KeyStone’s Stock Talk Show, Episode 226.

We have a great show for you this week. I will start with a brief excerpt from my presentation at the Toronto Money Show this past week on current market valuations including a bifurcation of market valuations and what you should focus on in your portfolio. In our YSOT segment, Aaron answers a listener question on Pollard Banknote Limited (PBL:TSX), a leading lottery partner to more than 60 lotteries worldwide, providing high-quality instant ticket products, licensed games, in-lane ticket options, and sales-driving merchandising solutions. While the stock is up over 46% year-to-date, it remains at half the price it traded at in its 2021 highs. Aaron let’s you know our thoughts on the company’s current valuations and what it would have to achieve to be a recommendation. Finally, Brett answers a question on Gatekeeper Systems Inc. (GSI:TSX-V), a provider of intelligent video and data solutions designed to provide a safer transportation environment for children, passengers, and public safety personnel on multiple transportation modes. Gatekeeper is primarily a contract driven business, and is subject to significant quarterly fluctuations, but has strong growth year-to-date after a very strong Q1 and trades at reasonable trailing valuations. Brett digs in further and lets you know his thoughts on the stock which is up 20% in 2023, but remains down 68% from its 2021 highs.

Let’s get to the show – we welcome my cohost, Mr. Aaron Dunn and a sole member of the killer B’s, Brett, with Brennan lost somewhere in the backwoods of Saskatchewan no doubt trying to take a selfie with a moose.

I was at two conferences this past week.

The first, was a research conference in Vancouver called the Planet Micro-Cap Conference, which I both spoke at and myself and Brennan interviewed 12 management teams. Myself, I interviewed teams from Kraken Robotics Inc., Electrovaya, Inc., Tribe Property Technologies Inc., C-COM Satellite Systems, Inc., Wishpond Technologies Ltd., and Microbix Biosystems Inc. All have some level of interest.

Overviews of the Toronto Money Show…first off, it is always great to get out to Toronto, our talk was well attended, but my general thoughts on the event was that it was not nearly as well attended as last year and the show missed the mark on a number of fronts.

First off – there was not a single Stock Picker or Analyst type panel. A panel where the audience gets to hear current recommendations from top analysts in the country – they are typically some of the best attended presentations at the event. Last year, I did one with 3 other analysts, and it was a full room – likely 500 people. This  year, there was a single panel…on “Social Investing”…and it was conducted by 20 to early 30 something panelists with great social media followings that had partnered on a brokerage and were selling this concept….to a largely 50_ audience – missing the mark for me.

We did note that “Canada’s youngest retiree” had a booth at the show…me and Aaron had a tongue in cheek laugh…Brett has put the picture up…it was from book, written around 20 years ago..look, me and Aaron consider ourselves old (at least our kids do) and this gentlemen was older than us. Perhaps it is time to “retire that slogan”

Honestly, he book appears to have some good common sense advice in it, but it was just a funny image.

Canada’s Youngest Retiree is 62..

As part of a larger presentation I looked at the rally in North American markets – starting with the S&P 500…and NASDAQ indexes after both were sharply lower in 2022.

The 2023 rally has been most pronounced on the NASDAQ, which was hit hardest in 2022, down roughly 33% on the year – this was a historic decline.

As we can see in the chart here however, the tech driven exchange has rebounded year-to-date in 2023, now up 33.8% – again, not clawing back all the losses, but a significant percentage.

But it is a tale of two markets – the gains in 2023 have been driven largely by 8 stocks – known as the Mega-Cap 8.  Alphabet, Amazon, Apple, Meta, MicroSoft, Netflix, Nvidia, and Tesla. They alone account for over 26% of the index and roughly 50% of its return year-to-date..8 stocks powering the total return of the 500 stocks in the S&P 500 – the remainder of the index and smaller-cap companies had not faired nearly as well….but let’s look at broader valuations first.

Broadly speaking, one metric we like to look at is the ***CLICK*** Shiller PE – is a more reasonable market valuation indicator than the regular PE ratio because it eliminates fluctuation of the ratio caused by the variation of profit margins during business cycles.

This is the Shiller over the past 20-years. The ratio reached is highest point in November of 2021, in the range of 38.6, which would be 47% above the average PE of the last 20 years – 26.2.

This was the highest ratio in the past 20-years and was eclipsed literally once since its was being tracked (over 100 years) during ***CLICK*** the dot come madness in 1999 at roughly 44.

Where are we now?

Valuations Today:

Shiller PE: 31.1.

Shiller PE is 18.7% higher than the recent 20-year average of 26.2.

Far better than in the range of 38 hit in November of this past year – which was 47% above the average PE of the last 20 years.

However, it is instructive to point out that the Shiller PE is still 79% above its all time average of 17.4 – indicating we are not nearly historically cheap.

Better than the peak – but risk remains & the market is bifurcated.

As far as the forward looking regular PE on the markets to transition to where we are on a forward looking basis today – it is a tale of two markets. (in terms of valuations).

This simple chart courtesy of Yardeni Research – which kinda looks like a plate of rainbow spaghetti – shows the disparity between Large and Mega Cap Stocks represented by the current forward PE in RED and PURPLE lines respectively and the Small-Cap Universe as represented by the GREEN LINE formed by the S&P 600 Small-Cap Index.

Forward Looking PE’s on:

  1. S&P 500 Large Cap: 18.9.
  2. Mega-Cap 8: 28.1.
  3. S&P 600 Small-Cap: 13.8.

So larger caps and the Mega-Cap 8 trade and significantly higher multiples than the S&P Small-Cap 600.

To give you and idea of the constituents of the S&P 600 Small-Cap – to be included in the index, a stock must have a total market capitalization that ranges from $850 million to $5.2 billion.

Drilling down on the large cap vs. small-cap story.

This is since 2005, the S&P 600 has historically traded at a premium to their larger cap S&P 500 counterparts, but we can see today, small-caps trade at a significant discount to large caps.

again, the discount here is pronounced and likely a long-term opportunity in quality growth oriented small-caps.

What to do today?

Focus on what you can control.

NUMBER 1: Construction of your portfolio – this is how to build your portfolio, how many stocks to own, over what period to build it, and how and when to adjust and review.  Come to one of our live Webinars or get an on-Demand version from and we will show you the simple steps to build a 15-25 stock portfolio.

NUMBER 2: Composition of your portfolio – What you put in it.

Types of stocks you want to own.

What do we like & what would be avoid today?

Near-term, I would not recommend buying the index. Fortunately, it is a market of stocks, not a stock market. There are still select companies growing…. I can go into what we are looking for and what we would avoid today.


Pay attention to the balance sheet more than ever now:

Avoiding Debt Heavy Business – particularly cyclicals with heavy debt – this is where you can really get into trouble.  Highly levered companies – interest payments are higher and eating into profitability. [CYCLICALS – restaurants, hotel chains, airlines, furniture, high-end clothing retailers, and automobile manufacturers.]

  • Cash rich. Strong free cash flow producing businesses with debt are fine.

Favouring cash rich businesses – these are stocks with net cash on the balance sheet and producing cash – yes, we want them to be able to weather a downturn, but we also want them to be able to profit from it.

Cash Rich Businesses:

Example – Dynacor Group Inc. (DNG:TSX): SPEC BUY. 35% of market cap in cash and zero debt.

Example – Hammond Power Solutions Inc. (HPS.A:TSX) – huge cash flow in 2022 – gone from net debt to net cash, ready to expand organically and through acquisitions.

Hammond Power today –  a leader in the design and manufacture of custom electrical engineered magnetics, standard electrical dry type, cast resin and liquid-filled transformers – not autobots or decepticons, although that would be cool. The transformers Hammond Power makes are used to step up power for it to travel a long distance or to step it down at your home or an applications such as a charging station…in fact every Telsa charging station in Canada has a Hammond transformer. For years we have seen it as a backdoor way to play the electrification of the boom.. when we re-recommended it several years ago, it traded in the $7-$8 range at around 7-8 times earnings (real, not adjusted) versus many the obvious EV plays (charging station companies, EV manufacturers etc) that traded at ridiculous valuations if they had any underlying cash flow at all. Hammond had decent growth in its core business, but as the world electrifies growth has increased.. the stock has followed. It still trades at 11 times this year’s expected EPS.

Hammond Power is one of the type of Unique opportunities we scour the markets to uncover for our clients on a daily basis. With the discount smaller growth oriented businesses are currently trading at, their may be a long-term opportunity presenting itself over the next year to position a portfolio for success over the balance of this decade.

Gatekeeper systems symbol GSI on the TSX Venture is a leading provider of intelligent video and data solutions designed to provide a safer transportation environment for children, passengers, and public safety personnel on multiple transportation modes. The company breaks its operations into School and Transportation segments and serves both the Canadian and US markets. The company currently has 3,500 customer school districts across every state and province in US and Canada. The stock is trading at $0.34 a share, rising 20% year to date.

Gatekeeper defines its revenue model as a Platform as a service or PaaS which sells its services including on-vehicle recordings, GPS, video, video analytics, transit-lane enforcement, passenger counting, mobile wifi, thermal cameras, AI dash cam and more as a package on a recurring contract basis. Like a SaaS model you do see recurring revenue but it the company also has more lumpiness when contracts are first initiated due to the initial installation of the required hardware.

Moving to the income statement.
During its fiscal Q3 2023 ending May 31st, Gatekeeper had revenue of $5.9 million up 35% compared to the prior year but down sequentially from the prior quarter’s record revenue of $9.7 million. The large fluctuation in revenue on a quarterly basis is due to contract revenue recognition. However, that is not to say the company isn’t growing as the year-to-date 9-month revenue was up 101% to $20.5 million. As well notably the gross margin for the company increased to 50% compared to 41% in the prior year, whereas the 9 months was flat at 44% year-over-year. The company has flipped into profitability over the past year with Q3 having a net income of $440 thousand versus a loss of $318 thousand in the prior year, with year to date being a net income of $2.2 million versus a loss of $800 thousand. As well it is worth noting that the company is now paying taxes, which in its previous profitable quarters it was not.

Gatekeeper was previously profitable prior to COVID-19 but saw significant revenue shrinkage and in turn EPS turning negative. As well in this graph, you can see that on a quarterly basis, earnings have not been consistent so far. I will note as well that, the share count only increased from 87.6 million at the end of 2019 to 91.5 million in the last quarter about 4.5% during this time period causing minimal drag on a per-share basis,which is nice to see given the material impact due to Covid which many companies funded deficits through significant dilution.

Additionally, the company has been able to flip to being operating cash flow positive of $563 thousand for the last 9 months, compared to a deficit of $3.6 million, and this is with increasing working capital levels over the past 9 months. Gatekeeper has been able to lower its line of credit to only $1.6 million from $3.5 million which is good to see given this is variable debt and we are now in a much higher interest rate environment.
As well, as net debt including leases falling to $1.5 million from $1.9 million. Leverage is not a concern if the company is able to continue its profitability and positive operating cash flows.
Looking at valuations, Gatekeeper trades at a trailing price to sales of 1 times and a trailing price to earnings of 7 times and if you normalized the past twelve months for taxation the shares would trade at approximately 8 to 9 times depending on the exact tax rate. So, the valuation is quite cheap given the recent growth on the top on bottom lines, however, it will be a touch higher if all else is equal given no taxation until the last quarter.
Our Take,
The company returning to positive earnings is great to see especially the last quarter having no major contract disclosures boosting earnings for just the quarter. The balance sheet is minimally leveraged at this time and has recently paid down over half also good to see. Moving forward we would like to see sustained net income with growth preferably being attributable to recurring revenue sources.

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