Today we have a great show beginning with a bit of a primer on “How to make the Sell Decision” – particularly in a good stock. In our Your Stock, Our Take segment we take a question from a listener about Questor Technology Inc. (QST:TSX-V), a micro-cap which has seen its share price fall from just under $5.00 to the $0.70 range in a very tough market for energy service stocks – we take a look to see if now is the time to buy. Our dog of the week we highlight one of the worst performing stocks on the TSX over the past year and formerly the largest company by market cap less than 18-months ago, Valeant Pharmaceuticals Intl Inc. (TSE:VRX). Our star of the week is, Nutrisystem, Inc. (NTRI:NASDAQ), a provider of weight management products and services including Nutrisystem® and South Beach Diet® which reported strong fourth quarter and full year results this past week sending the stock soaring.
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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 shockingly impressed by the trade deadline moves this past week by his Vancouver Canucks that we is considering removing the paper bag from his head that he has worn to each game he attended the year, Mr. Aaron Dunn.
Chat about “How to make the Sell Decision” – particularly in a good stock
The SELL Decision
Investing is not just knowing what stocks to buy, it is also about knowing when to sell and individual stock – the decision to sell can also become more difficult when you are dealing with a good company.
Our decision to sell if most often based on as stock exceeding or significantly exceeding (say by 25-50%) what we consider to be its fair value based on earnings or cash flows. If it is a great company that we want to own for say 3-10 years, the decision is more complex. We then take into account the general risk level of the stock.
***We do not want to be trading in and out of a stock if it hovers 5-10% above fair value***
We often break down stocks we look at into a couple of categories – particularly in our growth stocks research.
Long-Term Non-Cyclical Business BUYs (being less risk) and Cyclical Stock BUYs (more risk)
Long-Term Business BUYs – companies with recession resistant businesses that are not dependent completely on a business cycle or commodity price movement. A great real world example of this would be a stock I have recommend here countless times, The Boyd Group – what they do autobody and glass repair – recession or not people tend to fix there means of getting from A to B.
Cyclical Stocks are companies who’s businesses are dependent on an economic cycle or an underlying commodity price such as an oil and gas producers or a gold stock.
We will tend to hold onto a stock longer if it is non-cyclical and well run, even if it passes its fair value near-term by 10 to even 20% at times as we are not in the business of timing in an out of a stock.
However, if we are looking at a cyclical stock, such as an energy service stock, we are far more likely to SELL and take profits if the stock exceeds fair value – we have never gone broke using this strategy. In fact we recently employed it with a stock we have recommended on this show a number of times – that being High Arctic (HWO:TSX).
Classic case of a great cash flowing business – that services a very cyclical energy sector. We had actually owned the stock for 4 years buying originally $2.20, it has raised its dividend 3-times and we issued a SELL report to clients recently at $6.20. The stock returned us around 200%.
To be blunt, HWO was not terribly expense but given the fact that it services a very cyclical industry which a number of trusted sources we look at believe may see a pullback in oil, we took the run up in the stock price of 65% over the past 5-months as an opportunity to crystallize or profits.
We saw fair value near-term at closer to $5.25, so the stock has exceeded this by almost 20%. We may actually buy back into it at some point as it remains our go to name for exposure to energy services, but we do not see cash flow growth over the near-term in that segment, so we are not invested there.
Valeant Pharmaceuticals Intl Inc. (TSE:VRX)
Stock dropped 17% this past week and is down 84% over the past year. The stock reported its latest set of quarterly numbers this past week and announced the sale of assets to pay down debt.
– Total Revenues of $2.4 billion for Q4 2016 and $9.7 billion for FY 2016.
– GAAP EPS of $(1.47) for Q4 2016 and $(6.94) for FY 2016.
– Adjusted EPS (non-GAAP) of $1.26 for Q4 2016 and $5.47 for FY 2016.
– GAAP Net (Loss) Income of $(515) million for Q4 2016 and $(2.4) billion for FY 2016.
– Adjusted EBITDA (non-GAAP) of $1.05 billion for Q4 2016 and $4.3 billion for FY 2016.
– GAAP Cash Flow from Operations of $513 million for Q4 2016 and $2.1 billion for FY 2016.
(we do not believe the market believes or is at all confident in the “adjustments” made her to calculate the Adjusted EPS – they likely factor out interest on debt)
Valeant Pharmaceuticals International Inc. referred to itself as “New Valeant” in its quarterly earnings slides on Tuesday. Don’t expect New Valeant to be much more successful than New Coke.
The perma-troubled specialty pharmaceutical company has taken some positive steps under its new leadership team and CEO, including meeting its own reduced full-year revenue guidance for once and setting relatively conservative future goals. But there’s not much that’s new about the New Valeant.
Quarterly “Low Lights”
Each of the company’s three units saw sales decline year-over-year in the quarter. Just two of its 15 reported sub-segments grew sales over the same period.
However you label it, Valeant remains a poorly thought-out collection of mostly declining assets, a roll-up built on a foundation of cheap debt, overconfidence, and tax arbitrage. Its debt load — $29.85 billion at the end of 2016, just barely down from the $30.26 at the end of 2015 — limits its flexibility. Valeant expects around $1.9 billion in proceeds from already announced divestitures. But the prospects seem slim of generating enough cash to give itself enough room to maneuver.
Your Stock Our Take: Questor Technology Inc. (QST:TSX-V)
Questor international environmental Cleantech company founded in late 1994 and headquartered in Calgary, Alberta,
Questor designs, manufactures and services high efficiency waste gas combustion systems; as well as, power generation systems and water treatment solutions utilizing waste heat. The company’s proprietary incinerator technology is utilized worldwide in the effective management of Methane, Hydrogen Sulphide gas, Volatile Organic Hydrocarbons, Hazardous
Good Balance Sheet for a Micro-Cap
$5.7 million or $0.21 per share – just under 30% of the company’s market cap in cash and zero debt.
Revenue for the third quarter ended $1.7 million, consistent with $1.7 million recorded in 2015. Questor continues to experience decline in the sales of the company’s incinerators as result of lower drilling activity and constraints on capital spending in the North American oil and gas sector due to depressed oil and gas prices. Revenue from incinerators rentals during the three months ended September 30, 2016 increased 59% versus the same period of 2015. The increase is primarily due to new large projects in the U.S. region that commenced during Q3 2016. Depressed oil and gas prices continue to effect capital constraints, as result Questor is experiencing significant interest in incinerator rentals as an alternative to incinerator sales. The company expects demand for incinerator rentals will increase through Q4 2016. Incinerators service revenue decreased 34% versus the same period of 2015. Service revenue is driven commissioning activity for equipment sales and new rental locations. The decrease in sales resulted in lower commissioning activity.
KeyStone’s Take: The prolonged downturn in oil and gas prices continued to decrease the activity levels and capital spending in the oil and gas industry in 2016 and the trend has largely continued into 2017. Questor remains focused on managing through the current industry downturn and holds a strong balance sheet, but near-term cash flow has been crippled. Management believes the Canadian governments target to reduce methane emissions by 45% by 2025 will create an opportunity for the company long-term. This appeared to be the case ahead of the collapse in energy prices and, in a recovery, we see Questor as a viable option.
We see the company as well run and possessing good tech, but from an investment perspective, until we see a more significant uptick in energy prices (oil to the US$65 or above) on a sustained basis, we do not see value here as a trade. If oil pulls back again in the summer or into the Fall, shares will likely have another move lower and we will revisit the stock in tax loss selling at the end of 2017. Monitor for energy price recovery.
- Our start of the week is Nutrisystem Inc; symbol is NTRI and the company trades on the NASDAQ exchange.
- Nutrisystem is a weight loss management company. From what I can see they sell pre packaged meals, plans and other produces that help people loss weight.
- The company just released its Q4 and year end results last Monday and the stock is up nearly 30% in the 4 trading days since.
- Revenue increased 18% and earnings per share Increased 34% for Full Year of 2016.
- For Q4, revenue was up 21% and earnings per share were 128%.
- President and Chief Executive Officer, stated, “In 2016, we exceeded top and bottom-line expectations as Nutrisystem continued to expand solutions for those looking to lose weight. We implemented a number of strategic actions designed to strengthen the business and propel future growth such as investments in our multi-brand strategy, new product innovation, new marketing campaigns and an enhanced customer experience.”
- Ms. Zier added, “We expect our momentum to continue in 2017 with Nutrisystem having a strong start to diet season coupled with the official launch of the South Beach Diet. We are extending our reach into new segments across the large weight-loss market. We believe we are well-positioned to deliver our fourth consecutive year of double-digit revenue growth and have a plan in place that will generate long-term value for shareholders.”
- Right now the stock is trading at 41 times earnings.
- This is the classic situation…excellent growth and strong outlook but premium valuation.
- If the company keeps growing earnings well into the double digits then they will likely continue to command this premium valuation.
- If on the other hand, they put out a quarter with just 10% to 15% earnings growth, while still solid, that may disappoint the market given the premium expectations being factored into the price.
- This looks like an interesting story for growth and momentum investors but not so much for growth and value investors.
- Nevertheless, solid earnings growth and a 30% bump in the share price wins this company our designation as Star of the week.