeyStone’s Stock Talk Podcast Episode 157
This week, in our, ask us anything segment we answer a couple of questions about your stock portfolio including how many stocks you should own and the simple process of constructing an equity portfolio. We also have 2 YSOT segments for your listening pleasure.
Our first YSOT this week came in from a listener on Hollister Biosciences (HOLL: CNX), which operates as a licensed manufacturer and distributor of recreational cannabis and cannabis products, and distributes its products through an arrangement with a cannabis distributor to licensed cannabis vendors in California and Arizona. The listener believes the company is significantly undervalued; we will let you know if we agree.
Our second YSOT is on HPQ-Silicon Resources Inc. (HPQ:TSX-V) – a Quebec-based silicon solutions company that offers innovative silica (SiO2), silicon (Si) based solutions and is developing a unique portfolio of high value-added silicon (Si) products sought after by battery and electric vehicle manufacturers. We take a quick look at the business.
Mailbag Questions:
“My question, I love your service and podcast. I had been mostly investing in using another stock picking service where the volume of stocks was high. After six months with that service, my portfolio had 49 stocks, and there were more stocks being discussed daily. My portfolio became hard to manage and the performance was poor. On your general advice I have paired down my holdings – generally, how many stocks should I hold?
- Lindsay – via email.
Great question: I am not here to through shade on other advisors our stock picking services but getting 49 buy recommendations in six months is silly on so many levels.
- Your criteria is not stringent enough if you are finding 49 stocks that are great buys every 6-months. We typically look at thousands of companies to get 3-5 recommendations. In fact, in an average year, we target 10-15 across our services, and if the value is not there it can be less. Quality over quantity.
- With 49 stocks you have basically bought the market if there is a decent degree of diversification. Less in fees and complications to just buy a market ETF.
“Markets are down but KeyStock picks are up. Are companies with strong value and cash on hand also a headge against volatility, like gold”.
- Graham – via twitter
Your Stock, Our Take
Could you take a look at Hollister Biosciences? Imo very undervalued. – Ramon via YouTube
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Hollister Biosciences (HOLL: CNX)
Current Price: $0.24
Market Cap: $65 million
What does the company do?
The Company operates as a licensed manufacturer and distributor of recreational cannabis and cannabis products and distributes its products through an arrangement with a cannabis distributor to licensed cannabis vendors in California and Arizona.
Key Points:
- Most micro-cap cannabis stocks don’t have any financials to speak of…meaning no revenue or profit.
- Thankfully, Hollister does have some decent numbers that we can dig into.
- Revenue for Q2 was US$17.6 million, an increase of 107% compared to the previous year. Revenue for the first 6 months of 2021, was the US $40.7 million, an increase of 330%.
- Hollister also reported profitability during the first 2 quarters of 2021 of about US$3.5 million, or $0.01 per share.
- With 300 million shares outstanding, this company has to produced significant earnings to register a decent amount of earnings per share. I would expect a share consolidation at some point.
- The company is targeting revenue of US$70 million; no mention of earnings guidance; up from US$30 million in 2020.
- The balance sheet is decent with about US$7 million in cash and just under US$4 million in debt.
A Few Takeaways
- A few things I like here are the U.S. focus and strong revenue growth. The limited market in Canada is quite saturated. We’ve definitely seen better opportunities in the much larger, developing U.S. market and the revenue the company has right away tells puts the company ahead of most publicly listed cannabis stocks.
- The company reports insider ownership of 50%. We like to see management and board aligned with shareholder’s, particularly for growth-oriented micro-cap stocks.
- There is a small amount of profitability which again puts its ahead of the vast majority of other cannabis stocks.
- On the other side…one thing I think the company could do a better job of is explaining their story and growth opportunity.
- The company does provide some information on their products and markets but after reviewing the press release, corporate presentation and MD&A, I wasn’t left with a good understanding of what will differentiate this company from its competitors.
- There is certainly a lot of growth in the U.S. cannabis market but there is also a lot of competition. The best answer to this I can see so far is that they are already well established with brands in a few key markets.
- Profitability while present is still relatively small.
- Revenue was also flat from Q1 to Q2 and is expected to be lower in the second half of the year relative to the first half.
Conclusion
Overall, I think there are some decent fundamentals here but it’s a small operator still, its higher risk and the story is still developing in the sense that the sustainability of revenue growth and profitability is more uncertain than we would like. We have a company that we prefer in the cannabis space which is more established and with more clear competitive advantages. For KeyStone, we would just monitor Hollister for now. We would be looking closely at the profitability over the next few quarters and into 2022 as well as any changes in the pace of revenue growth and developments in the growth strategy.
Your Stock Our Take
Came in from Evan – Would be interested to hear your take on HPQ Silicon Resources.
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HPQ Silicon Resources (HPQ:TSX-V)
Current Price: $0.69
Market Cap: $229 Million
What does the company do?
HPQ Silicon specializes in the exploration of quartz located in Quebec as well as development for its transformation into silicon (which is important for batteries and EV vehicles). The key property of the company is the Roncevaux property.
Technology developments include:
- The PUREVAP™ Quartz Reduction Reactors – a new green and low-cost process that will allow HPQ to transform Quartz (SiO2) into Silicon Metal.
- The PUREVAP™ Nano Silicon Reactor (NSiR) – a new process that will allow HPQ to go higher up into the Silicon value chain, by transforming the Silicon produced by the PUREVAPTM QRR into the nanomaterials that batteries and EV manufacturers are looking for.
- A new plasma-based process that could convert Silica (Quartz, SiO2) into fumed silica (Pyrogenic Silica) in one step.
Key Points:
- Pyogenesis (exposure to metal powders and processes) has made a strategic investment in HPQ of about 10% of the companies fully diluted shares. The reason for the investment is to expand their role as HPQ’s technology provider for the family of silicon processes which they are developing exclusively for HPQ, namely:
Recent Financial Results: (Q2, 2021)
- Still no revenue yet.
- Net Loss was about $1 million last quarter. So generally, we would still highlight the company as speculative.
- As of June 30, 2021 balance sheet had – $7.6 million in cash and about $1 million in debt.
- Plus, I want to add, HPQ’s share count is very high so I would anticipate more dilution in order to keep their R&D and capex going. And I will also note that they are at over 360 million shares fully diluted…. so it’s not the sexiest share float to work with.
Our Take:
Generally speaking, it’s an interesting story. The company is addressing lithium-Ion battery technology and the Electric vehicle market, which of course could be a huge opportunity. If the technology development pays off and the company is able to prove upon its pilot plants coming online and begin generating sales – an investment could potentially pay off.
BUT, as we have mentioned with other companies based on a technology that is still under development (like Cielo Waste Solutions), we are not scientists or experts in the process of turning Quarts into silicon metal, so we are completely relying on our trust that management is on the precipice of great technology. And the question you would need to ask yourself is whether you want to place your hard-earned dollars in something that you may not understand??
I should also add that there is also the thought that one day Pyrogenisis could buy out HPQ, but again, this is a speculative investment thesis.
It’s good to see some catalysts coming for the company, but ultimately, we would stay on the sidelines until we have more confidence in the business’ “proof of concept”.
Ryan’s conclusion.
We often separate small-cap companies into Concept vs. proof of concept stocks.
HPQ remains what we call a “concept” stock. Until a company has posted sales and then posted cash flow from those sales, it is a concept.
This type of business hold is a higher level of risk.
There are many companies out there that have the same market cap or valuation, which already have sales and earnings and have similar upside, with less downside as they have a “proof of concept”.
I am not saying one cannot speculate on a stock such as this, but it is high risk and the strategy of composing a portfolio of 15-25 stocks that are concept stocks is a bad one.
We prefer to have our client compose their portfolios with 15-25 stocks that have a different profile – one that includes revenues and cash flow as a basic proof of concept to start – at minimum. A market fallacy that once the company has proof of concept – sales and cash flow – you have already missed out….NOT THE CASE!
The best performing stock for the past 13 years on the TSX – Boyd had significant proof of concept when we recommended it in 2008. It also had all the blue sky upside that many aside to concept stocks – and actually achieved those blue sky returns. 10,000.
Still can have all the upside….XPEL, BOYD…all have proof of concept, extreme upside potential.
