KeyStone’s Stock Talk Show, Episode 191

Great to be back with you this week. We will start by touching on Aaron’s Money Talks with Mike Campbell and the Vancouver snowfall of 2022. Aaron will present a quick segment on why dividend growth stocks should be part of every Canadian investors portfolio heading into 2023. In a Stock Talk 101 segment, Brett will give you his take on the “problem of investing in concept stocks”. In our YSOT segment, I take a question on embattled Canadian software company, Dye & Durham Limited (DND:TSX). The serial acquirer which provides cloud–based software and for legal and business professionals, has seen its share price drop 67% in 2022 in the tech crash and the listener asks if it finally offers value. Finally, Brennan compares CN Rail and CP Rail in the wake of the Kansas City Southern deal. A listener asks us which is the better buy now the dust has settled?

I welcome my cohosts – Aaron, and the Killer B’s – Brennan and Brett.



We commonly get questions on microcaps and small caps with little or no revenue no profitability which is fundamentally poor, but people are drawn to the concept of what management is trying to do.

What are concept stocks?

A concept stock is a company with substantial historic losses and in many cases, little or no revenue, meaning investors need to buy into the “concept” instead of the underlying financials.

Recently we’ve seen high-tech concept stocks in tech, AI, EVs or any Industry Cathie Wood would invest in are industries which I see pop up constantly as concept stocks. But they are not always high-tech; another common group is oil and gas exploration. Where investors need to buy in that a certain plot of land has oil & gas and that it is economically viable, we see this all the time when looking through small Canadian companies on SEDAR.

The companies are young, as most will collapse, as they are not able to create short or medium-term success.

Financially they will be spending heavily in research and development, which if successful will appear on the balance sheet as intangible assets like patents.

Looking historically,

In the 2006  paper “The history and performance of concept stocks”, they categorize concept stocks as the top percentile of sales to market value companies. Using data from 1967 to 1999  they found on average, concept stocks perform worse than the broader market. And I would evenargue that they are more absurd today with the rise of high-tech concept stocks. You can see in their data the sharp uptick in market values leading up to the dot com crash in the early 2000s. [1]

The Issue with Concept Stocks as Investors

Concept Stocks can’t be valued using standard methods.

As concept stocks are unlikely to have any income or cash flows, they can’t be valued by these metrics. Most valuation metrics will use some sort of cash flow or net income-related metric, price to earnings, price to free cash flow etcetera. For the ones that do have sales a price-to-sales ratio is used and generally results in an extremely high metric. Price to sales already has inherent problems with valuation as companies being able to grow only revenue may never convert to cash or net income, meaning no value is able to be returned to shareholders.

The next step down the line is no revenue concept stocks which are even more speculative and commonly will rely on macro forecasting for industries which may not even exist or be in their infancy. Meaning to produce a cash flow model, an analyst would need to forecast the industry, and the market share the company would get, then infer the profit margin much of the time years without a solid baseline of historical data. Effectively it’s impossible to forecast these models down to a cash flow model. So, whenever you see in the slides or press that a company expects to take so much market share of a business 10 years from now and cite a market size in the billions as a basis for their valuation, be skeptical.

Let’s look at a current example of a concept stock

First Hydrogen Corp., symbol FHYD on the TSX Venture, is a company designing a hydrogen utility van and sells hydrogen as a service, effectively providing the equivalent of gas pumps for their customers. The idea or concept that the company is trying to sell to investors is their hydrogen van is a better solution to green long-distance transport compared to electric vehicles.

The company is trading at $4.80 a share with a market cap of $238 million, it has performed extremely well over the last year up 176%, so clearly, people are buying into the concept.

It had no revenue in the past quarter and a massive 160 thousand in the last, leading to a trailing twelve months price to sales of 1486 times, this number is effectively meaningless but is useful to show that even a weak valuation method of price to sales can’t be used. However, it does show First Hydrogen is a concept stock as no person who remotely cares about financial fundamentals would invest.

The company is starting its fleet trials at the start of 2023 and will continue for 24 months, so investors can’t expect real sales till the back end of that assuming success, which is a large assumption. Meaning no return to the company should be expecte in the next couple years.

The problem is like many concept stocks it’s a race against time or in this case cash flow for investors. The company has 3.7 million in cash and another 900 thousand in current assets, but has used 6.6 million in cash over the past 6 months, the only reason it has cash is it has raised 7.6 million from shares over the same period. With the high share price share dilution is less than it otherwise would have been, but if it starts to decline with no real cash flows over the next couple of years, it can create a dilution death spiral which we commonly see in these cash flow negative companies.

The concept of hydrogen vans could ultimately succeed while investors even early on get diluted out of their gains.


In summary, concept stocks are extremely speculative, have poor valuation methods and, on a whole, perform worse than the broader market, which is why we don’t invest in them.


Your Stock Our Take

Dye & Durham Limited (DND.:TSX)

Price: $14.08

Market Cap: $928.936 Million

Yield: 0.56%

Company Description: Dye & Durham Limited is provider of cloud–based software and technology including legal software and data and payments technology solutions designed to improve efficiency and increase productivity for legal and business professionals. The company is executing on a growth-by-acquisition strategy.

Between 2013 and 2020, the company performed 13 acquisitions and grew from a few million in revenues per year to over $300 million USD per year. Since the summer of 2020, the company has been on an acquisition spree adding over seven major acquisitions for more than $1.15 billion CAD – and one which it chased of 12-months will not be proceeding and the company is also being forced to sell one of its acquisitions due to a competitive review. The sale will be of the company’s July 2021 $156 million acquisition of the TMG Group.  Perhaps the company will close a winning deal, but the market knows DND is forced to sell, and M&A conditions have deteriorated. This is something to watch closely.

Acquisition Challenge: 

12 months ago, Dye & Durham, agreed to a $2.9 billion acquire Link Administration Holdings Limited, a publicly listed Australian firm which provides services to the superannuation administration industry. The deal was trimmed to $2.5 billion in July but once again did not move forward. A third offer was tabled, essentially trying to buy just part of Link, but it was rejected.

In our opinion, given the valuation to be paid, DND may have dodged a bullet. Additionally, with the shrinking equity value on DND’s stock, the higher price of debt and the amount of leverage on the company’s balance sheet, the Link acquisition looked like DND over extending itself, almost from the start.


First Quarter Fiscal 2023 Highlights


  • Revenue of $120.2 million during the first quarter, an increase of $7.5 million or 7% from the same period last year.
  • Adjusted EBITDA of $64.4 million, an increase of $2.1 million or 3% in the same period last year.
  • Net loss of $(11.5) million.

Balance Sheet: DND has total debt of $1.16B and while it produces solid cash flow, this is high for a company with a market cap sub $1 billion. We note: The company has $878,500 of floating rate on its debt and it has increased substantially since the company entered into it in n December 3, 2021 – at present the interest rate is in the range of 9-12%, likely nearly double the range of 5-6% the company was initially paying. This cuts into cash flow.

Our Take: On the surface, DND trades at approximately 5 times trailing cash flow which appears attractive. Given the significant debt for a company of its size, we would use an Enterprise Value to capture this in the ratio – thus DND trades at around 9 times Enterprise Value to Operating Cash Flow – my issue would center around the lack of visibility to organic growth.

It is a difficult game to grow by acquisition if the businesses you acquire have limited to o growth. Using debt to do so in a rising rate environment, is even more challenging.

If you generate cash and patiently use it to acquire, that is a different equation and one that can be easier to succeed at, but we find it to be rare in public markets for a variety of reasons.

Another near to mid-term concern is that 68% of revenue has exposure to real estate transactions in Canada, the UK and Ireland, and Australia. The company itself called out “an extremely challenging real estate market in Canada,” and this was as at the end of September 2022 – the sector has worsened since that time.

Finally, I will point out that the company withdrew its FY 2023 Adjusted EBITDA target, given the deteriorating macro-economic trends which are resulting in a lower number of real estate transactions in the markets the ompany operates.

There is a case to be made that with the solid cash generation of its core business, DND is intriguing as its shares continue to pull back, but given the near-term headwinds in its market, the high floating debt levels in a rising rate environment and lack of significant organic growth, we are not buyers near-term.

YSOT – I was wondering if you could compare CN Rail with CP Rail in the wake of the Kansas City Southern deal. Which is the better buy now the dust has settled?


Canadian National Railway Company (CNR:TSX) vs. Canadian Pacific Railway Limited (CP:TSX)

Canadian National Railway engages in the rail and related transportation business and operates a network of 19,500 miles of track spanning Canada and the United States.

Canadian Pacific Railway owns and operates a network of approximately 13,000 miles in Canada and the U.S.

In the fall of 2021 CP acquired Kansas City Southern for USD$32 billion. To pay for the deal CP will issue 262 million new shares and raised approximately $8.5 billion in debt and will assume approximately $3.8 billion of KCS’ outstanding debt. KCS shares have been placed into a voting trust until the Surface Transportation Board (STB) issues a decision on the Class 1’s proposed merger, which is expected in the fourth quarter of 2022. Upon STB approval, CP and KCS said the railroads expect to achieve full integration over the next three years. So right now, the company is reporting KCS’ results using the equity method rather than the acquisition (or consolidation) method.

Market Cap$110B$95B
Dividend Yield1.76%0.74%
Payout Ratio42%24%
Revenue+26% to $4.5B+19% to $2.3B
CFO-14% to $2.1B+101% to $548M

-11% to $2.13

(Merger termination fee in 2021)

+35% to $0.96

(Using equity method KCS)

Net Debt$14,989M$26,056M*
Net Debt to EBITDA2.0x4.2x*
EPS (TTM)$7.06$3.14


Given the better topline growth, dividend yield, balance sheet, and valuations – I have to give the cake to Canadian National Railway.


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