KeyStone’s Stock Talk Show, Episode 232.
We have a busy show for you this week – as we prepare for our Fall 2023 DIY Stock Investing Webinars – tickets are now on-sale and going fast – do not miss out on the event. Our Star of the Week should be no stranger to clients as it has been in our Canadian Small-Cap Focus BUY portfolio for quite some time. The company, Hammond Power (HPS:TSX), a manufacturer of dry-type transformers, power quality products and related magnetics, last week announced strong Q3 growth and a record backlog sending the stock nearly 20% higher once again. Hammond is now up 244% year to date and over 11,800% since our original recommendation. IN our YSOT segment, Aaron starts with a look at another company that needs no introduction, McDonald’s Corporation (MCD:NYSE). The company released solid Q3 results today and increased its dividend 10%. Aaron let’s you know where Mikey D’s is today on a valuation basis. Brennan takes a look at Mark Cuban, well known for being an Investor and TV Personality on Shark Tank and is the owner of the Dallas Mavericks. His net worth was ~$4.6B, Brenan will let you know how he began and how he got to where he is today. And finally, Brett answers a viewer question on Reklaim (MYID:TSX-V) which provides an ecosystem for consumers providing them with the ability to view, edit, opt-out and be compensated for the use of their data. Shockingly, the shares are up 260% year to date currently trading at 0.09 with a market cap of just over $10 million Canadian. The stock was trading down on the year until the Q2 results. Brett let’s you know if there is anything investment worthy in the business.
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).
Hammond Power Solutions Inc. (HPS.A:TSX)
Price: $68.96
Market Cap: $809.057 Million
Company Description: With a history that dates back 100 years, Hammond Power designs and manufactures custom electrical engineered magnetics, standard electrical dry type, cast resin and liquid-filled transformers. The company offers autotransformers, buck-boost transformers, control transformers, distribution transformers, drive isolation transformers, encapsulated transformers, furnace transformers, multi-pulse transformers, padmounted transformers, regulating transformers, and medium voltage distribution transformers, as well as reactors, active harmonic filters, dV/ dT filters, and unitized substations. The company serves the oil and gas, mining, steel, waste and water treatment, commercial construction, data centers, EV charging, energy storage, solar, and wind power generation industries. Hammond Power has manufacturing plants in Canada, the United States, Mexico, and India.
Hammond is up 244% year to date and 325% from when we recommended it at our Fall 2022 seminars in the $16 range last fall.
We also recommended Hammond at $7.26 in 2017 and it has gained 836% since that time, but we can trace Hammond right back to our original recommendation in the $0.60 range, it has gained 11,808%
Event: On October 26, 2023, of this past week Hammond Power reported
Quick Details: Q3 2023 Highlights:
- Record sales of $179 million in the quarter, a 20.5% increase versus 2022. Year-to-date sales of $523 million, a 26.3% increase versus 2022.
- Net Income of $14.4 million in the quarter, a 25.2% increase versus 2022. Year-to-date net income of $43.5 million, a 63.5% increase versus 2022.
- Earnings per share of $1.21 for the quarter and $3.65 year-to-date.
- Order backlog increased 11% versus Quarter 2, 2023 (sequentially) and 40.3% as compared to Quarter 3, 2022 (year over year).
I am not going to comment too much on valuation and our current rating as we will update clients fully this week.
Valuation:
Following the results, Hammond Power trades at a trailing PE of 13.74 and an Enterprise Value/EBITDA of 9.82. Balance sheet is solid with a strong net-cash position.
Our Take:
Hammond Power is a tremendous overnight success story 100+ years in the making. It is an excellent example of what KeyStone’s discovery type research can bring to a portfolio. Despite the fact that Hammond is one of, if not the best performing stock on the entire Toronto Stock Exchange in 2023, not a single analyst covered the stock back in 2000, when we recommended the stock in 2017, at the start of 2021 as a Focus BUY or last Fall when we recommended it to those who attended our Fall Live Webinars. Just now with the stock up thousands of percent are we starting to see Bay street pay attention. Why? Hammond has never needed big bank or brokerage money to fund its operations – these are the best types of businesses, but Bay street pays them little attention and it is to the detriment of Canadian investor portfolios. Fortunately, our independent research can fill the gap and provide our clients with recommendations on unique underfollowed companies like Hammond Power that should be in a well designed portfolio.
In tough times, investors need these type of tremendous winners in their portfolios more than ever.
Mark Cuban
Slide 1
Mark Cuban is an Entrepreneur, starting MicroSolutions – a computer consulting service business – in 1983 which he sold to CompuServe for $6M in 1990. Following his exit, Mark decided to buy an American Airlines Unlimted Airpass and travelled the world and partied like a degenerate (he says).
But in 1995 he and his business partner Todd Wagner founded Broadcast.com, the first internet radio streaming company, which got him to his billionaire status when he sold to Yahoo in 1999 – at the peak of the .com bubble.
And he also started Cost Plus Drugs in 2016 which aims to make pharmaceutical drugs more affordable for Americans by pricing them with a flat 15% fee on top of the wholesale prices.
Other than being an Entrepreneur, Mark is well known for being an Investor and TV Personality on Shark Tank and is the owner of the Dallas Mavericks which he purchased in 2000. And you can actually see all of his private investments on his website “MarkCubanCompanies.com”.
According to Forbes, in 2023 his net worth was ~$4.6B.
Slide 2
Looking at a few of his publicly traded investments which he has disclosed, he indicated that Netflix and Amazon are his two largest stock holding’s and that he likes both because of their Artificial Intelligence Capabilities – and in 2021 he stated that he believes Netflix and Amazon will outperform the S&P 500 over the following 10-year period – we will see if he is right about this.
He also invested heavily in twitter before it was eventually bought out and taken private by Elon Musk – and Mark has been very critical of Musk as he believes Twitter (or X) is much worse now with more bots and trolls on the platform than ever before.
Mark also has invested in Cryptocurencies including Bitcoin, Ethereum and other StableCoins. And I think that this is pretty interesting – Mark actually got about $870K stolen from his Crypto Wallet when he accidentally downloaded a fraudulent version of MetaMask – one of the most common crypto wallet managers….
And lastly, given a $3.3B fair value estimate from Statista, Mark has done quite well with his investment in the Dallas Mavericks NBA team which he purchased for $285M in 2000.
Slide 3
Now I kind of want to switch gears and look at the case study of how Mark got to “Billionaire” status during the .com bubble.
So as I mentioned previously, Mark started broadcast.com back in 1995 with his friend Todd Wagner when they realized that they were unable to watch or listen to the Indiana Basketball games. So they had the idea to disrupt broadcasting by streaming content online.
As you can see here from 1996 to 1998, the company’s revenues were growing at a good pace, generating $22.4M in revenue in 1998, but the company was losing money hand over fist with a net operating loss of $18M and EPS loss of $(0.52) per share for the year.
Despite this the company went public in July of 1998 at a price of $18 per share, and it quickly became known as one of the most high-flying IPOs in the history of the stock market as the stock soared 250% to $62.75 on the first trading day. And up to this time, no other stock in history had ever rose so sharply on its first day of trading.
Slide 4
Under 1 year later, at the tippity top of the Tech Bubble on April 1st 1999, Yahoo! Purchased Broadcast.com for $5.7B in Yahoo! Stock, which equated to a P/S multiple of well over 200x Sales…..
And as you can see here, the Schiller PE’s highest ever point took place just a few months after this acquisition was announced in December 1999.
So again, Yahoo literally made this purchase months before stock market valuations were about to collapse.
Slide 5
And if we look at what Yahoo was trading at during this .com mania, at this market valuation peak in December of 1999, Yahoo was trading with a P/E multiple of over 1000x, but yet analysts were justifying the premium as you can see here from this article on CNN Money.
Luckily Mark who had received Yahoo! Shares, understood that he better hedge the potential downside risk of Yahoo’s stock, so he worked with Goldman Sachs to craft a Collar trade where he bought put options to protect the downside, and sold Call options to offset the cost of the puts, but also limit further upside if Yahoo climbed higher. Luckily for him this hedge ended up saving him his $1.4B.
Slide 6
Now I am just going to finish with a few quotes from Cuban.
“Now when we got broadcast.com going if the Internet stock market hadn’t been insane and been this big bubble, I wouldn’t have made as much money…”
Generally, I see Mark as a bit of an arrogant/brash individual sometimes, but I like that he is honest here and clearly understands that he wouldn’t have become a billionaire if there wasn’t some dumb luck involved with the timing of the tech bubble.
“Don’t be afraid to make mistakes. I learned some expensive lessons when I first started trading stocks. It was painful. But I tried to learn what I got right and wrong.”
I like this quote because I think it is very important for investors to learn from their mistakes. We are all going to make them, but it is crucial to look at your past actions to learn from them. Don’t just brush them off and keep repeating what you had been doing.
“The number-one job of the hedge-fund manager is not to make sure that you can retire with a smile on your face – it’s for him to retire with a smile on his face.”
I like this quote because it is right in line with KeyStone’s philosophy on the “broken model” where big bank advisors and analysts typically overdiversify their clients in 100s of stocks in fee heavy portfolios.
“In my opinion, right now there’s way too much hype on the technologies and not enough attention to the real businesses behind them.”
I thought I would end with this quote as at the end of the day – just like Yahoo paying over 200x sales for broadcast.com, there was way too much hype on the new technologies of the internet and not enough focus on the real fundamentals of the businesses behind them.
YSOT Reklaim MYID:TSX
- Reklaim symbol MYID or My ID trading on the TSX Venture provides an ecosystem for consumers providing them with the ability to view, edit, opt-out and be compensated for the use of their data. Reklaim aspires to be the destination that consumers visit to reclaim control of their online data.
- The shares are up 260% year to date currently trading at 0.09 with a market cap of just over $10 million Canadian. The stock was trading down on the year until the Q2 results.
- Zooming out, the stock is still substantially lower than its pandemic high of $0.72 even after the Q2 jump in price.
- Looking at the last quarter, the company had an all-time high revenue of just over $1 million for the quarter, a 62% increase year over year of which 93% is classified as recurring revenue which is always a good thing to see. The company’s gross margin improved to 80% from 71%. The company did post its first positive quarter of earnings of 255 thousand, driven by revenue growth and a reduction in operating expenses as the company streamlined its infrastructure and removed a high-cost data vendor. Going forward the company expects tailwinds from increased data privacy laws putting requirements on data collection. So a promising quarter, as far as the income statement.
- However, the balance sheet is a different story. At the end of the quarter, the company held cash of 190 thousand, with debt of 1.1 million, resulting in a net debt position of 900 thousand. The majority of the debt is convertible debentures with a significant effective interest rate of 21.9% at the time of issuance. The company did announce another conversion of debentures to shares on the 24th of October of 100 thousand which I believe was the remainder of the debentures held by the CEO Neil Sweeney as he was one of two parties which purchased the debentures initially. Past direct debt, that company has significant accounts payable of $2.0 million at the end of the quarter, but reached a settlement after the end of the quarter lowering accounts payable by 500 thousand resulting in 1.5 million, using that figure the company has a current ratio of 0.7 which is not good, and indicates that the company may need to raise more cash in the future. However, management in the Q2 earnings call said it did not expect to need to raise more capital at that time, as they believe they will be able to fund the company’s expenses with operating cashflows going forward. But cash management is a significant risk at this time.
- A quick look at the company’s share structure as it has used either direct equity or convertibles to fund the company. Over the past 12 quarters, the company’s outstanding shares have increased from 52 million to 112 million, so significant dilution to say the least. With the potential of more dilution with the remaining convertible debentures regardless, the exact dilution depends on the price of the stock at the time of conversion but at the current $0.09 it would add 11 million or so more shares.
- Our Take, it is good to see a shift into profitability especially with the recurring nature of the revenue, but the company is teetering on the edge of more dilution and if anything interrupts the profitability it could result in significantly more dilution. Going forward, we would like to see continued profitability with positive cash flows being used to pay down the debt and improve working capital to derisk the balance sheet. We will continue to monitor the stock.
