KeyStone’s Stock Talk Podcast Episode 141
This week in Our Case For / Case Against debate we take a look at a well-run network management services provider for the mortgage lending and insurance industries, Real Matters Inc. (REAL: TSX). Despite the fact it holds a great balance sheet and the company’s record financial results in 2020, the stock has been cut in half since its highs and is flat over the past year. Aaron argues the bull case, I crush him with the bear case and Uncle Brennan sits in as judge, jury, and executioner.
In our Your Stock, Our Take Segment, we answer a listener question on PowerBand Solutions Inc. (PBX:TSX-V), a well-promoted auto-fintech. PowerBand has an integrated, cloud-based transaction platform that facilitates transactions amongst consumers, dealers, funders, and manufacturers (OEMs). It enables them to buy, sell, trade, finance, and lease new and used vehicles, on any phone, tablet, or PC connected to the internet. A listener asks what to make of the company’s reported sales numbers and if the drop is an opportunity of a sign of things to come.
One small segment from our recent DIY Stock Investment Webinars detail “common mistakes investors make when building their investment portfolios’ – or just in stock investing generally.
Over the next couple of podcasts, we will go over a few in quick 3-5 minutes segments.
This first is about committing to the process.
Commit to the process.
If you’re serious about building a 15-25 stock portfolio – you have got to commit to it. Contrary to what many people think, this does include watching the markets on a daily basis (unless you absolutely love it – it brings you some strange sense of fulfillment to and otherwise drab life). Watching the talking head on one of the daily Financial Networks can actually be a negative for your portfolio and mental well-being. In fact, we advise against it. You will sleep easier at night.
What I meant is to see the process through – if you buy your first 2-4 stocks in the first month, and the stocks go down or the market corrects, it is not time to quit. Keep buying great companies over the prescribed 12-24 month period. Build that portfolio strategically over time. Commit and see it through. Evaluate it in years not days or months. Stick to the plan.
The worst thing you can do is abandon the plan and start looking for other strategies or piecing together another adhoc strategy.
Stick to it – not every stock will perform perfectly. Expect several of the 15-25 stocks you purchase to not perform as expected. But if the majority does perform well and 2-3 perform extremely well, we believe your overall portfolio returns will exceed expectations when you look at the portfolio in 2, 3, 5, and 10 years down the road.
FOR & AGAINST
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Real Matters Inc. (REAL: TSX).
Price: $15.96.
Market Cap: $1.36 Billion.
Real Matter is a provider of network management solutions to North American lenders and insurers. Its platform leverages independent field agents to deliver Appraisal and Title & Closing services. Real Matters is based in Toronto, Canada.
Case For:
- High growth rate.
- US Appraisal growth in 2021
- Cash Rich Balance Sheet
Case Against:
- Real traded at premium multiple appearing to offer growth at a reasonable price, in anticipation of a multi-year rate refinance cycle – as rates have moved higher those prospects grow dim. Investors and homeowners stop refinancing if they are locked in at lower rates. Real now smells like a value trap
- Consensus earnings call for $0.61 per share this year, $0.74 next and lower to $0.64 in 2023.
- Despite the drop, valuations are not cheap at 26 times this year expected earnings with minimal growth expected over the next 3-years and a decline in year 3.
- The company has pulled revenue and cash flow guidance in favour of mirky market share guidance.
- Adding to the uncertainty, Real’s founder has continued to sell aggressively over the past year – dumping ~25% of his holdings over the past month alone. Not a vote of confidence. With uncertain growth, I am not interested.
Your Stock Our Take
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PowerBand Solutions Inc. (PBX:TSX-V)
Current Price: $0.63
Market Cap: $88.7 Million
What does the company do?
PowerBand Solutions is a technology company that provides the automotive industry with web-based vehicle auction, remarketing, leasing, and finance service and software programs for automotive dealers and consumers. The software is hosted in Microsoft’s Azure cloud and offers a number of distinct but interconnected product offerings to its clients.
Now quickly looking at the stock performance:
- PBX has had a very volatile 2021 so far. At the beginning of the year the stock was trading at about $0.30 per share, and by mid-March, the stock was up over 390% to a high of $1.49 – but it has since retraced these gains, trading back in the $0.60 range.
- What is driving this performance? TBH I think it was a bit of a misunderstanding from the market on some of the information it provided in its news releases.
Most Recent Financial Results (Q3, 2020) for the period ended September 30, 2020.
- Revenue was $576,000 up 25% from Q3, 2019.
- Net Loss for the quarter was -$2.9 million, compared to a loss of -$2.5 million for the same quarter last year.
- From this period which again was ended September 30, 2020, TTM Adjusted EBITDA was still a loss of -$5.9 million.
- Trailing P/S multiple of over 40x
Now as you can tell it has been a while since the company released up-to-date audited financial results, as these results just mentioned are still from the period ended last fall.
But nonetheless, the company has come out with a couple of short news releases indicating “Gross” sales which is a Non-IFRS measure, meaning that the figure is not recognized by auditors, so we are putting our faith in the company by trusting the figure). But in this recent news the company announced that at March 2021, YTD gross sales were $26.3 million.
Now personally after reading these news releases which indicated “Gross” sales, I was a little confused. I had just run the trailing revenues on the company, and they posted TTM audited revenue of $2.1M… so what gives??? And to be completely honest I think the market was a little confused too – as the company made a news release to clarify what it meant by “Gross Sales”, and this is what the CEO’s response was:
“To clarify, gross sales are expected to translate into increased PowerBand revenues, which are determined by commissions, fees, and other arrangements that represent a percentage of gross sales carried out on the DRIVRZ™ platform. Revenue results will be released in audited statements as required by regulators.”
We do wish to clarify details of the December 14, 2020 press release: The “sales” of $1M reported for the first six months of 2020 are IFRS-GAAP revenue. The “gross sales” of $21.7 million for the full 12 months of 2020 is non-IFRS-GAAP revenue.
So this raises absolute red flags in my mind.. not only is the company touting Gross Sales, which from my understanding are just gross vehicle, and financing transactions completed on their platform – which DO NOT reflect the economic sales of the company – they can’t even provide us with an apples-to-apples comparable period of 6 months. So if we simply just annualize 6m audited sales for 2020, we get approximately $2m. THIS IS A HUGE DIFFERENCE FROM THE GROSS SALES of $21.7 million for the full year of 2020.
Conclusion:
I think this is pretty straightforward that Powerband Solutions does not meet our criteria. I am a car guy as I have said many times on the podcast, so I certainly like the industry and the branding of its products. But it is not profitable, they trade at over 40x sales (from the most recent audited results that I could find), and it actually angers me a bit when a company reports figures that I do not believe reflect the economic value of the company. Management teams are supposed to provide information to shareholders that are decision-useful, meaning the information is accurate & relevant. Now I certainly believe the results are accurate, but I struggle to find how posting gross sales are relevant to the economic value of the underlying company.
