Today we have a packed show beginning with a preview of our upcoming Cash Rich, Profitable Canadian Small-Cap Special Report. We will chat about why we look at Cash rich stocks and what clients will find in the report. In our Your Stock, Our Take segment we look at a profitable Canadian success story, a true micro-cap, Pioneering Technology Corporation (PTE:TSX-V), one of the best performers on the TSX-Venture last year – we review whether or not it is poised for further growth in 2017 and beyond. Our star of the week is a recommendation from less than one year ago in our U.S. Growth Stock research, Applied Optoelectronics Inc. (AAOI:NASDAQ). And finally, our dog is U.S. Small-Cap Cemtrex Inc. (CETX:NASDAQ) which was subject to a controversial short report this week.
If this is your first time listening, then thanks for stopping by. This podcast is produced every week for your enjoyment and show notes are found at www.keystocks.com. Come back often and feel free to add the podcast to your favorite RSS feed or on iTunes. You can also follow us on Twitter @KeyStocks and on Facebook.
Now, let’s dig into the show.
I would like to welcome again, myhost, KeyStone’s Senior Equity analyst, father of 1, and a man by who was so impressed with former Canadian Prime Minister Brian Mulroney’s serenade rendition of “when Irish eyes are smiling” to Donald Trump this past week that he is thinking of taking up singing lessons himself, Mr. Aaron Dunn.
Chat about the upcoming release of our annual Cash Rich Report – you can ask a few questions about it.
Aaron: I noticed all three full recommendations are well above last year’s recommendation price and that “impressively” 4 of the 7 “Special Situations” highlighted in last year’s report have actually been taken over in the past year!
Ryan: First off, we have been very proud of what we have been able to achieve with this report over the past 5-years since its inception. Again, last year the three recommendations performed very well and the 4 takeovers from the 7 Special Situations really prove that we are identifying some real value in underfollowed areas – which is one of the goals. It is rewarding – and it better be, because it is a fairly involved process to put together.
It typically takes around 3 and a half months to put together as we read over 3,000 annual reports (alienating friends and family), dismiss well over 98% of the stocks we encounter, then conduct management interviews and compose summary reports on over 50 individual Cash Rich, Profitable Canadian Small-Cap Stocks with a couple of specific recommendations.
Essentially, we are looking for:
- Stocks with greater than 5% of their market capitalization in net cash (cash or cash equivalents minus debt).
- We defined our Canadian Small-Cap universe as Canadian –listed stocks with a market-cap of under $1 billion.
- Each stock had to produce positive cash flow over the past 12-months or had a history of positive cash flow.
Aaron: Why Cash Rich stocks?
– Cash Rich, but also profitable and the best will be those growing that cash position…
Ryan: In boom times, cash generating stocks can make early acquisitions, increase dividends, and invest in growth without diluting shareholders.
In a downturn, debt heavy stocks can experience pressure paying interest on loans and often shares in the business are sold down to pennies
Not only are cash generating stocks with zero debt able to withstand recessionary pressures, they are positioned to profit from them.
Cash rich stocks can hold value, swoop in and purchase great assets on sale and position shareholders for long-term growth.
Aaron: What will be included in this year’s Special Report?
Ryan:
- Full recommendations on approximately 10 of the cash rich stocks currently in coverage with BUY/SELL/HOLD recommendations,
- Highlight our 2017 Cash Rich Small-Cap Monitor List – stocks KeyStone is awaiting potential entry prices in during the course of 2017,
- Select a number of Special Situation Cash Rich stocks – High Risk, High Potential Reward Cash Rich Small-Caps for 2017.
- Provide current full recommendations on our Cash Rich Small-Cap All Star Stocks (4-5 individual BUY reports),
- And finally, present 3-4 new BUY recommendations from the 3,000 stocks reviewed.
Your Stock Our Take: Pioneering Technology Corporation (PTE:TSX-V)
Operations: Based in Mississauga, Ontario is an “energy smart” technology company and North America’s leader in innovative cooking fire prevention technologies. Pioneering engineers and brings to market energy-smart solutions for everyday consumer appliances making them safer, smarter, and more efficient. The company’s patented technologies/products address a multi-billion-dollar problem – cooking fires. According to the National Fire Protection Association, stovetop cooking is the number one cause of household fire and fire injuries in North America (48% of all household fires – up from 20% in 1980). Pioneering’s temperature limiting control (TLC) technology is now installed in approximately 200,000 multi-residential housing units across North America without a single cooking fire being reported and delivering a return on investment for its customers. Pioneering has proprietary cooking fire prevention solutions, including its trademarked Safe-T-element, SmartBurner, RangeMinder & Safe-T-sensor, for the majority of the more than 140 million stoves/ranges and over 140 million microwave ovens throughout North America.
The stock has been one of the better performing names on the TSX-Venture over the past year. Let’s look into why.
Financial Performance:
Revenue for the twelve-month period ended September 30, 2016 was $6.64 million up approximately 51% versus $4.39 million for the same period year ago as market penetration, led by the SmartBurner product, increased in both Canada and the U.S.
2016 net income, excluding non-cash related items (deferred tax recovery and stock-based compensation expense) was $1.3 million ($0.03 per share diluted) up approximately 644% vs $175,426 for the same period year ago. Adjusted EBITDA $1,683,346 up 158% versus $652,640 in the same period year ago. Perhaps most importantly, the company believes it is well positioned to continue this growth into 2017.
Valuations: (where the stock is now and looking forward based on is underlying financial performance)
Pioneering has produced tremendous growth over the past 3-years, but with just $6.64 million in annualized revenues, it remains a true micro-cap. The company now has a market cap in the range of $51 million and trades at around 41 times 2016 earnings, which is rich. Management is expecting growth in 2017, but we have no concrete guidance to go on. Even if the company were to double earnings to the $0.06 range (which is a difficult feat for any operation), the stock would be trading with a forward PE of around 20, which is higher than the average market PE. This would not be incredibly overvalued, but it would not suggest an undervalued stock. We must also factor in that the company is not paying any tax at present and while it holds significant loss carry forwards, this will not continue forever.
We see Pioneering as a well-run company with potential growth ahead of it, but the stock appears fully valued at present and is vulnerable to a correction if it faces any quarterly hiccup near to mid-term as it trades at premium multiples at present.
DOG:
Cemtrex (NASDAQ:CETX)
Price: $4.13
Cemtrex provides advanced custom engineered electronics, emission monitors & instruments for industrial processes, and environmental control & air filtration systems for industries & utilities.
Stock was on a tear (doing great) financial and in the market until this week.
A year ago it was trading at just over $2.00. It hit a high of $8 at the start of the year and was around $6.00 at the start of the week.
But since Monday the stock has dropped 30%.
This is in spite of reported Q1 earnings earlier in the month with EPS up 56% and EBITDA up 138%?
So what happened?
On Wednesday, a short report was released on Seeking Alpha containing a number of allegations including various types of financial fraud, undisclosed payments to stock promoters, and undisclosed sales of sales by insiders including the company’s founder.
The company immediately issued a press release disputing the allegations stating that they were pursuing legal action against the short report writer and confirming amongst other things that the founder has not sold any shares in the company in years.
So Ryan we’ve seen this type of story play out several times having we?
RYAN
STAR:
We have a treat for you this week in our Star category. We do not often include a company in current coverage but the gains in this stock over the past month were too difficult to ignore. From our U.S. Growth Stock research we present;
Applied Optoelectronics, Inc. (AAOI:NASD)
Leading provider of fiber-optic network products for the internet datacenter, cable broadband, fiber-to-the-home and telecom markets, today announced financial results for its fourth quarter and year ended Dec. 31, 2016.
The stocks jumped 30% early morning trading to $48.50 – the company has now gained 108% in 2017 alone and 205% over the past year!
All three of the company’s end markets are driven by bandwidth demand fueled by the growth of network-connected devices, that included video traffic, cloud computing and online social networking.
Fourth Quarter 2016 Financial Summary
· Total revenue increased to $84.9 million, up 60% compared with $53.0 million in the fourth quarter 2015 and up 21% compared with $70.1 million in the third quarter of 2016.
· Non-GAAP net income increased to $15.5 million, or $0.84 per diluted share, compared with non-GAAP net income of $3.9 million, or $0.22 per diluted share in the fourth quarter 2015, and non-GAAP net income of $7.0 million, or $0.38 per diluted share in the third quarter of 2016.
For the year, non-GAAP net income increased to $24.6 million, or $1.39 per diluted share, compared with non-GAAP net income of $17.0 million, or $1.03 per diluted share in 2015.
Perhaps most importantly, growth is projected to stay strong into the next quarter.
First Quarter 2017 Business Outlook
For the first quarter of 2017, the company currently expects:
- Revenue in the range of $87 million to $91 million.
- Non-GAAP gross margin in the range of 38% to 40%.
- Non-GAAP net income in the range of $15.5 million to $17.2 million, and non-GAAP fully diluted earnings per share in the range of $0.80 to $0.88 using approximately 19.5 million shares.
What is driving the growth –
AAOI is the majority market share supplier to its two largest hyperscale data center customers – Amazon (NASDAQ:AMZN) and Microsoft (NASDAQ:MSFT), the two largest and rapidly growing cloud computing players. In a recent presentation, the company stated it is in the early stages of doing business with its new data center customer acquired in Q3 2016, which is widely believed to be Facebook (NASDAQ:FB). AAOI has also stated that ramping up to critical mass at the newest data center customer would likely smooth some normal quarterly lumpiness associated with its two largest customers, within a generally strong and likely sustained upward secular trend.
While stock is now up nearly 200% since our recommendation last year – mid-term, the growth trajectory appears bright.
