Today we kick off with a preview of the OTC QX market and the construction of our US Small-Cap Discovery Portfolio in our US Growth Stock Research, in our Your Stock Our Take Segment we review a viewer question on the wildly volatile healthcare Small-Cap Nobilis Health Corp. (NHC:TSX) . And in our Stars and Dogs of the week we review two Internet Behemoths, Alphabet Company (GOOG:NASDAQ) and Amazon.com Inc.(AMZN:NASDAQ).
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.
Now, let’s dig into the show.
I would like to welcome again, myhost, KeyStone’s Senior Equity analyst, father of 1, and a man who, this Monday will, for the first time in over 40 years, finally hang up the vampire cape, turning in his pillow case and officially retire from the trick or treat game, Mr. Aaron Dunn.
Launching Our US Small-Cap Discovery Portfolio – looking for profitable – small, but growing US stocks with a lack of current coverage, typically with market caps of under $500 million. Stocks that have just broken through into profitability or turnaround situations.
1) Start with a quick explanation of the OTC.
In the United States, over-the-counter trading in stock is carried out by market makers using inter-dealer quotation services such as OTC Link (a service offered by OTC Markets Group) and the OTC Bulletin Board (OTCBB, operated by FINRA). The OTCBB licenses the services of OTC Link for their OTCBB securities. Although exchange-listed stocks can be traded OTC on the third market, it is rarely the case. Usually OTC stocks are not listed nor traded on exchanges, and vice versa. Stocks quoted on the OTCBB must comply with certain limited U.S. Securities and Exchange Commission (SEC) reporting requirements. The SEC imposes more stringent financial and reporting requirements on other OTC stocks, specifically the OTCQX stocks (traded through the OTC Market Group Inc). Other OTC stocks have no reporting requirements, for example Pink Sheets securities and “gray market” stocks.
Some companies, with Wal-Mart as one of the largest, began trading as OTC stocks and eventually upgraded to a listing on fully regulated market. By 1969 Wal-Mart Stores Inc. was incorporated.
2) Why do you find opportunities here?
This is discovery research – we literally pour over the financial statements of over 1,000 US stocks and discard 99% as garbage in this area to try and uncover a couple of potential gems – the ugly ducklings that can grow into brilliant swans…it is a different type of research, but when you are looking where no one else is, you have the potential to find a mispriced stock.
In this area of our research – we buy earlier before the greater market.
3) How would you rank the OTC in terms of risk profile?
Highest risk end of our coverage in the US. – only suitable for risk capital.
STARS AND DOGS
Dog – Amazon.com, Inc.(NASDAQ:AMZN)
Shares of Amazon.com Inc. AMZN, -4.93% fell more than 40$ or 5% Friday after the e-commerce giant reported earnings below analyst expectations and sales that were merely in line with forecasts. Amazon.com said it earned $252 million in the third quarter, or 52 cents a share, compared with $79 million, or 17 cents a share, in the third quarter of 2015. Sales rose 29% to $32.7 billion, compared with $25.4 billion a year ago, the company said. Analysts polled by FactSet had expected the e-commerce giant to report earnings of 77 cents a share on sales of $32.69 billion.
But according to the Seattle-based e-commerce giant, there’s a very good reason why it whiffed on profits.
On an earnings conference call Thursday, Amazon Chief Financial Officer Brian Olsavsky explained Amazon (AMZN) has invested heavily in two key areas: fulfillment centers and video.
Indeed, during Amazon’s third quarter, the company built 18 fulfillment centers — the very same warehouses where many orders are filled. For the entire calendar year, Olsavsky said he expected Amazon to finish building 26 fulfillment centers in all.
“The last year we added double-digit fulfillment centers was 2012,” Olsavsky pointed out on the call.
Indeed, it’s worth noting that when Amazon funnels its revenues into aggressively building out more fulfillment centers, its profits have taken a hit time and again.
The other key area Amazon has invested heavily in? Video. Although Amazon never specifically breaks out just how many people use Prime, its popular loyalty rewards program, Consumer Intelligence Research Partners estimated in June that there were roughly 63 million users.
Video, in the form an ever-expanding selection of licensed content and original content, has been key to helping drive Prime memberships and retaining those users. But original content in particular doesn’t come cheap. Amazon did not disclose on the earnings call how much it’s pouring into video, but its competitor Netflix (NFLX) plans on spending $6 billion in cash on original content throughout 2016.
While on most traditional financial metric ( ) the stock looks pricy, it has been very hard to bet against Amazon – despite the drop on the earnings miss, the stock is still up 15% year-to-date and 257% in the last 5 years, and over 1,900% in the last 10-years.
While today’s earnings miss gives it the not so coveted status of KeyStone’s Dog of the week. The near-term correction may have investors who buy on weakness howling all the way to the bank in 2-3 years from now.
Alphabet Company (GOOG:NASDAQ) – is of course, the holding company for Google – which includes Internet products, such as Search, Ads, Commerce, Maps, YouTube, Apps, Cloud, Android, Chrome, Google Play, and hardware products, including Chromecast, Chromebooks and Nexus,
Eighteen years after its founding, the world’s biggest online advertising company, is now a search, mobile and video juggernaut with a $600 billion-plus market cap and over $200 billion in annual sales, is still growing the number of ads it sells at a 30%-plus clip. That’s an accomplishment that doesn’t get enough credit, one that highlights both the company’s ability to execute against its many opportunities and how the broader online ad industry keeps growing at the expense of older forms of media. Google parent Alphabet (GOOGL) reported third-quarter revenue of $22.45 billion (up 20% annually) and adjusted EPS of $9.06 (up 23%), topping consensus analyst estimates of $22.05 billion and $8.64.
Fueling most of the Q3 growth: Ad revenue from Google’s own sites rose 23% to $16.1 billion. Also helping was the fact that Google’s non-advertising revenue rose 39% (better than Q2’s 33%) to $2.4 billion
Ad sales on non-Google sites remained pressured, rising just 1% to $3.7 billion as display ad dollars continue shifting towards Facebook (FB) and other social media platforms.
Anecdotally, I am not even sure my 10 year old knows what network TV is, but I know I cannot pry him away for YouTube – — which gets over half its video views from mobile and has become a big advertising channel for many brands and online merchants. On its earnings call, Google mentioned YouTube’s 6-second Bumper ads continue seeing strong uptake with brands, and that it has rolled out measurement tools which show YouTube ads are nearly twice as likely as TV ads to drive search activity.
I will not bet against Google, despite its size, it continues to grow and create cash flow at a tremendous clip –
This gives it the coveted status of our Star of the week – something tells me the stock will may an appearance here again in the not so distant future.