After a brief hiatus, we are back to discuss our appearance at the recent Virtual Canadian Money Show including my panel discussion on investing cycles and market valuations at present. Aaron hits the mailbag to answer a question on two unique small-cap royalty-based stocks, Nova Royalty Corp (NOVR:TSX-V) and Electric Royalties Ltd (ELEC: TSX-V). Nova is a royalty company focused on providing investors with exposure to the key building blocks of clean energy – copper and nickel. Electric Royalties was established to take advantage of the demand for a wide range of commodities (lithium, vanadium, manganese, tin, graphite, cobalt, nickel, zinc & copper) that should benefit from the drive toward electrification of a variety of consumer products including cars, rechargeable batteries, large scale energy storage, renewable energy generation, and other applications. Aaron takes a look at whether the businesses are producing anything close to cash flow or significant revenues at present. Finally, Brennan discusses a listener question on how to buy big US tech firms such as Amazon, Alphabet, or Microsoft fractional shares with Canadian dollars via CIBC’s new Canadian Depository Receipts (CDRs).


Panel Discussion:

Question 1: Best sectors or stocks in a late stage of a cycle?

Investing based on where one perceives we are in a cycle is fraught with peril. At a basic level, stock investing or finding good companies to invest in, is hard enough unto itself. You are introducing another variable in regards to cycles. Now, not only do you have to be right about the investment, you have to be right on where we are in an economic cycle. Your guess on where we are, is just that, a guess. This unto itself is problematic in a number of ways. First and foremost, you can just be plain wrong. Thus, the sectors you invest in will likely be wrong. Second, even if you are somewhat right, you will exclude many segments that include great long-term investments to try and time the next 6-18 months. That is a poor strategy. When trying to predict cycles, one is basically trying to time the market, which, even for pro’s, has proven to be a fool’s game.

Talk amongst yourselves on that.


Question 2: Valuations.

Where we are now in terms of valuations:

Schiller PE

Valuations broadly give me a reason to be cautious – and I am not an alarmist. We are a long-term GARP (searching for Growth at a Reasonable Price business to invest in). If you look at the Cyclically adjusted PE ratio in reference to the S&P 500:

Shiller PE: 40.4 (+ 0.53%)

Shiller PE is 57% higher than the recent 20-year average of 25.7

Implied future annual return: -5.5%

Recent 20-year low: 13.3

Recent 20-year high: 40.4

S&P 500: 4591.14

Regular PE: 28.9 (Recent 20-year average: 25.6)

I have heard in some circles worries that one should be worried about US tech giants, the FAANG stocks, because of the run they have been on in recent years.

I am less worried about the FAANG including Microsoft and the next tier companies like Adobe or Salesforce with Alphabet trading at 27 times earnings, or Meta at 23 times earnings or even Amazon at 68 times earnings which is on the lower end for the company. We have had active buys on Microsoft and Alphabet and have owned them for years.

What I am worried about is what I would call the mid-large cap tier – of US SaaS and technology companies that have been pushed to blue sky valuations by what I would call Pauliana type investing. Bets that all of these businesses will become the next FAANG stock.

In the panel last week I highlighted this group that includes names like Palantir Technologies Inc. (PLTR), Snowflake Inc. (SNOW – 128 times sales), and DocuSign, Inc. (DOCU – 30 times sales at the time).

Good businesses with great revenue growth. In fact, some are businesses we may like to own, but near term, the valuation risk is high. And in many cases, these stocks have been selling at 50-150 times sales (NOT earnings or cash flow, sales). Let me contextualize this by looking at what peak valuations were, in terms of price/sales multiples, for what are that current tech unicorns.

Peak Valuations (P/S) for Tech Unicorns

The rationale for the increase is some cases is strong recurring bases and they will all dominate a sector and, again, form the next group of FAANG stocks. But if you take a look at peak valuations historically for the actual FAANG or top tech group of today – they never approached these levels.

I note – DocuSign, which is a good business, following my call out of high valuations, dropped 42% in one day late last week.

DocuSign Shares Fall More Than 40% as Customer Behavior Shifts

The e-signature software company’s CEO says the company didn’t react swiftly enough to changing trends

DocuSign helps businesses from banks to real-estate firms electronically complete transactions.

The company warned that consumers were returning to more normalized buying patterns with the widespread rollout of Covid-19 vaccines and the gradual return to the workplace.

The e-signature software maker missed on a key earnings metric during the October quarter, pulling in $565.2 million in billings, falling short of its prior guidance between $585 million and $597 million. Billings reflects new-customer sales, subscription renewals and add-on sales for existing customers, the company said.

Good company, good growth, one stumble, and the price is cut in half basically – premium valuations can do that.

In Canada – look at Lightspeed – another high-growth business, but it was trading at 40 times sales in September. It is light on cash flow not close to earnings and the stock has dropped 60% since September after a bit of an earnings miss.  It still trades at 17 times sales.

My broad argument was that it was the mid-large cap tech darlings of the past 2-3 years where we see the risk, rather than the mega-caps generally speaking. We are seeing that play out.

Nova Royalty Corp (NOVR.V) and Electric Royalties Ltd (ELEC.V)

I know you guys usually stay away from commodities but you have mentioned liking royalty companies better. I was wondering what your thoughts are on Nova Royalty Corp (NOVR.V) and Electric Royalties Ltd (ELEC.V)?

Nova Royalty Corp (NOVR.V)

  • Public company as of September 2020
  • Price: $2.95 / Market Cap: $240 million
  • Royalty companies focused on copper and nickel. The company has acquired royalties on 19 different properties located in North and South America. Only 1 of these royalties is on a producing asset. 6 royalties are on assets listed as the development stage and the remaining 13 royalties are on exploration projects.
  • Financials:
    • Q3 revenue of $182K.
    • Cash burn for the first 9 months of 2021 of approximately $3 million.
    • $2.2 million in cash on the balance sheet.
    • No guidance on revenue or profitability.
    • Completed a share offering on August 25th for 4.1 million shares at a price of $3.30.
    • The acquisition of royalties on its single producing asset was completed on August 27th. Payments are expected to be received semi-annually.


Electric Royalties Ltd (ELEC.V)

  • Public company as of June 2020
  • Price: $0.39 / Market Cap: $27 million
  • Royalty company established to take advantage of the demand for a wide range of commodities (lithium, vanadium, manganese, tin, graphite, cobalt, nickel, zinc & copper) that will benefit from decarbonization. The company reports a portfolio of 18 royalty properties located mostly in Canada and Australia.
  • Financials:
    • The company reports zero revenue.
    • Cash burn for the first 9 months of 2021 of approximately $1.2 million.
    • $2.8 million in cash on the balance sheet.
    • No financial guidance on revenue and profitability. The company did announce on October 28th that it has received its first cash royalty from the recent acquisition of a producing property but there were no specific numbers provided.

KeyStone’s Take

We would not be buyers of either of these companies. Both are highly speculative by our analysis with little to nothing in the way of actual financial performance. Investors can keep an eye out for future quarterly reports to see how much each company’s single producing royalty stream will contribute in terms of cash flow. My sense is that if these companies were expecting significant revenue and cash flow over the next few quarters then they would have announced this to investors. In the case of Nova, we have to date seen almost no revenue and in the case of Electric Royalties, we have seen zero revenue.

Another thing to note is that both of these companies are promoting themselves as part of the renewable or cleantech theme, which is currently very popular with investors. In my opinion, this is somewhat disingenuous. I can kind of see the argument with Electric Royalty because of some of the metals they report in their portfolio. In the case of Nova, this is copper and nickel, which are used in some renewable technologies but its still a stretch to bill a copper mining company as part of the clean energy trend.

Just so I don’t leave on a low note, there is a small-cap copper company that we are looking at called Amerigo. Its not a royalty company, they produce copper tailings out of a mine in Chile. Its also not a recommendation today, but it does produce strong cash flow, pays a dividend of 6% and has a sizable cash balance. Right now, Amerigo is just a name in our monitor list that we continue to review, but I’m mentioning it here so that at the very least we can end this segment on a high note.


Tom (Saskatoon) – I was wondering if you could provide a discussion regarding the pros and cons of Canadian Depository Receipts issued by CIBC for fractional ownership of expensive US stocks. Are they appropriate for small investors looking to participate in some of these companies?

First off, let’s describe what a Canadian Depository Receipt (CDR) is:

Canadian Depository Receipts (CDRs) – modeled after the American Depository Receipt (ADR) – which is a bank-issued certificate representing shares in a foreign company for trade on Canadian stock exchanges. CDRs are listed in Canadian dollars on Canadian exchanges, so Canadians now have better access to large U.S. tech stocks for a fraction of the price and no longer need to worry about those pesky FX fluctuations which can help or hinder their returns.

So, to provide a quick answer to Tom’s question – “Are they appropriate for small investors to gain access to these stocks?” YES, they are appropriate for small investors looking to participate in some of these large U.S. tech companies. Especially if the investor wants to avoid foreign currency fluctuations between the U.S. and Canada.

So, with that said, lets jump into the pros and cons.


  • Lower cost per share to gain exposure to the company you want to invest in. Whereas someone who only has $1,000 to invest in Amazon cannot purchase a share on the NASDAQ, they could in turn purchase the CDR which represents a fractional share of Amazon.
  • Canadian investors no longer need to worry about Foreign Currency implications:
    • No longer need to pay conversion fees to transfer their CAD to USD.
    • No longer need to worry about the fluctuating FX rate as the CDR is currency hedged.
    • Also investors do not need to record the FX exchange rate when they purchased and sold the stock to accurately calculate their taxable gain.
  • Dividends in CDRs also flow through to the Canadian investor in Canadian dollars.


  • Limiting your broader diversification across currencies for a portfolio. Currency fluctuations do not just work against an investor, as they can also add to your total return if the investment currency appreciates. So, avoiding currency fluctuations isn’t always the best thing to do. And we would say that currency diversification is prudent in a Canadians portfolio.
  • Investors are still charged withholding taxes on their dividends – so just because they are receiving the dividends in Canadian dollars, investors must remain cognisant that they will continue to be taxed the same as if they held the stock on the NASDAQ or a U.S. exchange.

We were recently asked by a client, “Why is there a difference between the trading price of Microsoft Shares on the NASDAQ vs. Canadian NEO exchange?” To drive home how a CDR works, here is a simple explanation on why the price difference for Microsoft on both exchanges.

Microsoft (MSFT: NASDAQ) shares on the NASDAQ represent one full share of the were trading at about USD$336. Whereas Microsoft’s CDR (MSFT: NEO) on the NEO exchange represents a fractional share – 6% of one share to be exact. (You can go to CIBC’s website to find each CDRs CDR ratio – which is where I got the 6% from) So, if we take 6% of one share of MSFT trading USD$336.04, we get an amount of USD$20.15. After converting to Canadian dollars at an exchange rate of approximately CAD$1.25/USD, the Canadian share price is approximately CAD$25.20.

And taking it one step further, to understand how the CDR hedges the foreign currency fluctuations, the CDR ratio is automatically adjusted on a daily basis. So, for example, if the Canadian Dollar increases in value compared to the U.S. dollar, the CDR ratio would be adjusted upward to reflect the change in value to a Canadian investor. And again, all of these CDR ratios can be found on CIBC’s website.

Now, whether CDRs are right for your portfolio really come down to whether you want to avoid FX fluctuations. CDRs are another way of owning large U.S. tech companies at a fraction of the price. But at the end of the day, we believe it is generally prudent for Canadian investors to have some exposure to U.S. dollars given the currency’s positive effects on broader diversification for a portfolio.


Sign up for the Stock Talk Podcast

Be the first to find out the latest Keystone Financial news, special reports, receive our Stock Talk Podcast, DIY Seminar event info, and Your Stock Our Take videos directly to your inbox for free.