KeyStone’s Your Stock Our Take: Thermal Energy International Inc. (TMG:TSX-V) and Dog of the Week: Cineplex Inc. (CGX:TSX)

This week in KeyStone’s Stock Talk Podcast we start by discussing the hot topic that so-called, Robinhood traders are responsible for the V-shaped recovery we have seen in the market since COVID-19.

In our “Ask Us Anything Segment”, we take a listener question on how to get an advantage investing in small-caps and we provide an example of how we used this tool to re-recommend profitable Small-Cap, Photon Control (PHO:TSX) to clients, which has nearly doubled in the past 2-months.

Our Dog of the Week is the embattled Cineplex Inc. (CGX:TSX), Canada’s largest movie theatre chain. The stock fell 17% today, after global movie theatre giant Cineworld (CINE:LSE) announced that it would not be following through with the $2.8 billion acquisition of Cineplex, initially announced in December of last year.

Finally, in our Your Stock Our Take Segment we answer a listener question on micro-cap Thermal Energy International Inc. (TMG:TSX-V), which is engaged in the development, engineering and supply of pollution control, heat recovery systems, and condensate return solutions, which can help their customers increase facility efficiency and reduce energy consumption.

 

Crisis Portfolio Building Webinar 2.0

Live Webinar Dates & Times

 June 16, 2020 @ 7:00pm EDT

New Topics, New Stocks – but at its core, the Live Webinar will show you how to take action during a crisis and start building a simple 15-25 stock portfolio designed to enrich you, not your advisor.

New Topics Include:

  • Explore how the current crisis could be a tipping point for technological change in areas such as work from home, cloud computing, cybersecurity, artificial intelligence, the internet-of-things and more.
  • Examine how in an environment where 10-year bonds are a paltry half a percent, high quality dividend growth stocks, many yielding over 5.5%, are your most powerful tool.
  • The webinar will provide specific opportunities in healthcare, U.S. tech, gold, and alternative energy.
  • How to deal with any hot stock tip and immediately classify it as speculation or investment worthy.

Why Attend?

All five stocks recommended in KeyStone’s Spring webinars have produced strong gains including Photon Control (PHO:TSX), jumping 100%+ and Enghouse (ENGH:TSX) jumping 53% in the crisis on record earnings! Plus, they’ll provide five current Buy recommendations to add to your portfolio today!

Attend if you simply want to become a better investor – build your portfolio with a proven, but completely different approach that you will find with a Big Bank Advisor.

Idea – Robinhood Traders Responsible for V-Shaped Rally Since COVID-19

Trading Generally vs. Investing – investors can certainly use the Robinhood app, it is designed to trade. For the average investor, trading is not a good idea. In fact, it can be seriously harmful for your portfolio.

Study Published in July of 2019 by Researchers at Sao Paulo School of Economics in Brazil.

Day Trading for a Living?

Abstract:

We show that it is virtually impossible for individuals to day trade for a living, contrary to what course providers claim. We observe all individuals who began to day trade between 2013 and 2015 in the Brazilian equity futures market, the third in terms of volume in the world. We find that 97% of all individuals who persisted for more than 300 days lost money. Only 1.1% earned more than the Brazilian minimum wage and only 0.5% earned more than the initial salary of a bank teller — all with great risk.

“The Trading Lifestyle”

Captain of this ship may be Barstool Sports’ founder Dave Portnoy who cashed in on his platform selling a stake in the business to Penn National Gaming which valued it then at $450 million – great entrepreneurial win. He has taken his 1.5 million Twitter followers into the market with videos touting hefty gains and unrivaled bullishness. I have nothing against Dave, but in his “Davey Day Trader Global” videos, he frequently states the optimistic mantra that “stocks only go up.” We are just looking at the evidence which shows trading is not a way to make money long-term.

It can seem tempting. Do not buy into it!

Look at the studies. Real wealth is created through investing – full stop, not magic button trading programs.

 

Ask Us Anything Segment

Question: How to get an advantage investing in small-caps.

It is an extremely broad question and there are many directions I can point you in. One of the reasons why we spend countless hours researching profitable Small-Cap stock is that it is one area where there are informationals inefficiencies which we can use to our advantage. Because of the lack of coverage – often there are no analysts or just a couple covering a stock versus twenty to a hundred or more in a large cap stock, getting to know a business can truly be profitable.

 

Study the Outlook

Be it from the company’s latest quarterly press release or in their quarterly financial statements look for the business’s guidance our outlook for the next quarter or coming year. Not all will provide this info but may will. In the case of a Small-Cap stock, if you are one of only a few people truly watching this, and you understand it, it can give you and edge – and be very profitable in some cases.Example: Photon Control (PHO:TSX)

On March 18th, of this year, the company reported its Q1 Outlook.

“As of today, we have recorded $14 million in revenues for Q1 2020, and we currently expect $1 million of additional shipments by quarter-end……. At this revenue level, we would expect Q1 2020 EBITDA margin to be at least 30% of revenue.

We looked at last year’s first quarter revenue of $8 million and saw the company expected 87% growth at minimum and massive jump from an EBITDA loss of -$1.5 million to a gain of at least $5 million. With the stock trading at the mid $0.80 range. It appeared like an opportunity. We got this all from reading the companies Outlook, a great place to start if you want to gain an advantage in small-cap investing.

Incidentally, PHO has now gained 88% in the past 2-months for our clients since we issued our buy report.

 

Your Stock Our Take

Christian – “Can you take a look at Thermal Energy Inc., they might have the wind at their back with all the current interest in reducing carbon footprint. They also provide their clients with annual energy savings and quick ROI. Take a look at them for me if you could?”

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Thermal Energy International Inc. (TMG:TSX-V)

Current Price: $0.08

Market Cap: $12 Million

What does the company do?

Thermal Energy International Inc. is primarily engaged in the development, engineering and supply of pollution control, heat recovery systems, and condensate return solutions, which can help their customers increase facility efficiency and reduce energy consumption.

Key Points:

Looking at the company’s past share price performance, the stock has essentially been range-trading between $0.05 and $0.17 over the last 3 years – so it’s definitely a higher-risk type of play.

Looking at how the company has been performing financially:

Recent Financial Results: (Q3, 2020)

  • Revenue was up 87%, to $5.8 million compared to the same quarter last year.
  • EBITDA was $709 thousand compared to a loss of $734 thousand for the same period last year.
  • Net Income came in at $429 thousand compared to a loss of 889 thousand for Q3, 2019.
  • Earnings Per Share (EPS) came in at $0.003 per share compared to a loss of $0.03 per share for Q3, 2019.
  • Looking at current TTM figures compared to the same period last year, Revenue was up around 9.5% while EBITDA and Net Income were up substantially from a loss in the previous TTM period.
  • So, taking these figures into consideration, it does appear as if the company’s financials are progressing in the right direction.

Our Take:

I certainly like the industry that Thermal Energy International Inc. operates in and I agree with Christian that the stock might have the wind at its back due to the interest in reducing emissions. Christian is usually pretty good at asking a Your Stock Our Take question on a company in an interesting industry.

Financially, the company has been progressing into profitability and on a valuation basis they are trading at relatively low multiples, coming in with a P/E multiple of around ~7. They also have a decent balance sheet with a net cash position of $500 thousand but it is worth noting that the Thermal Energy has a D/E ratio of 0.66, so they are certainly using leverage to grow the business.

Something I believe that you should remain cautious of if you are looking to invest in Thermal Energy Inc. is the company’s large increase in the number of outstanding shares, which ballooned to 160 million shares this past quarter, from only 32 million shares in the same period last year. This is definitely a concern as this might indicate the company will further dilute in the future and it makes the company’s EPS in the last quarter relatively insignificant, coming in at only $0.003 per share. If we were to dig deeper into the company the next piece of analysis that we would conduct is to assess whether this increased share count was due to any recent acquisitions or what the company planned to do with the cash raised from issuing the shares.

To conclude, we like the industry, the trajectory of the company’s financials and its decent valuation. But because of the increase in share count and not very meaningful earnings on a per share basis, we would refrain from telling anyone to invest in the company.

 

Weekly Dog

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Cineplex Inc. (CGX: TSX)

Current Price: $11.50

Market Cap: $720 Million

 What does the company do?

Cineplex Inc is the largest movie theatre chain in Canada with a network of 165 theatres and 1,695 screens. The company also owns other media assets.

Key Points:

Cineplex has had an incredibly difficult year in 2020. Being in the movie theatre business, the company has been effectively shutdown during the pandemic and all of the theatres remain closed as of today.

Today the stock price fell 17% after global movie theatre giant Cineworld announced that it would not be following through with the $2.8 billion acquisition of Cineplex, initially announced in December of last year.

The deal was announced at a price of $34 per share but Cineplex’s share price fell 65% in March after the Covid-19 shutdown began and all movie theatres in Canada closed.

Cineworld made a deal to buy shares at $34 that now trade at $11.50 so for me it seems obvious why they would want out of this deal. Cineworld is claiming that Cineplex breached covenants and Cineplex is now saying that it will sue.

Conclusion:

Would Cineplex be a company that KeyStone would consider recommending? The answer is a no.

Financially, the company wasn’t doing great even before the pandemic. In 2019, revenue was up 3.6% but adjusted free cash flow per share declined 35%. Cineplex has delayed its Q1 filing but we don’t need to see the financial statements to know that the company isn’t making any money right now. Including lease obligations, the company also has a very levered balance sheet with nearly $2 billion in debt.

Even in the best of times, the movie theatre industry is highly dependent on the lineup of blockbuster movies that are released. A major long-term challenge facing the industry is how to remain competitive and the number of entertainment options continues to explode for consumers. There has been notable trend of declining movie theater attendance in recent years. Same theater attendance was down 5% in 2019 and 2% in 2018.

What we see is a company facing significant short-term and long-term operating challenges and which also has a leveraged balance sheet. This is a dangerous combinations and this is a company would avoid.