KeyStone’s Stock Talk Podcast Episode 122

This week, we debut a new segment pitting 2 KeyStone analysts against each other in a rapid-fire “Case For and Case Against” an individual stock. Our third analyst will act as judge, jury, and executioner to pick the winning argument. In the line fire this week is Cannabis giant, Canopy Growth Corporation (WEED:TSX). This week’s Your Stock, Our Take was sent in from a listener on Constellation Software Inc. (CSU: TSX), a great Canadian success story and capital compounder which manages and builds industry specific software. Finally, our Star of the Week is VitalHub Corp. (VHI:TSX-V), which develops mobile healthcare solutions that allow clinicians to access information about patients. The stock is up over 20% in the last 5 days and 90% in the last three months. We let you know if it can continue.

The week we introduce a new segment and get into some spirited debate. The segment will be called The Case For & Against a Stock. This week, Brennan will be providing the case for or the agreement for investing in Canopy Growth Corp and I will be opposing him with the case against slapping your hard earnings dollars down on this stock and Ryan will be arguing the case against Canopy at present.  Aaron will act as the judge, jury, and ultimate executioner to determine who wins this epic debate.

Each participant will only get one minute to get out their argument. 

The Case for and Against:

Canopy Growth Corp. (WEED: TSX) 

Quick description of Canopy – a diversified cannabis, hemp and cannabis device company, offering distinct brands and curated cannabis varieties in dried, oil and Softgel capsule forms, as well as medical devices.

Current Price: $26.10

Market Cap: $8.87 Billion

For Case:


  • Canopy was a first market mover.


    1. This not only provides them a considerable amount of brand recognition among consumers (especially in such a competitive market), but also provides them with a runway for access to funding while they try to work into profitability. 
    2. On the note of funding, the company does have a cash balance of over $2 billion which should allow them to remain operational for some time. 


  • Diversification & International Exposure


    1. Leading market share positions in Canada, US, and Germany. 


  • The Macro Environment is compelling in these jurisdictions.


    1. Canada’s retail Cannabis sales are expected to increase by 4x through 2023, 
    2. the US CBD market is anticipated to grow by 6x through 2023 (not to mention if federal legalization takes place)
    3. Germany’s market is expected to grow by 10x through 2023.


  • Opportunity in the beverage market.


    1. Canopy currently has ~76% market share in the Canadian ready-to-drink cannabis beverage market. I believe beginning with Canada could set them up to dominate the world RTD cannabis beverage market. 


Case Against

Number 1: Despite all the promises, Canopy has never made a dime of economic profit. For any business, profit is proof of concept. Canopy remains just a concept.

Number 2: Poorly managed – Canopy vastly overestimated consumer demand and overbuild production – as a result, the company shut down cultivation facilities and took significant write-downs on grossly overpriced acquisitions

Number 3: In Canada, the rollout of LP licenses, distribution and retail was bungled by governments at all levels and continues to be a challenge with a thriving black market and weak enforcement.

Number 4: Better options out there including top recommendation, Trulieve, which dominates the medical market in Florida, is profitable and has higher growth. Up 94% in 2020, where Canopy is down 5%.

Number 5: Analysts estimate you have to wait another four years to see marginal profitability from Canopy – right now, you are paying 20 times sales.

It is one think to grow a business, it is quite another to grow it profitably and Canopy has shown zero ability to do so and should not receive your investment dollars until it does. 

It is clear Brennan’s case has been literally clouded by his excessive use of their product.

Win: Ryan

On a positive note – Canopy has a better balance sheet than most and a great partner in Constellation. Iy may be able to wait out all others, gain market share and be a long-term winner. But when the mention of profitability is still 3-4 years out, we see no hurry.

Your Stock, Our Take

Constellation Software is one of the top technology companies in Canada and I would like to get your take on the company.

Catherine. – via email. 

Your Stock, Our Take

Constellation Software Inc. (CSU: TSX)

Price: $1,500

Market Cap: $32 billion

What Does the Company Do?

Constellation Software acquires, manages and builds industry specific software which provide specialized, mission-critical solutions that address the particular needs of our customers. The company reports over 125,000 customers in over 100 countries.

Key Points:

  • The stock has been a very strong performer, tripling in price over the past 5 years and up about 19% year to date. 
  • Constellation Software has been primarily a growth by acquisition company. 
  • Roll up strategies can be very risky. So far, the company has demonstrated a high level of skill acquiring and integrating new businesses. 
  • The company made US$550 million in acquisitions last year. 

Recent Financials

  • Q2 revenue grew by 9% to $922 million. 
  • Organic revenue growth was -8%. The company completed a number of acquisitions in the quarter for a total price of $67 million. 
  • Net income increased 12% to $83 million ($3.90 on a diluted per share basis) from $73 million ($3.45 on a diluted per share basis) in Q2 2019.
  • Last year, in 2019, revenue growth was 14%. Revenue has increased at an average rate of about 18% over the past 3 years. 
  • In 2019, organic growth was negative 1%, or about flat after accounting for currency exchange. 
  • The stock trade at about 31 times operating cash flow reported over the last 12 months and 65 times net earnings. 


Constellation Software certainly trades at a premium valuation, particularly when we look at the earnings. Based on cash flow, the valuation is not unreasonable, especially when we take into account the tremendous track record of value creation over the past decade and the fact that software companies tend to trade at higher valuations. Constellation has relatively low capital expenditure requirements and for this reason it is probably better to value the company on cash flow and free cash flow. 

A concern I have is definitely the lack of organic growth. Obviously, this year is an outlier due to Covid-19, but the company has generally lacked organic growth over the past 18 months. Even previous to this period, organic growth has been in the 2% to 3% range, which is okay but not particularly impressive. The lack of organic growth means that the company will continue to be dependent on acquisitions. 

Given where growth sits right now, I don’t Constellation as particularly attractive based on valuation. Of course, this can change at any time-based new acquisitions or an uptick in the existing business. I know a lot of analysts think that the stock is cheap at the current price. This may be the case relative to its historic valuation. It certainly looks reasonably valued compared to other large cap, Canadian tech companies with growth. 

Its not a buy recommendation for KeyStone as we tend to be more price sensitive and would want to see better organic growth. But I would not bet against the company. 


Star of the Week

VitalHub Corp. (VHI:TSX-V)

Current Price: $2.95

Market Cap: $69.7 million

What does the company do?

VitalHub Corp. develops mobile healthcare solutions that allow clinicians to access information about patients. Its technologies include blockchain, patient flow, mobile and web-based assessment and electronic healthcare record solutions.

Star Performance:

The stock is up over 22% over the last 5 trading days and up over 96% in the past 3 months.

What is driving the stock? 

Driving the stock is a material licensing transaction announced on October 19th, where VHI’s newly acquired subsidiary, Intouch, is going to have its digital health platform installed at King’s College Hospital NHS Foundation Trust in the United Kingdom which treats over one million patients annually. The expansion includes the licensing of Intouch’s latest healthcare modules, enabling a transition to virtual clinical care.

And on October 16th, its recently acquired subsidiary, Transforming Systems, announced the development of an elective care module, SHREWD Elective, in cooperation with National Health Service (NHS) England. The module was developed in response to the need of NHS England to manage the growing pressure in planned care across the country. The module presents a “helicopter” view of what’s going on in the hospitals in real time. Like providing the number of patients waiting and for how long.

Recent Financial Results: (Q2, 2020)

  • Revenue was down 3%, to $2.75 million compared to the same quarter last year.
  • Adjusted EBITDA was up 36%, to $754,000 compared to $552,000 for the same quarter last year.
  • GAAP Net Earnings per share for the quarter were $0.01 compared to a loss of ($0.23) for the same quarter last year.
  • The company is trading with an EV/adj. EBITDA multiple of ~44x. Making the stock quite expensive after the recent run-up. 
  • And they have a net-cash position of $13 million and sustainable debt multiples which is good for a company still working on attaining consistent profitability. 


I actually covered VHI in our YSOT segment about this time last year when the stock was trading around $1.55. And at that time, I mentioned that the company has been showing upward trajectory in its financials all while maintaining a healthy balance sheet – but they still hadn’t posted consistent profit over a few quarters. And on top of this, the company has continually diluted shareholders to fund growth/acquisitions – which is a difficult way to create value for shareholders which is something I noted. 

Regarding the recent news that has been driving the share price, I am not sure if either news release will be a major catalyst for the company, but regardless it shows that the company is moving in the right direction. And I certainly think that if they can begin to slow down on diluting shareholders to grow the business and begin to fund operations with internally generated cash flow the company would be much higher on my list of companies in the space. 

All-in-all I love the healthcare technology space as technology is really just taking shape in the healthcare sector. There are many places for innovation and the overall healthcare sector can benefit from all the efficiencies it can generate. We will keep an eye on the direction of VHI among other companies that we deem interesting in the space, but the recent news and share price performance has made the company our Star of the Week. 


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