KeyStone’s Stock Talk Show, Episode 242.
We are back this week after a busy weekend kissing babies and shaking client hands at the 2024 World Outlook Conference in Vancouver – it was a great turn out and great to see hundreds of clients in the audience. I am going to kick off the festivities with a snippet of a recent presentation I gave on the powerful impact adding just one or two great capital compounding stocks to your portfolio in your entire lifetime can have on your returns. Aaron will update you on the massive move for Meta Platforms, Inc. (META:NASDAQ) – formerly FaceBook which announced plans to implement a dividend last week. Brennan will circle back on Reliq Health Technologies Inc. (RHT:TSX-V), a telemedicine provider that develops virtual care solutions for the healthcare market. We have fielded a number of questions on the company and while revenue growth was evident, the lack of profitability made it a non-starter based on our criteria and Brennan told listeners to steer clear of the business. With it down another 55% since last summer, Brennan answers another viewer question on the stock. Finally, Brett answers a viewer question on Linamar Corporation (LNR:TSX), an advanced manufacturing company for automotive and manufacturing usage. Recent acquisitions have spurred growth and the valuations are looking intriguing – Brett will give you his thoughts.
Let’s get to the show – we welcome my cohost, Mr. Aaron Dunn and the killer B’s, Brett and Brennan.
World Outlook Conference – Great weekend at the event. Talked to a lot of clients and new investors. Chatted with a couple management teams, I hosted a lunch and myself and Aaron presented on Saturday to a great crowd of about 800-900 plus on hand.
The excerpt here is from a couple of recent presentations I have given…
Slide with some of KeyStone’s great capital compounding recommendations:
The point of this section was to show investors the powerful affect adding just one to two truly great stocks can have on your portfolio.
This is a very simple, but powerful concept (but one you will not here from most advisors)Investing in just 2 or 3 truly great stocks in your lifetime is game changing for your portfolio.”
But don’t just take my word for it….
In fact, this past year Warren Buffett, perhaps the greatest investor of all time, stated that “In his 58 years of Berkshire management……
“(his) satisfactory results have been the product of about a dozen truly good decisions – that would be about one every five years.”
Let that sink in…
What he is saying is that only 12 great investments (stocks) in his almost hundred years on earth, have made him one of the richest humans on the planet.
It does not take many, and, perhaps most importantly, they do not have to be complicated moon shot businesses that promise to change the world – often the are the most boring, mundane businesses you can imagine – Buffett’s greatest wins include Coca-Cola – a seller of sodapop, Bank of America, and
American Express – all returning massive capital compounding returns… and are a reminder of this. Boring businesses, astonishing returns, with less risk.
I like to give real world examples – of these types of boring businesses from our research today – here are 4 actual KeyStone recommendations that have changed the fortunes of our clients portfolios.
I put these returns up because they make us look smart, quite frankly, the other three guys here need it…me, not so much, but I do it for them. My real point it to show you that boring businesses can produce astonishing returns.
- Boyd owns automobile repair shops – they fix cars!
- Hammond – makes electrical transformers and has been around for over 100 years.
- XPEL sell automobile paint protection.
- WaterFurnace – makes geothermal heating and cooling systems for homes.
Not sexy, but look at the returns.
Having heard this – a couple of questions should pop to mind….
#1) How can I find the next XPEL, Boyd, Hammond Power or WaterFurnace – what do these great businesses have in common?
As far as the profile of stock you should be looking for – we have created entire 3 hour webinars on this topic, but keeping it simple – look for great cash flowing businesses, with good management, that trade at reasonable prices and have a long-term growth path ahead of them.
Number 2: #2) How do you construct a portfolio to capitalize on great capital compounding stocks like these – first – do not build it with the traditional big bank portfolio model (where your advisor complicates your portfolio with 5-20+ ETFs, funds or other investment vehicles each owning 50-200+ stocks – leading you to a portfolio that holds 500 to 1000s of stock, which is “owning the market” – if you construct a portfolio I this manner . – even if one of these great stocks makes it into your portfolio, it will be one of 500 or 1,000 plus stocks and will not move the needle in terms of returns for you.
What we advise you to do is…
If you want to beat the market, you cannot be the market.
Create your own simple equity portfolio.
USE A STRATEGY WE COINED – ***CLICK*** Focussed Diversification
Build a 15 to 25 stock portfolio, gradually, over a period of 12-24 months.
Reduces risk/exposure to short-term market correction.
Provides flexibility to add positions as new opportunities become available.
Start with 3 to 5 initial positions.
Add 2 to 3 new stocks per quarter as new information/research is released.
In practice, this is an example of what the structure of a portfolio built with a Focussed Diversification Strategy will look like.
7-10 stocks in deployed into our 3 core areas of research – Canadian Small-Mid Cap growth stocks, Core Canadian Dividend Growth Stocks, and Core US Growth Stocks.
I put together a simple allocation example
Simple Allocation Example:
20 Stocks with an equal weighting.
$25,000 in each stock ($500,000/20 = $25,000).
THE GOAL HERE IS TO SHOW YOU… How impactful one great stock can become.
$500,000 Porfolio – 15 years ago, Boyd was included on an equally weighted basis. Today the one stock is work $3.3 million. Just one stock is now worth nearly 7 times the entire original portfolio. All 19 other stocks could have gone to zero and this portfolio would still be in excellent shape – of course we are also looking to growth a solid percentage of the other 19 stocks as well – but it shows you the amazing power a truly great stock can have on your portfolio if you combine the right research with a porfolio built with this model.
If you had a $1 million portfolio…that one stock would be worth $6.6 million today…
The returns are even better if we use Hammond Power in the example as it has now outperformed Boyd.
Reliq Health Technologies Inc. (RHT:TSX-V)
Market Cap: $41 Million.
Reliq Health is a telemedicine provider that develops virtual care solutions for the healthcare market. It offers its iUGO Care platform, a software-as-a-solution that allows patients to receive care in the home.
To remind listeners we have reviewed Reliq a few times on the podcast now, once in 2018 as a dog when the stock was down 85% over the course of that year as the company was putting up severe losses on some of the contracts that it had recently secured. And keep in mind at this time the business was completely contract driven.
Then in September of 2022 and again in August of 2023 we reviewed the stock as a YSOT segment considering the company had switched from primarily a hardware business to a software-as-a-service (SaaS) model in 2021.
However, the stock is down 55% since I last covered it in August.
What’s driving the stock lower???
Well #1, Reliq’s last quarterly financial results were reported back in May 2023 which was for Q3 ended March 31st, 2023 (and these were the financials that I reviewed on the podcast over 6 months ago and I did say at that time, they were showing good trajectory)… However, the company announced on October 31st that it was unable to file its audited annual financial statements and expected to file them on November 14th. The November deadline went by without any results and the company then announced that it expects to file its Annual filings on or before January 12th, 2024….. but this due date also past. So currently outstanding are both the Annual Financial Results (ended June 30th, 2023) and Q1 2024 results which was for the period ended September 30th, 2023.
And as a result of the missed deadlines, the Canadian Investment Regulatory Organization (CIRO) placed a temporary trade suspension on the stock which is still in place.
#2 on what is driving the stock lower is further dilution. Management stated in 2023 that they expect strong growth in 2024 and that it did not expect to need to raise capital or take on debt to fund operations…. However…. As I predicted would likely take place given the negative cash flow, on October 5th the company raised $6M for 15 million shares, which now places the company’s outstanding share count at above 220 million shares outstanding.
And I am just going to leave this Youtube comment up on the screen here from Josh Jordan as it aged quite well in relation to my prediction that the business will have to continue to dilute to keep the lights on…
#3 While all this has been going on, there has been a bit of a shuffling with management, as CEO Dr. Lisa Crossley resigned for health reasons.
So overall….. uncertainty is definitely heightened at this point… And is essentially why we have seen the stock lower by over 50% in the past 6 months. But as I said in August, I think that it will be crucial to ensure the business can maintain its slight profitability achieved in Q3 2023 (which was reported almost a full year ago)… but clearly… investors of Reliq remain in the dark.
YSOT Linamar Feb 2024
We got a question from Greg on Linamar symbol LNR on the TSX. Linamar is an advanced manufacturing company for automotive and industrial usage. The company is broken into two segments Industrial which includes equipment like scissor lifts or farming equipment for all parts of the crop production cycle with their latest acquisition of Borgault. On the mobility side products include vehicle chassis, engines, transmissions and components for electrification. The stock is currently trading at $64.98 or a $4.0 billion market cap offering a yield of 1.4%, the stock is down 11% over the past year.
Looking at the last quarter, Q3 2023, revenue was up 16.0% to $2.43 billion. Gross profit increased 22.5% to $340 million which is a 14% margin, an improvement from the prior years 13.2%. Moving down the income statement operating earnings grew 15.6% to $214 million, a flat margin of 8.8% compared to Q3 2022. EPS grew 13.3% to $2.38 a net margin of 6.0%. For 9 months EPS increased 25.1% to $6.47 at a margin of 5.5%. Further removing the impact of foreign exchange and certain gains and losses EPS for 9 months increased 45.9% to $6.80 from $4.66 as the company had significant gains in 2022 increasing earnings. The normalization is an attempt at isolating the actual operations of the company.
Shifting to the balance sheet, the company has cash of $695 million with debt of $1.7 billion, resulting in a net debt position of $1 billion, and leverage of 0.8 times.
However, after the quarter’s end and closing in Q1 2024, just last week the company finalized its acquisition of Bourgault for $640 million increasing leverage to approximately 1.4 times. The acquisition of Bourgault is the continuation of its diversification strategy into farming equipment. The company is now able to offer equipment for the full broad-acre crop production cycle. Bourgault is expected to add sales in the range of $450 to $500 million with operating margins in the range of 14-18% similar to the existing industrial segment. The company expects roughly 55% of operating earnings to come from the industrial segment and the remaining 45% after the acquisition.
Quickly jumping to a slide from a corporate presentation, showing the historical leverage. Linamar has been able to lower leverage after acquisitions before deleveraging as the company acquired companies and assets over the past two years. The company does expect to be under 1 time in the next 12 months, and this is something we will be watching as leverage with a low-margin company/industry can quickly get out of hand, especially in higher interest rate environments like now.
Further, if we take a step back looking at historic trends on a 10-year timeline, the company has been unable to have consistent accretive per share growth and has been rather stagnant since 2018, but this can be attributed in part to the cyclical nature of the auto industry and interest rate changes. As well this is the same period we saw acquisitions, which of course is common to create short to medium-term drag for the goal of long-term growth.
Moving to valuations, the company is trading at an 8 times PE and an EV to EBITDA of 4 times. So, the market at this time is pricing the company for effectively no growth.
The company is becoming interesting as it is quite cheap and has been on an acquisition spree over the past couple of years. The balance sheet post acquisitions still has room and isn’t at the point of being over-leveraged. As of now, we would like to see growth from the integration of the acquisitions as well as organic growth hit the bottom line on a per share basis. As well with this latest acquisition, we should see a bit less cyclicality in the long term as the company’s sales are less concentrated in the auto industry. As a whole, we will continue to monitor the company for that per share growth so we can see better multiples for the company.