KeyStone’s Stock Talk Podcast Episode 134
This week, we start with a brief discussion regarding Warren Buffet’s right-hand man, Charlie Munger’s, comments on trading platforms such as RobinHood.
For the second week in a row our Star of the Week is a company directly from our Canadian Small-Cap Growth Stock Research. Adcore Inc. (ADCO:TSX-V), a profitable digital advertising or AdTech company, was recommended to clients 1-year ago this month at $0.69. Adcore’s share price jumped 47% this week, 138% this month, and 315% in the past year since our recommendation. Congratulations to clients who own the stock.
In our YSOT segment, Aaron answers a question on TripAdvisor Inc. (TRIP:NASDAQ), one of the world’s leading travel platforms. The website and app provide travellers with more than 878 million reviews on 8.8 million hotels, restaurants, airlines, cruises and experiences. The stock has surged on optimism of travel normalizing over time – has it come too far too fast?
Finally, Brennan answers a listener question on Jack Nathan Medical Corp. (JNH:TSX-V), an omni-channel healthcare provider that builds turnkey, barrier-free medical and dental clinics in high-density centers in Canada and internationally. Does its growth-by-acquisition model offer potential value? We take a look.
Charlie Munger Comments on Robinhood et al.
Charlie Munger, vice chairman of Berkshire Hathaway and long-time business partner of Warren Buffett, issued a strong condemnation of the businesses he said enabled the recent frenzy of speculative trading by retail investors.
The 97-year-old investor, speaking during a question-and-answer session at the Annual Meeting of Shareholders of the Daily Journal Corporation (DJCO) in Los Angeles, responded to a query about the recent run-up in shares of heavily shorted stocks like GameStop (GME) last month.
“That’s the kind of thing that can happen when you get a whole lot of people who are using liquid stock markets to gamble the way they would in betting on race horses,” he said. “And the frenzy is fed by people who are getting commissions and other revenues out of this new bunch of gamblers. And of course, when things get extreme, you have things like that short squeeze.”
“It’s not generally noticed by the public, but clearinghouses clear all these trades,” he said. “And when things get as crazy as they were in the event you’re talking about, there are threats of clearinghouse failure. So it gets very dangerous.”
The specter of a clearinghouse failure was one of the issues raised during the U.S. House Financial Services hearing on the Reddit-fueled trading frenzy earlier this month. During the hearing, Vlad Tenev, CEO of Robinhood, the online brokerage popular with retail investors, admitted that the company would not have been able to post the $3 billion in required collateral that the Depository Trust & Clearing Corporation (DTCC) made against the company in late January after investors flooded the platform with trades. In a worst-case scenario, this ultimately could have forced liquidation of the unsettled clearing portfolio and “resulted in a total lack of access to the markets” by users, Tenev said at the time. Ultimately, Robinhood restricted trading in GameStop, and dozens of other equities, to the chagrin of its users.
HE WENT ON TO SAY:
“It’s really stupid to have a culture which encourages as much gambling in stocks by people who have the mindset of racetrack bettors. And of course, it’s going to create trouble, as it did,” Munger said.
“And I have a very simple idea on the subject. I think you should try and make your money in this world by selling other people things that are good for them,” he said. “And if you’re selling them gambling services where you rake profits off the top like many of these new brokers who specialize in luring the gamblers in. I think it’s a dirty way to make money. And I think that we’re crazy to allow it.”
In another question, Munger was asked whether he still identified “wretched excess” in the financial system, as he had warned of in February 2020, and asked where he saw the excesses as most egregious in the current market.
“It’s most egregious in the momentum trading by novice investors lured in by new types of brokerage operation like Robinhood,” Munger said. “And I think all of this activity is regrettable. I think civilization would do better without it.”
My Take on Trading Apps Generally.
The access for everyone that platforms such as RobinHood provide is great in theory.
But for them to make money – they need transaction volume. To the upside or downside. It does not matter, just volume.
However well intended these platforms are – ultimately, they make more money, the higher trading volumes. It becomes “trading” and today, with apps producing digital confetti and shiny emojis on each buy and sell, it is more akin to gambling. This is not good for investing and the new investors that enter the market.
There are now countless studies on trading as a strategy to make money for the average investor. It simply does not work – full stop. If these apps promote trading – which is what they do, and trading has been proven to be an incredibly difficult if not impossible strategy to make money long-term in the market – I agree, it becomes a dirty way to make money.
The stock market, if looked at properly, can be a great way to create wealth long-term. Opening it up, making access simple for everyone is a great idea. But, selling them on risky, unprofitable strategies defeats the purpose and can destroy wealth.
What is needed – education. If you get RobinHood or WealthSimple you need to educate yourself on investing. It is a great deal simpler than you might think. And we can help you with that.
Adcore Inc. (ADCO:TSX-V)
Market Cap: $161.8Million.
Firstly, congrats to all clients who own the stock which was recommended to clients 1-year ago this month at $0.69. Adcore’s shares jumped 47% this week, 138% this month, and 315% in the past year since our recommendation.
What does Adcore do?
Established in 2006, the company is headquartered in Tel Aviv, Israel and provides machine-learning powered advertising technologies used by digital agencies and advertisers to leverage digital marketing in an effortless and accessible way with the goal of scaling activity and maximizing ROI. Adcore is a certified Google Premier Partner, Microsoft Partner, Facebook Partner and TikTok Partner.
February 23, 2021, Adcore announced that it has secured conditional approval to list its common shares on the Toronto Stock Exchange (the “TSX”) and graduate from the TSX Venture Exchange (the “TSX-V”).
In November the company stated that, despite the global pandemic the business was on track to report over 15% year-over-year annual growth which equates to strong Q4 revenue growth. The rebound the company experienced in Q3 2020 is gaining even more momentum in Q4 2020, positioning the Company for record fourth quarter revenue, with direct clients’ e-commerce activities up dramatically this holiday season.
We recently updated clients on the stock and if management executes there remains longer term growth upside in the stock. The company’s strong gains once again this week on the TSX listing, make it our Star of the Week. And, we reiterated our congratulation to clients who own the stock and has seen the stock appreciate 315% in one year since we recommended it at $0.69.
Your Stock Our Take
TripAdvisor Inc. (TRIP:NASDAQ)
Current Price: $48.00
Market Cap: $6.5 billion
What does the company do?
Tripadvisor is the world’s leading travel platform. The website and app provide travelers with more than 878 million reviews on 8.8 million hotels, restaurants, airlines, cruises and experiences. In 2019, 60% of revenue was derived from the hotel, media and platform segment, which includes hotel revenue generated through advertising as well as commissions from the bookings. Experiences and dining represented 29% of revenue.
TripAdvisor is a topical company to discuss right now.
Travel companies have been some of the hardest hit through the pandemic as almost everybody is staying close to home. But now we may be seeing some light at the end of the tunnel. We have vaccines rolling out with some success and Johnson & Johnson just recently had their new Covid-19 vaccine approved by the FDA as safe to use.
Many people are expecting this summer to be at least an improvement over last year’s and certainly the prospects for travel should continue to improve over the next 12 to 18 months. People have been locked up in their homes for a year now. They want to travel. Travel destinations want tourist dollars. There is a big possibility of a boom in the travel industry once restrictions get lifted.
Where does this leave the travel companies?
In the case of TripAdvisor, investors appear optimistic. Although maybe a little too optimistic. TripAdvisor could have been a Star this week with the stock price up 29% over the last 5 trading days and 120% over the last 12 months.
It is not a surprise to us however, that this share price gains are the result of improving financial performance. The Q4 results were released February 18th. Revenue was down 65% for the quarter and 61% for the year. The company reported a $167 million loss for the year compared to earnings of $250 million in 2019.
These numbers aren’t a surprise. We know that the industry is suffering and we absolutely expected to see big drops in revenue and negative earnings until things recover.
The surprise to me is where the share price is today. The share price today is back where it was in November of 2019. This was pre-pandemic. The company today is trading at the same price it traded at when it was reporting more than double the revenue, was producing positive earnings and free cash flow, and there was none of the uncertainty associated with the pandemic.
Clearly, investors are looking forward and the assumption that financials will start to improve substantially over the next 12 to 18 months is reasonable. However, I don’t think its reasonable to assume that revenue and profit will be back up to pre-pandemic levels during this period. Its possible but there are still too many uncertainties to bet on that. And even if revenue and earnings do fully recover, you’re still paying a significant valuation at the current price relative pre-pandemic earnings.
Investors also have to consider the fact that there was little to no growth in revenue and earnings in the few years leading up to the pandemic. The company’s share price actually peaked in 2014 and has been on a fairly consistent slide downwards even before the pandemic was a factor.
Investors have to ask themselves what they are buying and what they are paying. I have little doubt that TripAdvisor’s revenue and earnings will recover quite a bit over the next 1 to 2 years but its fairly clear that this recovery is already being factored into the share price. I don’t see any value here.
Your Stock Our Take
Martin via Youtube
Jack Nathan Medical Corp. (JNH:TSX-V)
Current Price: $0.85
Market Cap: $67 Million
What does the company do?
Jack Nathan Medical Corp. is an omni-channel healthcare provider that builds turnkey, barrier-free medical and dental clinics in high-density centers in Canada and internationally.
The company delivers a seamless patient experience whether the patient connects online from a mobile device, a laptop or in one of its state-of the art clinics within the Walmart footprint. JNH currently has 76 clinics across Canada and owns and operates 6 clinics in Mexico – with another 50 in development.
- The business has actually been located in Walmart since 2006 and is planning on expanding its operations to Europe, Asia Pacific and Mexico through both organic growth and M&A.
- JNH launched its telehealth virtual care on March 17th, where they are also promoted on Walmart’s website. And on May 15th, JNH partnered with Prescribe IT – allowing people to get their prescriptions electronically.
Recent Financial Results (Q3, 2020)
- Revenue was $993K, up 3.5% from the same quarter last year.
- Adjusted EBITDA was down 55% to $110K from $246K this time last year.
- Balance sheet looks healthy with net cash after leases and debt of approximately $5 million.
- Trailing Normalized EBITDA for the 2020 fiscal year is approximately $1.07 million – providing an EV/EBITDA multiple of approximately 58 times – which is pricy at present.
Growth Opportunities going forward?
The company plans to open up new clinics in Canada and internationally (with 50 new clinics in development in Mexico), it plans to leverage technology such as (eCommerce with Walmart.ca / E-Prescriptions / Patient Scheduling / & at home health care).
To conclude on JNH, I like that the company has a great partnership with Walmart, which should pave the way for future growth. And it does have an aggressive growth strategy in Mexico regarding the 50 additional stores in development, but I would certainly like to question management and get an idea of what sort of growth figures they are expecting for 2021 and when these additional clinics will be operational in Mexico. I also like that the company has been adding telehealth and online prescriptions to its offerings, which gives it some exposure to the healthtech space and allows it to market its services on Walmart.ca. Financially speaking JNH has a great balance sheet, has been growing modestly YoY, but it trades with a higher EV/EBITDA multiple – we continue to monitor it.