KeyStone’s Stock Talk Show, Episode 179

Great to be back with you again this week – the bear ripped into the market again last week and we touch on a number of hot button topics this week including the US Federal Reserve moving rates higher once again, Canadian inflation numbers, an update on SPAC performance year-to-date, the pound falling to all time lows, and what appears to be billions of capital sitting on the sidelines. In our Your Stock, Our Take segment, Aaron answers a question on Adobe Inc (ADBE: NASDAQ), the well-known provider of content creation, document management, and digital marketing and advertising software and services to creative professionals and marketers. Brennan answers a client question comparing two US health care related stocks UnitedHealth Group Inc. (UNH:NYSE) and CVS Health Corp (CVS:NYSE). In our Star and Dog segment Brett takes a look at a Start Canadian manufacturor and distributor of high-quality packaging materials and related packaging machines, Winpak Ltd. (WPK:TSX) – a team we actually interviewed last week and Nautilus, Inc. (NLS:NYSE), the pandemic Start which has turined dog seeing its share price plummet ~90% from its highs. Finally, if we have time, I will complete Howard Marks thoughts on the folly of macro forecasts.


Welcome, my cohosts, Aaron and the killer B’s, Brennan and Brett!

Fed Hikes Rates Once Again

To no one here’s surprise: 

Mid last week:

  • The Federal Reserve raised benchmark interest rates by another three-quarters of a percentage point and indicated it will keep hiking well above the current level.
  • The central bank has been looking to bring down inflation, which is running near its highest levels since the early 1980s.
  • Fed officials signaled the intention of continuing to hike until the funds level hits a “terminal rate,” or end point, of 4.6% in 2023. That implies a quarter-point rate rise next year but no decreases.

Wharton’s Jeremy Siegel had some harsh criticism of the Fed accusing the rate setters of making one of the biggest policy mistakes in its 110-year history.

Jeremy Siegel – Wharton Finance – University of Pennsylvania – commentator on CNBC.

“I think we’re giving Powell too much praise. … The last two years are one of the biggest policy mistakes in the 110-year history of the Fed by staying so easy when everything was booming.”

— Jeremy Siegel

Inflation in Canada slows in August, up 7% annually

Still a shockingly high rate, but trending down.

Statistics Canada says retail sales fell 2.5% to $61.3 billion in July

Futility of Macro Forecasts – forecasts cannot be write often enough to be worthwhile.

  • Howard Marks.

Most forecasts consist of extrapolation of past performance.  Because macro developments usually don’t diverge from prior trends extrapolation is usually successful. Thus most forecasts are correct. But since extrapolation is usually anticipated by security prices, those who follow expectations based on extrapolation don’t enjoy unusual profits when it holds. Once in a while, the behaviour of the economy does deviate materially from past patterns. Since this deviation comes as a surprise to most investors, it’s occurrence moves markets, meaning an accurate prediction of the deviation would be highly profitable. However, since the economy doesn’t diverge from past performance very often correct forecasts of deviation are rarely made. And most forecasts of deviation turn out to be incorrect. Thus we have A) Extrapolation forecasts – most of which are correct but unprofitable. B) potentially profitable forecasts of deviation which are rarely correct and thus are generally unprofitable.

QED – most forecasts don’t add to returns ( they can be entertaining though!) – fancy way of saying one is logically proving something!

Adobe Inc (ADBE: NASDAQ)
Price: $282
Market Cap: $131 billion

Company Description:

  • Adobe provides content creation, document management, and digital marketing and advertising software and services to creative professionals and marketers.
  • The company has a long list of subscription based, software applications for content creation, including Adobe Photoshop, Illustrator and InDesign.


  • Strong performance over the last 10 years up to November of last year.
  • Between 2012 and 2021 the stock was up more than 23 times.
  • Since hitting a peak price of $700 in November of 2021, the stock price has declined 60%.
  • The stock has dropped almost 30% over the last 2 weeks after the announcement that it would acquire Figma, a leading web-first collaborative design platform, for approximately $20 billion in cash and stock.

Financial Overview

  • Third Quarter Fiscal Year 2022 Financial Highlights:
    • Record revenue of $4.43 billion, which represents 13% year-over-year growth.
    • Subscription revenue made up 90% of total revenue for the quarter.
    • Operating income was about flat at just under $1.5 billion.
    • GAAP earnings per share were $2.42 compared to $2.52 in the same quarter last year.
    • Adobe has a strong balance sheet with $3.46 per share in net cash.
  • Historic financial performance:
    • Tremendous track record of financial success.
    • 7 consecutive quarters of revenue growth at an average rate of 20%; 23% revenue growth in 2021.
  • Analyst Expectations:
    • Expect earnings to grow 9% to $13.60 per share in 2022 and then 15% to $15.60 per share in 2023.
    • Stock trades at approximately 20 times 2022 expected earnings.
    • ADBE was trading at over 65 times earnings towards the end of last year. The typical trading range over the past 5 years has been above 40 times earnings.

Acquisition of Figma

  • The company’s $20 billion acquisition of Figma was not received positively by the market.
  • According to Adobe, Figma has a total addressable market of $16.5 billion by 2025.
  • The company is expected to add approximately $200 million in net new annual recurring revenue this year, surpassing $400 million in total ARR exiting 2022. Gross margins were approximately 90 percent and operating cash flows is positive.
  • There is no mention from Adobe about profitability.
  • Based on the $400 million ARR exit rate in 2022, Adobe is paying a price-to-sales multiple of 50 times. To put this into perspective, Adobe itself is trading at a price-to-sales of about 8 times currently.


At face value, Adobe looks like a solid investment opportunity long-term. It has a strong, even dominant position, in its market, the proverbial ‘competitive moat’. The company also has high recurring (or subscription) revenue, strong profitability and analysts do expect to see continued growth over the next year. To top this off, the valuation of about 20 times current year’s earnings is well below the recent peak of 65 times in 2021 and the trading range of over 40 times for the last 5+ years.

But in the near-term, there are issues that investors have to take into account. Growing has slowed and is expected to be much lower over the next year relative to previous years. There was a surge in demand for everything digital during the pandemic, including content creation, and now that high level of demand is starting to weaken.

The market is concerned about possible competitive pressures. Margins have compressed and the fear of recession is weighing on future growth expectations. Finally, the price Adobe is paying for Figma is also very high at 50 times sales and reminiscent of peak tech valuation from last year.

Taking all of this into account, I believe that Adobe is a fundamentally strong, SAAS company, and it does appear to offer an attractive investment opportunity long-term. That said, I see no reason to rush into a position on Adobe. The acquisition price for Figma is expensive and I would like to see some of the smoke clear from this transaction. Adobe’s share price momentum is also very negative so investors should have time to fill a position gradually and potentially purchase some shares at a lower price.

A reasonable strategy for investors interested in taking a position in Adobe would be to start with a smaller position size and then gradually add shares over the next several quarters as the company releases financial results and provides updated outlooks.

Your Stock Our Take

Question come in from our U.S. Growth Stock Chat last week to compare UnitedHealth Group Inc. (UNH:NYSE) and CVS Health Corp (CVS:NYSE).


UnitedHealth Group Inc (UNH:NYSE) – One of the largest private health insurers, providing medical benefits. Along with its insurance assets, the company has its Optum franchises which provide healthcare services from medical and pharmaceutical benefits to providing outpatient care and analytics.

CVS Health Corp (CVS:NYSE) – Offers traditional, voluntary, and consumer-directed health insurance products and related services. CVS Health has a sizable pharmacy operation, and includes nearly 9,900 retail pharmacy locations primarily in the U.S.


Price / Mkt Cap. $508.08 / $476.4B$97.34 / $128.5B
Dividend Yield / Payout1.3% / 25%2.3% / 25%

Rev. CAGR of 9.3% from 2017-to-2021.

Net Income was up 18.8% in the quarter.

Rev. CAGR of 12% from 2017-to-2021.

Net Income was up 6.2% in the quarter.

Balance SheetNet Debt of $23.4B, and a net debt to EBITDA multiple of ~0.4x.Net Debt of $59.2B, and a net debt to EBITDA multiple of ~3.2x.


(Full-Year GAAP)

GAAP EPS of $20.45-$20.95.

(13% over 2021)

GAAP EPS of $7.23-$7.43.

(24% over 2021)



Fwd PE of 25 times

TTM EV/EBITDA of 9.2 times.

Fwd PEG Ratio = 1.9x


Fwd PE of 14 times

TTM EV/EBITDA of 10.4 times

Fwd PEG Ratio = 0.6x

Both are quality businesses.

CVS has historically grown revenue at a better rate, pays a better dividend yield, is guiding toward better earnings growth this year, has more attractive valuations in relation to growth, but the one negative of the company is that it is quite levered up. The debt is sustainable, but it is getting the higher end of where we would like to see it.

UNH has much less debt but certainly trades at more of a premium given its earnings growth guidance.

Personally speaking, I think that I would go with CVS given the better dividend yield, and profile that closer fits Growth at a Reasonable price. But the risk is certainly higher considering its debt load.

STAR and DOG of the Week

Star – Winpak WPK:TSX

While the tsx composite index has fallen 13% year-to-date, our Star of the Week, Winpak symbol W-P-K on the TSX has surged 23% to $45.66. The company manufactures and distributes high-quality packaging materials and related packaging machines. The company owns twelve production facilities located in Canada, the US, and Mexico. Its products include the packaging for perishable foods, beverages and healthcare applications.

The company is the opposite of the core losing stocks this year, it is a low-risk consistent stock with a large cash position, allowing it to avoid and perhaps benefit from the risk-off market we’ve seen this year. We interviewed some of the management last week, and I can say that a mentality of consistent and cautious growth is built into the company. An example of them being cautious is increasing its inventory levels to $260.3 million to minimize the impact of the ongoing global supply chain issues.

Them being cautious does not mean they are not growing. Winpak grew its revenue by 27.2% year-over-year to 310.3 million for Q2 2022. The adjusted EBITDA grew 17.8% to $58.7 million and Net income grew 18.1% to $33.7 million or $0.52 per share. This was on the back of an improvement in gross profits as selling prices exceeded the impact of rising costs.

For further details, we will be releasing our Canadian Opportunities Report in October, where Winpak will have an in-depth report. But, until then, Winpak is our Star of the Week!

Dog – Nautilus NLS:NYSE

Once a pandemic favourite, Nautilus Symbol NLS on the New York Stock Exchange has fallen 72% year to date to a $1.67. Nautilus is a manufacturer of fitness equipment under the brands’ Nautilus, Bowflex, Modern Movement, Schwinn Fitness, and Universal. Otherwise known as the equipment many people buy and use only once.

Revenue has sunk nearly 70% year-over-year to only $55 million from $185 million. Net income was eliminated, going from a profit of $14 million to a loss of $60 million. That shift in earnings has eliminated the bullish case for the company. Although a major portion of the loss was a significant goodwill write-down of $27 million, which doesn’t impact operations.

Further, we are going into an increasingly grim near-term situation for consumer cyclical products. The macroeconomic pressure will put further downward pressure on both the top and bottom lines.  The company has already been applying increasing discounts on its products which lowered its gross margins. The gross margin fell to 5.5% from 25.1%, with 11% of the drop being due to discounts.

Worse to come, if the company continues in this manner, it will begin to run into the limits of its balance sheet. It may have been a pandemic star, but Nautilus is now Our Dog of the Week!


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