KeyStone’s Stock Talk Podcast Episode 132
To start this week, we highlight a couple of Stars from our coverage universe. The first, Sangoma Technologies Corporation (STC:TSX-V) is a Communications as a Service or (CaaS) solutions for businesses of all sizes. The past week the company made a US$437 million transformational acquisition of Star2Star Communications, a top-ten vendor of cloud communications solutions in North America. After resuming trading Monday, the stock has jumped 35% in two days from $3.87 to $5.20. Sangoma was recommended to clients 3 years ago at $0.72 – now a 630% gain to clients – congratulations to those who own the stock! The second star of the week is CRH Medical Corporation (CRH:TSX), which saw its stock jump 80% yesterday after it was announced Well Health would acquire the business.
In our YSOT segment we take a look at PowerBand Solutions Inc. (PBX:TSX-V). The company is a fintech provider which offers an integrated, cloud-based transaction platform facilitating transactions amongst consumers, dealers, funders, and manufacturers (OEMs). It enables them to buy, sell, trade, finance, and lease new and used, electric- and non-electric vehicles, on any phone, tablet or PC connected to the internet.
Finally, Aaron Dunn will look at GameStop Corp. (GME:NYSE), and the phenomenon that is WallStreetBets. WallStreetBets and it’s forum or “subreddit” on the popular website Reddit, drove GameStop to dizzying heights on a massive short-squeeze, only to see the struggling business predictably crater. Is GameStop even worth its current price – we take a look.
Busy past week. Busy current week. We participated a couple conferences last week, the World Outlook being the largest and gave 3 or 4 speeches.
The World Outlook was very well attended, and we have had really positive feedback on the talks at the event.
Star of the Week
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Sangoma Technologies Corporation (STC:TSX-V)
Price: $5.20
Market Cap: $717 Million.
Sangoma is a vendor of communications products and services, delivered on-premise and in the cloud. Its product offering includes UCaaS, SIP Trunks, Collaboration Services and PBXs.
Firstly, congrats to all clients who own the stock. Sangoma was recommended to clients 3 years ago at $0.72 and many times since. Stock halted last week as the company reported a US$437 million transformational acquisition of Star2Star Communications, a top-ten vendor of cloud communications solutions in North America. After resuming trading Monday, the stock has jumped 35% in two days from $3.87 to $5.20. Sangoma has now returned over 630% in the last 3 years.
Acquisition
The Star2Star acquisition came at a high price tag – Sangoma paid approximately 30 times EBITDA, but it appears to have triggered a couple of positive dynamics which have boosted the stock. 1) it increased SaaS revenues significantly 2) Sangoma’s client and revenue base have given the business a new the scope. Both of these appear to be producing a re-rating higher in terms of what multiple the market is willing to pay for the stock.
Conclusion
We have updated clients on the stock and if management executes there remains longer term growth upside in the stock. It’s strong gains over the past 2-days, year and three years since our recommendation make Sangoma our Star of the Week.
CRH Medical Corporation (CRH:TSX) – Star.
Finally, I will quickly point out that CRH Medical Corporation (CRH:TSX), announced this week it will be acquired by WELL Health Technologies Corp. (WELL:TSX) at an approximate 80% premium. We welcome the strong gains in a stock we had currently ranked as a HOLD and will likely take the offer and advise clients to deploy capital in some new names we have released buy recommendations on over the past month or some other new names we are looking closely at over the coming weeks.
The 80% jump, makes CRH our second star of the week.
Your Stock Our Take
Daryl via Email
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Powerband Solutions Inc. (PBX:TSX-V)
Current Price: $0.65
Market Cap: $67.35 Million
What does the company do?
PowerBand Solutions is a technology company that has developed a web-based vehicle auction, remarketing, leasing and finance service and software programs for automotive dealers and consumers.
In November 2018, the company entered into a 50/50 joint venture agreement
with D2D Auto Auctions, an online auction, remarketing platform in the U.S. And in July 2019, the company acquired a 60% in MUSA Holdings, LLC, a new and used vehicle leasing platform in the U.S.
Key Points:
- This summer, the company announced that its partner D2D Auto Auction had reached an agreement with a U.S. national car retailer to purchase used vehicles on D2D’s virtual auction platform.
- And that Royal Administration Services, Inc., a provider of automotive insurance products across the United States, will be recommending dealers use the PowerBand virtual transaction platform for drivers and dealers.
Recent Financial Results
The company hasn’t actually reported its fiscal 2020-year-end results yet, but management has provided a brief press release. Stating that revenue was up 138% over the third quarter of 2020 to approximately $795 thousand. And this would mean that trailing-twelve-month revenue was approximately $2.38 million. Up almost 19% from the 2019 fiscal year.
Looking at the company’s profitability, it is still losing money. With the company making mention that for the 2020 fiscal year it will post an adjusted loss of about $9.6 million.
P/S Valuation
Currently the stock trades with a trailing P/E multiple of 28x times sales, which is very pricey. And the market seems to be pricing in some serious growth going forward.
Balance Sheet
Looking at the last available financial statements which are actually from Q3, 2020, Powerband had a net debt & lease position of approximately $7.5 million. And working capital was a deficit $1.8 million – so, I would say that the company’s balance sheet isn’t too flattering.
Growth Opportunities going forward?
The company recently announced a private placement where Powerband will issue 18.3 million shares at a price of $0.29 cents per share, for gross proceeds of $5.3 million. With these funds expected to support the company’s “continual development, growth, market expansion and for general working capital purposes”. Taking into consideration the company’s balance sheet which I just described above makes sense why the company would be raising funds as they are not profitable and do not have a great financial position at this time.
And looking forward to 2021 the company expects to launch in Canada in Q2, and Australia in Q3. – So, there are some possible growth catalysts that will continue into 2021. But management hasn’t provided any financial guidance, so it is very difficult to quantify the possible growth going forward.
Conclusion:
To conclude, PowerBand Solutions has a decently attractive product offering of cloud-based solutions for the automotive industry and has shown good revenue growth over the past quarter. But the downsides to the company are its lack of proofitablilty, its expensive valuation of almost 28x revenue and a balance sheet with quite a bit of borrowing on it. All while needing to raise funds to support growth and manage the health of its balance sheet. Because of these problems that I listed above; it is not a name that we would recommend at this time.
Weekly Dog
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GameStop Corporation (CME: NYSE)
Current Price: $49.00
Market Cap: $3.4 Billion
What does the company do?
GameStop Corp is a U.S. multichannel video game, consumer electronics, and services retailer. The company operates across Europe, Canada, Australia, and the United States.
Key Points:
This week I have Gamestop as our Dog. This is a very topical company. Anyone following the market has heard the names Gamestop and WallStreetBets a lot over the last few weeks. What been happening specifically in this stock is really a xxx for what’s been happening in many areas of the market.
Some background, Gamestop was recently the most shorted stock on the US stock market. About 130% of its outstanding shares were sold short. How do you short more shares than actually exist? The answer to that question is probably a podcast segment unto itself. I will just say that the ability to sell short more than 100% of a company’s outstanding shares is completely ridiculous and unnecessary from a regulatory perspective.
In any event, hedge funds were very negative on this company and for good reasons. Gamestop is a retailer of video games. Who buys physical video games anymore? The answer is not many people. So Gamestop was seen as an archaic business and the company’s financial performance fully supported this thesis. Gamestop’s revenues have been in decline over the last 5 years and they are losing money. Hedge funds didn’t like this company and so they did what hedge funds do a shorted it severely.
Enter WallStreetBets this is a discussion forum on the website reditt with millions of followers and a focus on speculating in stocks and derivatives. The influencers on WallStreetBets saw an opportunity to make money in Gamestop and some other severely shorted stocks. This was not based on any knowledge they have of the companies or their markets. Being savvy speculators, these key influencers know that when someone shorts a stock and the stock price moves up that the shorter has to keep making payments to the brokerage to make up some of the difference. This can be expensive. Often it forces short selling to ‘cover their shorts’ which basically means buying back the shares and returning them to their owners to exit the short position. That ‘short covering’ or buying has the impact of pushing the share price higher and forcing more short sellers to cover.
With over 100% of the outstanding shares shorted, WallStreetBets influencers knew that there was a lot of potential buying of shares that would happen if they could start forcing short sellers to cover. And that’s what they did. They instructed the followers of the forum to buy shares of Gamestop to manipulate the share price higher, force short sellers to cover, which in turn would push the share price higher still.
This was very effective. What we saw was Gamestop’s share price move from $18 at the start of January to over $350 by the end of the month. Most of this move up took place in just a couple of days. And they didn’t just do this to Gamestop. Many highly shorted stocks were targeted including Blackberry. Hedge funds generally use lots of leverage and they were not anticipating this kind of activity. For some of these funds, recent events have been catastrophic. For any hedge fund or short selling, these events at the very least have them reviewing the, until now, unforeseen risks of their investment strategy.
Conclusion:
Gamestop’s price peaked on January 27th at $350 and has since declined 85%. Other stocks have shown similar moves. Blackberry doubled in price in a matter of days and then just as quickly the share price was cut in half. There is a lot of chatter about what this means for the market and the hedge fund industry and whether or not what the WallStreetBets influencers should be considered criminal markets manipulation.
My take on this is really mostly that its stupid. None of this has anything to do with real investing. Its something that KeyStone would stay far away from and we advise the vast majority of investors to do the same. I personally have very little sympathy for the hedge funds and short sellers. They like to play the game and this was a scenario where they didn’t like the outcome. With respect to market manipulation, this is really what short sellers have been doing for years. They take short positions in companies and then distribute very inflammatory reports on the companies in the hope that they cause investors to sell on fear. In many cases, the allegations short sellers make are not falsifiable and really are just being made to cast doubt.
To be clear though, I don’t think that what WallStreetBets or what professional short sellers is good for the market. In fact, this is exactly the kind of the thing that distracts investors from the true purpose of the markets and erodes confidence both from investors and quality companies that are considering a listing. The only thing we can do is stay far away from these kinds of scenarios.
With respect to Gamestop as an investment…we would not touch the company. Financially it is not doing well. There is nothing I can see tangibly from the company that justifies an investment right now.
