KeyStone’s Stock Talk Podcast Episode 109 – Summary
This week we will begin by briefly touching on and article detailing how, and I quote, “Subprime Canadian borrowers are weathering the crisis just fine.” How Joe Bidens tax plan could affect US markets.
In our Your Stock, Our Take segment we take a look at three interesting companies. The first, Gatekeeper Systems Inc. (GSI:TSX-V), a provider of intelligent video solutions for public transport and smart cities. We have two “Stars” for listeners this week. The first, should be no stranger to KeyStone clients being the first Cannabis related stock we ever recommended just in December/January of the past year. The company, Trulieve Cannabis Corp. (TRUL:CNX), is a vertically integrated “seed-to-sale” company and is the first and largest fully licensed medical cannabis company in the State of Florida. Trulieve’s shares have surged 30% in the past week. Our Second star is, NexTech AR Solutions Corp. (NTAR:CSE), which develops and operates augmented reality solutions. The stock is up 70% in the past week. We let you know if it continues to be an opportunity or a potentially dangerous investment at present.
Subprime Canadian borrowers are weathering the crisis just fine.
Our Take: What happens when CERB and mortgage deferrals run out?
Teaching Coding and Basic Financial Literacy in Grade 1!
There is a great deal of negative news out there – this was a positive item that I noted over the past week. We are big on financial education and at KeyStone we also think we should be educating kids on the tech of tomorrow. The Ontario government seemed to take some real steps forward on this over the past week.
Premier Doug Ford shared details of the new Ontario math curriculum on June 23 and it’s got some big updates for grades 1 to 8 starting in September. Most notably, this change includes introducing coding skills and finance terms starting as young as grade 1.
That will include learning about units of data storage such as kilobytes and megabytes as standard.
Students will also learn vital personal finance skills in each grade.
As Per CTV News, these will begin with absolute basics like identifying all coins and bills and calculating change for purchases.
Then, starting in grade 4, students will learn the importance of spending and saving their money.
Grade 5 will see kids learn how to budget their money, and in grade 6 and up, they will learn and understand financial planning, according to Ford.
Biden’s Tax Plan
Biden’s Progressive Tax Rates
Current Biden Plan
Corporate Tax 21% 28%
Small Business Income Tax 37% 39.6%
Income and Payroll Tax 37% 51%
Capital Gains Tax 23.8% 39.6%
Death Tax on Unsold Stock 0% 40%
Trulieve Cannabis Corp. (TRUL: CNX)
Current Price: $22.23
Market Cap: $2.5 billion
What does the company do?
Trulieve Cannabis Corp is a, U.S.-based, vertically integrated and fully licensed medical marijuana company. This means that the company is involved in cultivating, processing and retailing cannabis and related products. The company is the largest medical cannabis company in the state of Florida and has recently expanded into additional markets.
Trulieve is a recommendation of KeyStone and has been our top cannabis recommendation since we initially picked up coverage of the stock in November of last year at a price of $16.00 per share.
The stock is up 28% over the past week as most of the rest of the cannabis sector continues to struggle.
What’s Driving the Stock?
There wasn’t news specific to Trulieve that has driven the share price. However, last week, its was announced that a joint Joe Biden-Bernie Sanders task force has recommended rescheduling marijuana on a federal basis, legalizing medical marijuana nationwide and allowing states to decide about recreational cannabis.
There is certainly speculation built into the move up in the share price over the last week as no actual regulatory changes have been enacted yet…and depending on who wins the upcoming election…anytime soon.
However, even before last week, Trulieve was outperforming the sector as the only profitable cannabis producer.
Why KeyStone Recommended Trulieve?
Our rationale for recommending Trulieve last year essentially came down to two things: profitability and market potential.
Like most people, we were following the cannabis sector closely for years before legalization happened in Canada. We published a very comprehensive report in 2018 on the cannabis sector and noticed two troubling features. First, the market is Canada was hugely oversaturated with licenced producers, and secondly, none of the companies were even close to profitability. Based on this we didn’t make any recommendations.
A year later, in 2019, we published another sector report and found that there had been little to no improvement in the profitability or supply/demand features of the market. All the Canadian producers continued to burn through massive amounts of cash and were too speculative for us to recommend. But we did take notice of Trulieve which was the only profitable company listed in Canada although its operations were in the U.S. The company had a market leading position, growth, and proven profitability and these were the features that made it stand out from the other 200 companies that we reviewed.
Since the time that report was released, we have seen a near 40% move up in Trulieve as the rest of the cannabis sector has generally exhibited atrocious performance with past leaders like Aurora Cannabis and Tilray down over 60%.
As always, we are reviewing Trulieve in the context of the recent price gains, financial performance, and future outlook, and will be providing updates to our clients.
Your Stock Our Take
Sandy via email – Great results for Gatekeeper Systems recently – is it a buy?
Gatekeeper Systems Inc. (GSI:TSX-V)
Current Price: $0.46
Market Cap: $39 Million
What does the company do?
Gatekeeper engineers, manufactures and distributes industry leading high-definition mobile video surveillance and safety solutions for a range of markets including school districts, law enforcement, public transit authorities, as well as the US military and Coast Guard. The company uses AI, video analytics and mobile data collectors to inter-connect public transit assets as part of intelligent transportation systems for Smart City initiatives. The company’s Platform-as-a-Service (PaaS) business model is designed to connect moving vehicles in the era of Internet of Things (IOT).
Recent Financial Results:
Revenue for both the three and nine months ended May 31, 2020 were the highest in the company’s history at $5.6 million and $12.6 million respectively which compares representing increases of 31% and 42% respectively.
Net income for both the three and nine months ended May 31, 2020 were the highest in the company’s history at $1.3 million and $1.42 , million representing an increase in profitability of 115% and 371%, respectively;
Annually recurring revenue for the nine months ended May 31, 2020 is estimated by management to be approximately $1.8 million, representing approximately 14% of total revenue.
There growth in the fiscal year-to-date, primarily driven by the Q3 results has been impressive. We appreciate the move towards a recurring revenue base, albeit still small at 14%. Historically, due to the contract driven nature of the business, quarterly results have been lumpy, moving in and out pf profitability.
We note: Non-operational items in the quarter which benefitted earnings include $247,086 in Canada emergency wage subsidy and over $100,000 in Foreign currency translation differences so between $350-$400K non-operating benefits directly to net income. The company also did not pay any tax due to past losses.
As at May 31, 2020, the company’s contracted sales backlog and sales funnel remains brisk, indicating the company is currently on track to hit revenue targets for the fiscal year 2020.
Over the last 8 quarters the company has posted 4 quarterly losses and 4 quarterly profits. While each of the last 4 quarters have been profitable to break even, Q3 was the breakthrough and accounted for over 80% of net income over the past year.
Gatekeeper has produces roughly $0.015 per share in EPS over the last 12-months, the bulk of which in Q3. It trades at roughly 30 times trailing earnings which is not cheap given its lumpy history. If it can smooth out earnings and add to its recurring revenue base we would become significantly more interested. Until then, we continue to monitor the interesting business.
NexTech AR Solutions Corp. (NTAR:CSE)
Current Price: $9.81
Market Cap: $622 Million
What does the company do?
NexTech AR Solutions Corp. develops and operates augmented reality solutions. The company is pursuing four verticals, which include:
- Ecommerce – (recently came out with an app.) customers include: Walther Arms, Wright Brothers, Mr. Steak, and Budweiser
- 3D/AR Advertising.
- AR for events.
- Hollywood Studios – AR for entertainment venue creating immersive content.
The stock was up over 70% last week and up over 460% in the past 3 months.
What is driving the stock?
After launching its augmented reality platform in late 2019, the company has announced partnerships with numerous companies including Budweiser and the Dallas Independent School District, which the market seems to be excited about.
But in more recent news:
- On July 8th, the company announced that it had filed to up-list its stock to the Nasdaq Capital Market.
- It recently announced it will be Launching into Video Conferencing Solutions and that it believed it would be able to expand capabilities in telemedicine. Again, getting the market excited.
- Revenue increased 177%, to $2.5 million compared to the same quarter last year.
- Adjusted EBITDA improved slightly to a loss of $1.29 million from a loss of 1.3 million for the same quarter last year.
- Basic Earnings per share (EPS) was a loss of ($0.02) compared to a loss of ($0.03) for Q1, 2019.
Looking at the company’s balance sheet, they have a net cash position of $2.3 million which is attractive.
The company recently changed their fiscal year end from May 31st to December 31st so it was difficult to find trailing twelve month revenue figures, but based on the last trailing 10 months, the company was trading with a trailing Price-to-Sales multiple of around 95 times which is certainly a premium valuation based on its fundamentals. But with a technology company here, we are certainly getting a tech valuation in the market.
NexTech AR Solutions seems to show some promise as it has established a few foundational customers and has some revenue to back it up. Augmented Reality is certainly the future of marketing via cell phones and e-commerce. I believe that the company could perform well into the future, but this is purely speculative and based on the idea that the company will be able to continue to grow rapidly and actually break into profitability in the future. Which there are no guarantees of.
Seeing as the company is not profitable and is trading at an extremely high Price-to-Sales multiple, we wouldn’t recommend the stock to our clients. We are fundamental value investors, not speculators. With this being said, we will continue to monitor the stock, but its recent share price performance has made it our Star of the Week.