KeyStone’s Stock Talk Podcast Episode 160

We have one final show to close out 2021 and ahead of our 2022 “predictions” show where we review last year’s predictions and make some bold predictions for the year to come. In this show we review our recently released Special Report that included a review of every NASDAQ-listed stock with a market cap of under $2.0 billion – which is over 3,000 stocks. We will also look briefly our just released Canadian Tax-Loss Selling report.

In our YSOT segment, Brennan reviews Skylight Health Group (SLHG:TSX), a multi-state primary care group in the United States. The company has produced strong revenue growth in 2021, but a lack of cash flow appears to be sinking this once high flying small-cap.

In our second YSOT Aaron reviews a listener question on Algoma Steel Group Inc. (ASTL:TSX), a Canadian producer of hot and cold rolled steel sheet and plate products. The company, which recently became public once again has seen profits soar on higher steel prices – Aaron looks at the sustainability of this profitability.


NASDAQ Under $2 Billion Small-Cap Market Report


U.S. Research report individually reviewed approximately 3,500 NASDAQ (primarily) listed stocks with market caps under US$2 billion. The impetus of the project was to get a better understanding of current valuations of this group, increase our analyst’s general knowledge of this set of companies and create a group of over 100 stocks which have a threshold level of the GARP or growth at a reasonable price criterion we use to identify near and long-term investment opportunities.

The research produced a list of just over 130 stocks which we have provided statistical analysis on in the tables section. From these initial numbers and our initial review of the businesses, we produced a list of 38 stocks which we provide mini reports on detailing the businesses, current valuations, and merits as potential recommendations. He report produced 5 recommendations, 8 updates from companies currently in coverage, 7 stocks in our Top Tier Monitor List and 19 stocks in our standard Monitor List.

What struck me is the diverse range of companies covered in the report including everything from gold & precious metals producers, to innovative Software-as-a-Service or SaaS businesses, to REITs, semiconductor manufacturers, retailers, e-commerce companies and enablers, payment processors, hardware manufacturers, biotech’s and health care providers and basically everything in between. A huge breadth of companies to choose from, which is great.

I am excited by this list and the books we have gained on so many of these companies will most certainly lead to new recommendation in 2022 and beyond.

Stealth Correction:

Of note, during the course of compiling this report, valuations in the US (and Canadian) micro, small and mid-cap markets have shifted significantly lower in what we would call a “stealth sell-off”. While the NASDAQ index remains in positive territory year-to-date in 2021, over 37% of NASDAQ stocks are now down 50% from their 52-week highs. The FAANG stocks now makeup almost a quarter of the S&P 500 and are masking a rather significant correction in the rest of the market, particularly in the micro, small, and mid-cap space. Despite the correction generally in this space, the valuations remain historically elevated to a degree which should give readers an idea of the extent that we saw irrational valuation heading into 2021 and in the early parts of the year. Value may be beginning to appear in certain segments, but I remain cautious broadly speaking.

Tax Loss Selling

Tax loss selling itself and the strategy to take advantage of potential opportunities that may arise due to tax loss selling is not specific to December 2021. Both can be used each year moving forward.

What it is and why it is done.

The practice known as tax-loss selling or tax loss harvesting involves selling investments in a loss position to offset the capital gains realized by other investments. In this case, the investment we are referring to is common stock. An example would be:

  • During 2021 You Sold in Shares (Stock) in ABC:TSX for a Gain: $1,000.
  • During 2021 You Sold in Shares in XYZ:TSX for a Loss: $1,000.

$1,000 gain, $1,000 loss, the net effect is that they offset each other and you pay no tax.

Tax-Loss Selling: In Practice.

If you have significant capital gains in 2021, you may be able to take advantage of tax loss selling. An example from our Canadian Small-Cap Research is Photon Control (PHO:TSX), which had been in our Focus Buy Portfolio since it traded at $0.46, 5-6 years ago. We also re-recommended the stock at $0.88 just over a year ago in March of 2020. Mid 2021 it was acquired by another public company for $3.60 per share all in cash. The gains were between 200 to just under 700% for many clients. This is a great thing, but it triggers significant tax consequences. On gains like that, one should never begrudge paying taxes and capital gains are far less than what you pay on your regular income, but if you can offset those gains with some past losses and reduce your taxes, why not? That is where tax loss selling or harvesting comes in in practice.

What to avoid.

Never sell a stock just to create a loss. While you may want to avoid the taxman and offset gains made during 2021, a decision made just to avoid taxes without thought to the underlying investment is poor investing strategy and can often be regrettable – costing you more in the long-run.

A stock at a loss in your portfolio is not the sole criteria for utilizing tax loss selling.

When to use tax-loss selling.

Take advantage of tax-loss harvesting ONLY in stocks you are already planning to sell as a result of your ongoing investment criteria/strategy: (which should include)

  • Selling Businesses where the fundamental criteria for originally purchasing the stock has changed including deteriorating financials, strategy changes etc.
  • Do not sell good businesses that trade at a loss, just to reduce a capital gain in one year.

What is the opportunity?

Take advantage of irrational selling. (investors, with an eye to reduce taxes, sell shares in companies indiscriminately. They sell because they are in a loss position with no mind to the current value of the business. While not always the case, this can temporarily depress the price of a good long-term business in “tax-loss selling season from late November to near the end of December – the exact timing can vary, but in that range.

Your goals:

  • BUY: good businesses with reasonable financials that face tax-loss selling – these are your proverbial “babies that get thrown out with the bath water”.
  • Avoid poor business with declining to no financial position that face tax-loss selling – remember, just because a stock was at $30 earlier in the year and is now at $7 today, it does not mean it is on sale. Many stocks will be sold in tax loss selling season for a very good reason. They are terrible investments. That $7 stock that was at $30 is not necessarily on sale if it is a poor business. It can easily drop to $3.00 in the coming year if it continues to underperform.

Your Stock Our Take

Came in from Andy – SLHG has since moved to a 52 week low. Curious to hear your thoughts on why?


Skylight Health Group (SLHG:TSX-V)

Current Price: $1.74

Market Cap: $69.6 Million

What does the company do?

Skylight Health operates a US multi-state primary care health network comprised of 24 medical clinics providing a range of services from primary care, sub-specialty, allied health, and laboratory/diagnostic testing.

The company is focused on shifting from a traditional fee-for-service (FFS) model to value-based care (VBC) model through its proprietary technology, data analytics and operations infrastructure.

  • In a FFS model, payors (commercial and government insurers) reimburse on an encounter based approach which puts a focus on volume of patients per day rather than creating positive patient outcomes.
  • In a VBC model, providers are rewarded for keeping patients healthy and lowering unnecessary health costs instead of volume of services. VBC will lead to improved patient outcomes, reduced cost of delivery and drive stronger financial performance from existing practices.

Key Points:

  • The company is growing primarily through acquisition, having made 8 over the past 12 months. They essentially touting themselves as a White Knight for Fee-For-Service primary care practices.
  • On May 28th, 2021, the company conducted a 1:5 reverse stock split and has 38.8 million shares following the split.
  • On December 7th issued US$5.8M preferred stock yielding 9.25%.

Recent Financial Results: (Q3, 2021)

  • Revenue was up 270%, to $12.2 million compared to the same quarter last year.
  • Net Loss was $(3.4) million compared to a loss of $(1.3) million in Q3 2020.
  • Adjusted EBITDA was a loss of $(2.6) million, compared to a gain of just $331K last year.
  • Balance sheet – $5.6 million in cash, leases and debt of $17.3 million, providing net debt of $11.7 million.
  • Management provided 2021 revenue guidance of $41 million, providing a Forward EV/Sales multiple of approximately 2.1x. And if we use the Q4 run rate of approximately $52.4 million, we are looking at a multiple of 1.6 times. (I honestly do not think these multiples look bad, but the question I have is how long will the company continue to lose money).

Our Take:

To answer Andy’s question on why Skylight’s share price has reached a new 52 week low, I would argue that we are seeing a few things:

  • Most small-cap names were decimated over the course of 2021, after a very strong rally in early 2021 driven by the meme stock exuberance.
  • As these small-cap names came off and entered tax-loss selling season, more pain evidently followed.

Now more specific to the business:

  • Throughout 2020 and into 2021, we saw many healthcare providers and clinic operators that have a tech side to their business receive tech multiples. In the case of Skylight Health, 98% comes from.medical services… so over 2021, we have seen many of these ridiculous multiples come back to earth.
  • We need to see the business focus on profitability, where right now the business is making acquisitions but not working toward profitability…

So, all in all, I think that it is an interesting business which is growing revenue at a great pace. It’s neat that it is trying to disrupt the healthcare space with a Value-Based Care system from a Fee-For-Service model (but I would like to dig deeper in understanding this model and potentially asking management how much of its total revenue is generated through Value Based care right now). The business trades with reasonable multiples, but until we see movement toward profitability, and not into a larger deficit, it’s a name we would simply continue to monitor.

Algoma Steel (ASTL: TSX)

Price: $13.40

Market Cap: $1.5 billion

Company Description:

Algoma Steel is an integrated steel producer in North America with raw steel production capacity of 2.8 million tons per year. The company has a 100-year history of operations. It was public in the past and just recently returned to the TSX with a reverse merger in October of 2020.

Key Points:

Algoma is one of the commodity stories that we have been received a few questions about recently. The stock is trading slightly lower that the $14.40 level it was at when it commenced trading on the TSX in October but it has had good performance over the last 5 trading days; up about 11%.

Fundamentally, Algoma is an interesting situation. The financial performance in the most recent quarter (which was Q2 fiscal 2022) was very strong.

Q2 Fiscal 2022 Summary:

  • Shipments were up to 587,340 tons, a 13.7% increase compared to 516,294 tons in the prior year quarter.
  • Revenue was up 168% to $1.01 billion, compared to $377.0 million in the prior year quarter.
  • Adjusted EBITDA was $430 million in the quarter and cash flow from operations were $380 million compared to negative cash flow of $56 million in the same quarter of last year.
  • Strong performance was the result of higher shipments in the period and a huge increase in average realized steel prices; up 146% to $1,594 per ton, compared to $649 per ton in the prior year quarter.

Looking forward to Q3 the company maintains a positive outlook.

Q3 Guidance:

  • Shipments: 590 – 610k tons (up slightly from Q2)
  • Adjusted EBITDA: At least $450 million

The company has an interesting strategy for future growth. Algoma recently announced an investment to build a new electric arc steelmaking facility. This has the potential to increase annual production from 2.8 million to 3.7 million tonnes. The facility also has the potential to help reduce the company’s carbon footprint by reducing CO2 output 70% and helping to make Algoma a leader in “green steel”.

Algoma’s board of directors also announced a plan to retire all of the company outstanding senior, secured, long-term debt. This would be a debt reduction of US$358 million. It would result in a very healthy balance sheet with low leverage and save an estimated US$8.25M in quarterly interest payments.


The valuation on Algoma relative to current financial performance is very attractive. Algoma produced about $450 million in free cash flow over the first 6 months of the year. At a market capitalization of $1.5 billion, this is a price to free cash flow multiple of just over 3 times based on a half year of performance. Annualizing the free cash flow would result in an incredibly low price-to-free cash flow multiple, but there are, of course, clear risks to annualizing the performance of a company that is commodity price dependent.


Overall, I think that the fundamentals on Algoma are very interesting. The company is producing substantial amounts of free cash flow, they have a plan for growth, the balance sheet is healthy and the valuation is low.

The key risk here is in the commodity price exposure. The price of steel and more specifically, the price of Hot Rolled Coil and Rolled Plate steel, are what will be the primary drivers of financial performance and cash flow for Algoma. There has been a massive increase in steel prices from August of last year. Since then, prices seemed to have peaked, but are still at elevated levels. In an environment where steel prices stay strong or even increase, there is substantial upside potential in Algoma. However, the flip side is that if prices were to weaken significantly, then investors would face substantial losses.

I think the important thing to remember here is that investors in Algoma are largely investing in the price of steel. For those that are bullish on this commodity or just want to add some commodity stocks in general to their portfolios, Algoma provides a compelling investment proposition. But don’t get too caught up in the in the current fundamentals, cash flow and valuation, as they can change quickly. Understand the risks of investing in a commodity stock like this, set you position size appropriately, and expect volatility.



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