KeyStone’s Stock Talk Show Episode 266.
Great to chat with you again – we have a busy show ahead of our New Small-Cap 10x Stock Investment Live Webinars next week. I will kick of this week with a YSOT on Parex Resources Inc. (PXT:TSX), an oil weighted producer in Columbia with a solid balance sheet and a dividend yield of just under 9%. A listener asks if we can explain why the shares are off 30% this year despite what looks like a solid last quarter and good valuations. Many of you will be happy to hear that Mr. Aaron Dunn is once again on assignment (I kid). Never fear, he has sent his segment in remotely and will be looking at investing in dividend and dividend growth stock in the context of the current interest rate environment and likelihood of declining rates. Brennan answers a follow up question from his segment last week – the viewer asks if the following three stocks, Vsblty Groupe Technologies (VSBY:CSE), HPQ Silicon Inc (HPQ:TSX-V), and Victory Square Technologies (VST:CSE) offer 10x potential. And last, but not least, Brett answers a viewer question on the concept of “guidance” or management’s guidance on annual or quarterly results and how you should use the information.
Let’s get to the show – my cohost, Mr. Aaron Dunn is on assignment –the killer B’s, Brett, and Brennan will help rescue the show.
We have 3 upcoming Live Webinars – focussed on effectively investing in profitable Canadian & U.S. Small-Cap stocks – we would love for you to share with your audience the details once again. I have included them below. Let us know when you can send this out – thank you!
Three Live & on-demand investor events in August/September. Titled “How to find the next 10x stock – great Canadian & U.S. Small-Caps”.
Learn the simple formula that allows KeyStone to identify and recommend 10x and even 100x stocks (10,000% plus returns) including Hammond Power (HPS.A:TSX) up over 20,000%, Boyd (BYD:TSX) up 9,909%, Janna (JAN:TSX) (acquired at $90, up 5,043%), WaterFurnace (WFI:TSX) (acquired at $30.60, up 2,561%) or XPEL (XPEL:NASDAQ) up 3,121%. And learn why a generational opportunity may be developing as profitable small-caps trade at their lowest levels relative to large caps in 25 years.
Full Agenda:
Section 1: Where to find the next 10x Stock.
Learn the simple formula that allows KeyStone to identify and recommend 10x and even 100x stocks (10,000% plus returns) including Hammond Power (HPS.A:TSX) up over 20,000%, Boyd (BYD:TSX) up 9,909%, Janna (JAN:TSX) (acquired at $90, up 5,043%), WaterFurnace (WFI:TSX) (acquired at $30.60, up 2,561%) or XPEL (XPEL:NASDAQ) up 3,121%.
How 2-3 great stocks in your lifetime can be game changing in your portfolio.
Section 2: Why small-cap stocks?
- 87% of all global equities that went up 1,000% or more over the past ten years began as small to micro-caps.
- 82% of those were profitable at the start of their ascent, and 91% had some history of profitability.
We will show you why when investing, small is better – it is why Warren Buffett famously stated he loves quality small-cap stocks,
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Not all small-cap are created equal – there are over 10,000 in the North America to choose from – where do we start? This segment will detail KeyStone’s unique but simple process.
Section 3: A generational opportunity – small-caps trade at their lowest levels relative to large caps in 25 years!
The forward PE on the Large Cap S&P 500 is 20.1. vs. the Small-Cap S&P 600 Forward PE of 14.3.
To put this in perspective for the better part of the past 25 years, small-caps, due to their higher growth profile, have traded with premium PE multiples to their large cap brethren. The continued inversion of the ratio creates an opportunity. If this relationship were to reverse in favour of small caps (as it held for the first 20 years of this century), there is significant upside in small caps.
Section 4: How to construct a full portfolio to benefit from game-gaming 10x Small-Cap Stocks.
While the toughest task if finding the next 10x stocks, in many cases, the job does not stop there. In this section, we show you how to structure a simple 15-25 stock portfolio consisting of potential 10x growth small-cap stocks, core dividend growth stocks, and core growth large caps that allow you to take full advantage of the growth potential in great 10x small-cap stocks.
Section 5: Learn how to hold great 10x stocks long-term – best practice behavior finance skills.
While finding a truly great 10x stock is the most difficult part, developing the skills to continue to HOLD that great company long-term can be challenging. We will show you how to use simple tools to help you to continue to HOLD that 10x stock (or even buy more). Become a better investor by learning best practice behaviour finance skills that will allow you to ride your winners to 10x status and cut your losers.
Section 6: Profile of a great Small-Cap with 10x Potential.
In this section our analysts will detail the 10 basic elements we look for to identify a great small-cap growth stock with 10x potential.
Section 7: Intro to KeyStone’s New U.S. Small-Cap Research – including the first BUY Recommendation!
An overview of our New U.S. Small-Cap Research Launch including what stocks we will cover, the portfolios we are building and more. As a Bonus, all attendees receive the first BUY recommendation from KeyStone’s New U.S. Small-Cap Growth Stock Research Service.
Section 8: Receive a Starter Small-Cap Portfolio: 5 to 6 profitable small-cap stocks to buy today!
Full analysis and reviews from our analyst team on 5 to 6 unknown, profitable small-cap stocks from our current research including a couple that have 10x potential;
- Our top cash-rich SaaS stock trading at half the multiples of its peers.
- Our top cash-rich, profitable gold stock – trading at 9 times earnings.
- Our top cash-rich, profitable energy stock.
- The 2 top performing unknown digital financial stocks in Canada,
- and two cash-rich small-caps trading under $2.00.
Section 9: Live Analyst Hosted Q&A Session.
A full 25-minute Live Q&A session with our analyst team on the BUY recommendations or any North American small & micro-cap stocks.Why Profitable Small-Caps?
- 87% of stocks that jumped 1,000% (10x) or more in the past ten years began as small-caps.
- 82% of those were profitable at the start of their ascent, and 91% had some history of profitability.
The data is clear, to find the next 10x stock the key is small, growing, profitable, and undiscovered. The Live Webinar profiles past 10x stocks and gives you 5 to 6 profitable small-cap stocks from our research including a couple with 10x potential:
- Our top cash-rich SaaS stock,
- Our top cash-rich, profitable gold stock,
- The 2 top performing unknown digital financial stocks in Canada,
- and two cash-rich small-caps trading under $2.00.
Why attend? In our Fall 2022 live webinar, KeyStone recommended Hammond Power (TSX: HPS.A) which has jumped over 600% from $16 to $112.07 – a recommendation like Hammond Power is well worth your time. Plus, all attendees receive the first BUY recommendation from KeyStone’s New U.S. Small-Cap Growth Stock Research Service.
Live or on-demand webinar events will be held as follows:
August 27th at 7 pm Pacific time
September 5th at 7 pm Eastern time
Tickets: Early Bird: $29.95* | VIP: $79.95*
*Attendees receive one or three of KeyStone’s 2024 Canadian REIT Special Report ($599) and/or, KeyStone’s Fall 2024 U.S. Mid-Cap Growth Stock BUY Report ($599), and/or On-Demand DIY Stock Investing Webinar – “Simplify Your Stock Portfolio in 2024 – Buy 15-25 Great Businesses” ($79.00).
Or purchase The Complete VIP Stock Portfolio Building Package (live or on-demand).
September 21st at 11 am Pacific time/ 2 pm Eastern time
Cost is $1,999 for a ticket and The Complete VIP Stock Portfolio Building Package. It includes a one-year VIP Membership, a 5-hour live/on-demand webinar, 15 high conviction growth and dividend growth stocks to buy, 100+ annual Q&A sessions, three analyst calls, all special BUY/SELL reports, and more. You save 45% or over $1,700 compared to the normal retail price for these services.
Expect these events to sell out so book now and take advantage of the free gifts offered.
Headquartered in Calgary, Canada, with an operating office in Bogotá, is the largest independent oil and gas company in country. Parex is an oil-weighted producer focused on conventional, high-productivity reservoirs in Colombia.
Parex has a number of positives for higher risk energy investors including the fact the company has always maintained a relatively strong and unlevered balance sheet is a volatile industry.The company also has a track record of returning capital to shareholders.
Continuing to pay and raise the dividend and buy back shares reducing the share count and increasing CFPS.
Let’s take a quick look at the companies…..Long-Term capital allocation framework.
THE PLAN IS TO
- Reinvest ~2/3 of FFO(Funds from operations) into Business
- Return ≥1/3 to Shareholders
▪ Drive sustainable business model
▪ Invest in long-term growth
▪ Replenish development inventory
Big ‘E’ Investments – big swings designed to hit high impact reserves…
▪ Portion of investment geared towards high-impact, big ‘E’ exploration
▪ Actively manage risk & reward
▪ Capitalize on Colombia advantage to generate potential for outsized returns
Greater than 1/3 – Regular Dividends (share buybacks).
▪ Quarterly regular dividend
▪ Target dividend growth
▪ Ensure sustainability through
commodity cycles
▪ Share repurchases
▪ Mechanism to supplement returns
Three-Year Plan: Growing production & free funds flow.
2024-2026 Plan based on $75/bbl Brent
5%+ Annual Production Growth
TARGETING GROWTH FROM OPERATED BLOCKS
$375-450MM of Capital Expenditures(3) Per Year
INVESTING GOVERNED BY ≥1/3% FFO SHAREHOLDER RETURN FRAMEWORK(4)
~$50MM Invested on High-Impact Exploration Annually
DRILLING WORLD-CLASS PROSPECTS FOR STEP-CHANGE GROWTH POTENTIAL
~$850MM Free Funds Flow(5) Generation over Outlook Period(6)
FREE FUNDS FLOW TO BE USED FOR SHAREHOLDER RETURNS(4)
Comments: 5% production growth is solid given the natural declines of some of the older operations such as LLA-34, which oil companies are always fighting against, but I do think for the market to really get excited about the business, they would have to hit on a couple of Big “E” targets. This is why we see the $50 million set aside annually for high impact exploration.
Q2 2024 Highlights.
Production, shown here as oil & gas BOE/day was down slightly year over year and sequentially.
Better energy pricing helped improve netbacks or margins.
We would prefer to see production growing.
FFO was up smartly sequentially and lower capex increased Free Funds flow significantly sequentially.
Production Outlook and 2024 Corporate Guidance.
Parex’s FY 2024 average production guidance of 54,000 to 60,000 boe/d and capital expenditure guidance of $390 to $430 million are trending toward the lower end of their respective ranges.
Lower production primarily reflects underperformance at Arauca as well as previously disclosed temporary shut-ins in the Northern Llanos, while lower capital reflects reduced spending at Arauca and LLA-38, with some offset from increased spending at LLA-32, LLA-122 and Capachos.
Balance sheet – strong and should move to net cash through 2024.
Summary:
Net Debt: US$55.7.
Net Debt/EBITDA: 0.1x
Valuations:
Summary:
EV/revenue (TTM): 1.00
EV/aEBITDA (FY 2024e): 1.8x.
EV/CFPS (FY 2024e): 2.02x.
Commentary:
The valuations, dividend and return of capital to appears attractive, and yet the share price is down 30% in 2024.
The declines are primarily in relation to forecasted production growth that has not moved forward as fast as originally expected – as a result, results have been lighter than expected and growth is being discounted to minimal – the near-term pessimism overdone but either a larger drill bit success or a steadier sequential increase from a number of new wells is likely needed as a catalyst.
Parex’s Q2 2024 production of 53,568 BOE/d was below the consensus at 56,128 BOE/d.
The company’s commentary that 2024 production results are trending towards the low end of guidance has hurt the stock.
Q2 2024 cash flow of US$181.0 million (US$1.76/ share) was ahead of our consensus at US$163.2 million (US $1.60/share) but the beat was almost entirely on realized FX gains in the quarter.
Parex is a potential option for investors looking for exposure to oil & gas, but we just released a BUY on another new energy company with roughly 40% of its market cap in cash and likely a higher growth profile.
Your Stock Our Take – YSOT VST HPQ VSBY
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Slide 1
We got a question on Youtube following my segment on Trigon Metals as we were exploring the possibility of it having the potential to be a 30x stock…
And the question came in from Mark Pilon who said:
Slide 2
Vsblty Groupe Technologies (VSBY:CSE)
Current Price: $0.065
Market Cap: $2.3 Million
VSBY operates as a software provider for retail analytics technology solutions for real time analytics and audience measurement, as well as offering hardware units including displays and other related advertising services.
HPQ Silicon Inc (HPQ:TSX-V)
Current Price: $0.35
Market Cap: $129 Million
HPQ is a technology company specializing in the green engineering of silica and silicon-based materials. HPQ’s projects are focused on proposing innovative silicon (Si)-based solutions all the while developing a unique portfolio of Silica (SiO2) and high value-added silicon (Si) products sought after by end users (Manufacturers of Li-Ion battery, Electric Vehicle (EV), anodes for Li-Ion batteries).
Victory Square Technologies (VST:CSE)
Current Price: $0.105
Market Cap: $7.6 Million
VST is a private equity and venture capital firm specializing in incubation, acquisition and invests in startups, Early stage and provides the senior leadership and resources needed to growth. Through its portfolio companies it focuses on technologies in blockchain, digital health, web3, creator economy, metaverse, machine learning, climate tech, youth, mental health, healthcare, special needs, technology, First Nation, artificial intelligence, and virtual reality/augmented reality, health, mobile gaming, film, esports, cannabis, and education.
Slide 3
Here are the stock charts of each of the three stocks. VSBY is in the green color and is down 98% over the past 3 years, HPQ Silicon is in red burgundy color and is down 53% over the past 3 years, and Victory Square is in the purple and is down about 79% over the past 3 years.
So, all in all, all of these stocks have performed poorly….
AND THIS RIGHT HERE IS WHY….
Slide 4
VSBY – Limited revenue and no profitability or cash flow.
HPQ Silicon – No revenue and of course no profitability or cash flow.
Victory Square – Has revenue, and decent growth in revenue, but again no profitability or cash flow…
So to me, its not overly a surprise these companies stock prices haven’t performed quite well over the past 3 years.
Slide 4
So to conclude, none of these companies have the profile of a business which we would classify as a potential 10x bagger.
The data is clear to us – to cite the Global Outperformers report done by Jenga Investment Partners:
- 87% of all global equities that went up 1,000% or more over the past ten years began as small to micro-caps.* (WHICH THESE COMPANIES ARE SMALL-TO-Micro CAPS)
- BUTTTTTT – 82% of those were profitable at the start of their ascent, and 91% had some history of profitability.* (WHICH NONE OF THESE HAVE).
Again, we will be doing webinars on August 27th & September 5th where we highlight potential 10 bagger stocks. So if you want our exact profile of these businesses, make sure to sign up for that webinar.
What is Guidance?
1)
We’ve received a couple of questions on what management means or what we mean by management’s guidance and how you should use the information.
Simply put management guidance is what management expects to occur financially or operationally in a future period whether it be the next quarter or a year ahead. Depending on the company it may be referred to as Outlook or similar terms.
It is non-standardized and can vary greatly depending on the company and industry. The more common guidance figures are revenue, gross profit, and EBITDA, which can vary between companies since they are not standardized, as well as various margins. But what is also common is operational metrics such as for an oil and gas company the amount of oil produced. As well, management may provide supporting metrics such as the price of oil, which they expect but can’t dictate, which allows you to account for their market expectations.
Also, management will likely guide a range, as even with their higher company knowledge it would be impossible to precisely predict most financial metrics ahead of the finalized results. As well, you may hear the terms miss or beat guidance if the results come in below or above the guidance for the period.
2)
Looking at the guidance for META for example,
In their Q2 results press release, they have a CFO Outlook commentary.
They expect revenue of $38.5 to $41 billion, so a low and a high range. So when we say or other analysts or management say that we expect revenue on the low end of the range, for example, it would be close to $38.5 billion.
As well they note a 2% foreign exchange headwind due to exchange rate changes, in other words, something that will impact their revenue but they have no control over. So if foreign exchange drastically changed, you would expect revenue guidance to change. While for Meta this will likely only shift financials slightly companies that depend on more volatile currencies could have significant changes. Management states foreign exchange assumptions because it could cause material differences that they don’t control.
With guidance, companies may provide qualitative commentary, which we can see here with the statement “ we expect infrastructure costs to be a significant driver of expense growth next year”. The colour management provides can be just as important as the numbers, as it can provide additional details as well as context.
3)
Shifting to another company, Conoco Phillips, which is an oil and gas company. They provide their production expectations, their depreciation, corporate segment net loss, adjusted operating costs, and capital expenditures. These figures are costs with the exception of production as they have more control over than revenue due to oil prices. They provide other metrics such as the return of capital and expectation tax rate. As well, they provide sensitivity analysis to oil prices.
So, as you can see the metrics used will vary by companies depending on the nature of the business and even what management wants to disclose.
And some companies may present the data to include actual results and expected results, which if you do see that can be denoted by an e and a for expected and actual.
4)
So how would you use management guidance or outlook?
You’ll see analysts, whether us or ones on Wallstreet use guidance within our models to value a company. As management has or at least should have a better picture of the company’s performance ahead of time we are able to use guidance as a baseline and then build in our own assumptions.
As the market is forward-looking and uses guidance in part for valuation, if a company has a significant shift in guidance, whether up or down can have a larger impact on the market reaction or stock price than reported earnings which are normally released at the same time. For example, guidance has been what analysts have been laser-focused on for Nvidia for the past couple of years during its run-up.
Additionally, guidance can be used to help track management performance if there are deviations from guidance, it may be due to a lack of execution or even knowledge of the company or industry.
5)
Some other important considerations,
Guidance can be provided in the press release, earnings call, MD&A, presentation or in multiple spots.
Management guidance may not be reliable, we see this time and time again in commodity-based industries where they will guide a specific revenue but be way off due to a shift in the underlying commodity. And even then some management is just poor at guiding, normally being overly optimistic making and guidance they do provide generally not something you can rely on. You should look at the past record of guidance and whether the results do occur over time to give you a sense of if you should rely on guidance.
Some companies will release targets, which normally when the term target is used will be more aspirational and generally on a longer timescale and less specific. While targets can be used in a similar fashion to guidance you need to make a distinction in the weight management puts on the precision and timeline.
I want to emphasize that management has no obligation to continue guiding metrics and can potentially stop, normally you would see this after a significant miss and they no longer believe they can predict their own results with any sort of conviction. As well they can change what metrics they guide and may narrow, expand or shift the guided ranges as there expectations change
As well guidance is non-standardized and lots of the time uses non-standardized metrics, and much of the time is not like-for-like if you want to compare companies you’ll need to adjust for that.
A criticism of guidance is that it can cause the market to hyper-focus on the select results and create short-termism for company management to the detriment of long-term results. As well you can also have management sandbagging or guiding lower so they look like they beat guidance when the results occur.
To summarize, guidance can be a great tool to help you value a company or anticipate performance but you should still be skeptical and consider if management’s assumptions are aligned with your own.
