KeyStone’s Stock Talk Show, Episode 231.
We have a busy show for you this week – as we prepare to launch our Fall 2023 DIY Stock Investing Webinars – tickets are now on-sale and going fast – do not miss out on the event. Last year we recommended Hammond Power at our Fall event. It has jumped 275% in a down market over the past year. This week Aaron will answer a listener question on Telsa (TSLA: NASDAQ) after the EV-maker disappointed on Q3 earnings. I will answer a question on which stocks tend to outperform in a recession including one less conventional company to consider. Brennan answers a viewer question on NTG Clarity Networks Inc. (NCI:TSX-V) a true nano-cap, that provides telecom and IT software and support solutions for telecom, utilities, enterprise, governments, and finance companies. The tiny company has been profitable, and the viewer asks if it is an opportunity of value trap. Finally, in our Stars & Dogs segment Brett’s Dog is SolarEdge Technologies symbol (SEDG:NASDAQ) which specializes in creating direct current-optimized inverter systems for solar photovoltaic applications. The stock which took a huge hit this past week on a poor outlook is trading at $84 down over 70% year-to-date and 36% over the past month. Our Star of the Week is Celestica Symbol (CLS:TSX). Celestica delivers innovative supply chain solutions to global customers. Brett details why this Star is up 123% in the past 6 months putting the price at $35.50 Canadian, a price it has not seen since 2002.
Let’s get to the show – we welcome my cohost, Mr. Aaron Dunn and the killer B’s, Brett, with Brennan.
Live & On-Demand Webinar
Live DIY Stock Investing Webinar – “Build a Winning Stock Portfolio for 2024 – AI to Electrification and Buffett’s Great Stocks.”
Learn how to build your own portfolio.
November 2 @ 7:00PM Pacific & November 9 @ 7:00PM Eastern
$29.95 | $79.95
Who should attend? Individuals or families who want further information on how to build a simple 15-25 stock portfolio.
What is included?
- 7 Profitable Stocks You Can Buy Today – KeyStone’s top AI Stock, top dividend growth stock, top SaaS tech, top cash rich healthcare, top gold-related, top unknown cash-rich small-cap, and more.
- How 2-3 great stocks in your life can be game-changing in your portfolio – Real examples from our research include Boyd Group (BYD: TSX) the best-performing stock in Canada over the past decade up over 10,500% and Hammond Power (HPS.A:TSX) up over 9,800% (Best performing TSX stock past year).
- Hot Topics: Invest in AI – what the opportunities are & what to avoid. Electrification – a generational opportunity as the world switches to EVs – research from our special report on over 400 electrification stocks, including Hammond Power up over 260% since our recommendation last fall.
- How the Big Banks Are Killing Your Returns: Build a Buffett Growth Portfolio in 8 Simple Steps – 15-25 growth & dividend growth stock portfolio designed to enrich you, not your advisor.
- A Canadian’s roadmap to US investing opportunities: insights from our report on the top 100 U.S. stocks.
- 5 Simple Steps to Review Any Stock in 5 Minutes or Less.
Where & When? Online November 2nd @ 7:00PM Pacific & November 9th @ 7:00PM Eastern
Included in Your Ticket:
- Early Bird Ticket – KeyStone’s 2023 Electrification Special Report ($599).
- Vip Ticket – KeyStone’s 2023 Electrification Special Report ($599), KeyStone’s Top 100 U.S. Stock Special Report ($599). On-Demand Webinar: Build a Stock Portfolio During a Bear, Profit in the Boom ($79).
There has been a good deal of talk about a coming recession – it has been ongoing for over a year now. Will North America drop into a recession or not?
Some stock market sectors, like health care and consumer staples, generally perform better than others in a recession.
- Healthcare:
-
-
- Johnson & Johnson (JNJ), CVS Health (CVS), Pfizer (PFE), or UnitedHealth Group (UNH).
-
- Consumer staples:
-
-
- Kroger (KR), PepsiCo (PEP), Procter & Gamble (PG), or General Mills (GIS).
-
- Utility (Utility-like) companies:
-
-
- American Water Works (AWK), Brookfield Infrastructure (BIP), or NextEra Energy (NEE).
-
- Lower-Cost Retailers:
-
- Walmart (WMT), Dollar General (DG), or Costco (COST).
I would add companies that offer more or semi-essential services such as auto repair – a good example of this is Boyd Group – the autobody repair consolidator that we have recommended for the past 15-years.
I my opinion these can be goalposts, but they entirely oversimplify the equation. For example, not every healthcare related business is the same. You can even have two health related business that grow by acquisition, servicing the same niche in healthcare but the capital structure and balance sheet (essentially) matter.
During a recession, capital is more difficult to access, even for great business. If Company A has no debt and a strong net cash balance sheet vs. Company B with a heavy debt load, limited cash and high debt service payments – their opportunities and, even risks in a recession can differ greatly.
Company A with the strong balance sheet can continue to execute on its growth-by-acquisition strategy from its internally generated cash & existing balance sheet.
Company B will continue to have to service its debt and will find capital more difficult to access (via debt or equity) and it will be more difficult to execute on its growth-by-acquisition strategy.
The bonus here is that Company A is also likely acquiring businesses at depressed valuations during a recession. This is the best time to make those acquisitions. So company B misses out to a degree on the best time to execute on its own growth-by-acquisition strategy.
The question goes on to give a non-traditional example of a stock that could perform well during a recession.
Enghouse Systems Limited (ENGH:TSX)
| COMPANY DATA | |
| Symbol | ENGH:TSX |
| Stock Price | $32.70 |
| Market Cap | $1.80 B |
| Yield | 2.77% |
Company Description: Provides vertical enterprise software solutions focused on contact centers, video communications, healthcare, telecommunications networks, public safety and the transit market. The company’s two-pronged strategy to grow earnings focuses on internal growth and acquisitions, which, to date, have been funded through operating cash flows. Enghouse has no outstanding external debt financing and is organized around two business segments: the Interactive Management Group and the Asset Management Group.
Huge net cash balance sheet – nearly $250 million in cash and no debt…the company also produces cash flow in the range of $80-$100 million annually to fund acquisitions. It’s universe of potential acquisitions are coming on sale at a time when capital is tougher to access.
YSOT NTG Clarity Networks Inc. (NCI:TSX-V)
Jeremy – who we met in Vancouver during the Planet Micro-Cap conference reached out and wanted me to look at the nano-cap 🡪 NTG Clarity Networks Inc.
Slide 1
Price: $0.035
Market Cap: $5.2 Million
Description:
NTG Clarity Networks Inc. provides telecom and IT software and support solutions for telecom, utilities, enterprise, governments, and finance companies. The company has offices in Canada, the USA, Egypt, Saudi Arabia, and Oman.
Slide 2
The company’s revenue distribution is about ¾ Professional Services and ½ Products/Software.
Professional services include:
- Software Development
- Operations Support Systems (OSS) & Business Support Systems (BSS)
- Training
- Security
Software Products:
- Operations Support Systems (OSS) & Business Support Systems (BSS)
- ERP Systems
- Smart2Go E-Business system
Slide 3
Long term, revenue growth has been quite volatile – but over the last 3 years there has been a good uptick in revenue – going from 7.9M in 2020 to 17.7M in 2022, and the business appears that it will put up a record year this year in 2023.
So looking at the Q2 2023 results released in August:
-
- Revenue was up 87% Y/Y to $6.37M – primarily due to increasing revenue in KSA (Saudi Arabia) where they added approximately 10 new customers.
- Net income was up 265% Y/Y to $698K – Due to increase in revenue.
- EPS was half of a cent compared to NIL for Q2 2022.
Cash: $440K
Debt: $7.67M
- Most of this debt, about $6.5M is held by a numbered company which is controlled by the company’s CEO. The company has agreed to extend the grace period for principal installment repayments until December 2023. The interest rate on the loan is prime + 2%.
Net Debt: $7.23M
Net Debt/EBITDA: 2.5x
Slide 4
Jeremy provided me with some 2023 revenue projections – which I could not specifically find published by the company anywhere. But he quoted ~$24M in revenue & $4M in Earnings. Which would provide a Fwd P/E multiple of only 1.3x.
And if we simply just go ahead and annualize Q2 2023 earnings, the stock would be trading at about 1.9x Fwd earnings.
The company also provided some comments indicating that Saudi Arabia’s economy has been strong due to oil prices so they have had some strong demand in the Middle East.
Slide 5
To conclude:
I think the question here is – “Is NCI deep value or Value trap?”
The company has shown good growth over the past three years… but will it continue is my major concern… it appears that growth is poised in the Middle East but the dismal track record of consistent growth does concern me to some degree.
The stock is trading at very low fwd. P/E mutliples, but is somewhat expected given the weak track record of consistent growth and exposure to the Middle East.
The balance sheet is reasonable, and management is aligned with shareholders with large Insider ownership, however I do wish that the company’s share count was a little cleaner. As even in Q2 2023 the company posted $700K in earnings…. But this only equates to half a penny per share in the quarter.
Overall – if the company can replicate the growth over the past three years, there is a case that the stock offers investors deep value. But due to the tiny size of the company, lack of track record, lack of liquidity, as well as exposure to the middle east – it is not a stock we would recommend to clients.
Dog of the Week: SEDG:NASDAQ
1)
Our Dog of the Week is SolarEdge Technologies symbol SEDG on the NASDAQ. SolarEdge specializes in creating direct current-optimized inverter systems for solar photovoltaic applications. Their offerings include power optimizers, inverters, and a cloud-driven monitoring platform catering to various solar market segments. This includes everything from small-scale residential solar projects to commercial and smaller utility-scale solar deployments. The stock is trading at $84 down over 70% year-to-date and 36% over the past month.
2)
The stock’s fall in price began after its Q2 earnings at the start of August. It guided that its Q3 earnings would be weak, with the expectation of revenue coming $880-$920 million well below the analyst consensus at the time of roughly 1.05 billion. At the midpoint this implies revenue growth of 7.6%. Also the expectation of non-GAAP gross margin to be between 28% and 31%. The CEO attributed the drop in guidance to a drop in US residential solar as a result of higher interest rates. So after this market sentiment for Solar Edge was clearly negative.
3)
Now fast forward to October, the company released an updated guidance for Q3. The company now expects Q3 revenue to be between $720 million to $730 million, which is a year-over-year decline of 13.4%. Gross margins are expected to be between 20.1% and 21.1%, so not only less sales but less profitable sales. The decreases result in an expected GAAP operating loss of $9 to $28 million. Non-GAAP operating is still expected to be a profit of $12 to $31 million, but it will be a substantial drop from $120.2 million in the prior year regardless.
The drop in guidance is due to significant cancellations of existing backlog from their European distributors, as end-market install rates were significantly slower than historic amounts. So initial guidance was lower as the US was weaker now that weakness has come to Europe the company sees more weakness. Just a note, the company is headquartered and has one manufacturing facility in Israel, which has not been materially impacted by the conflict there, but it may play a role in the current market sentiment. The company reports Q3 on November 1st, but for now its our dog of the week!
Star of the Week: CLS:TSX
1)
Our Star of the Week is Celestica Symbol CLS on both the TSX and the NYSE. Celestica delivers innovative supply chain solutions to global customers, through two segments Advanced Technology Solutions or ATS and Connectivity & Cloud Solutions or CCS. The ATS segment serves Aerospace and Defence, Industrial, Healthtech, semiconductor, display and robotics. The CCS segment serves Communications and Server and storage Businesses. The stock is up 123% in the past 6 months putting the price at $35.50 Canadian, a price it has not seen since 2002.
2)
So why has the price finally seen a substantial increase after 20 years of stagnation?
The company saw a major jump after its fiscal Q2 2022 earnings in late July. The company reported a strong revenue growth of 13% for the year to $1.94 billion with increased operating margin of 5.5% from 4.8% and adjusted EPS increasing to $0.55 from $0.44, a strong increase from top to bottom. The growth comes from a couple of factors that normalized supply chains over the past year allowing for its aerospace and defence market to return, and the strong growth from its hyper scaler datacenter customers driven by the surge in AI and machine learning which has an increased demand for proprietary computer solutions.
3)
Further on top of the great results the company raised its 2023 outlook to revenue of $7.85 billion from $7.6 billion and an adjusted EPS of $2.25 compared to a range of $2.00 to $2.05. As well, the company anticipates 10% or more adjusted EPS growth for fiscal 2024 which is roughly $2.5 per share, which would put the valuation of the company at just over 10 times 2024 adjusted earnings. As a whole, Celestica has just really had a great year of growth not only has it been able to meet its expectations but has been able to move them up. The company reports its Q3 later this week and we’ll see if it is able to continue its trend of top-to-bottom line growth, but either way it’s our Star of the Week!
