KeyStone’s Stock Talk Show Episode 267.
Great to chat with you again – we have a busy show ahead of our New Small-Cap 10x Stock Investment Live Webinars starting this week. I will kick of this week with quick review of my appearance on Michael Campbell’s Money Talks show this past weekend and a look at the relative valuation opportunity in small-cap vs. large cap stocks. Brennan replies to a viewer question about KeyStone’s views on using a Sprott Trust (Example – symbols PHYS or PSLV) or equivalent to hold physical gold as a portion of one’s overall portfolio. In our YSOT segment, Brett answers a viewer question on POET Technologies Inc. (PTK:TSX-V), a designer and developer of optical interposers. The viewer asks if POET has 20x potential. Finally, and on remote, Aaron answers a question on the promising, high growth small-cap Kraken Robotics Inc. (PNG:TSX-V), which just reported strong Q2 growth. The viewer asks our thoughts on the current valuation of the this marine technology company which provides complex subsea sensors, batteries, and robotic systems.
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 are very excited – to be launching our all new 10x stock webinars this week – get you tickets – the first segment is 90% sold – we do have a room limit and are almost there.
Hey guys, did you know that we recommended a stock one year ago, basically to this date, that has been the best performing stock over that time on the entire Toronto stock exchange? It is up 334% over the last 53 weeks…details on that in my segment..that is a teaster.
And…I was on Money Talks with Mike Campbell this weekend – always a great show to be on…tons of great feedback, we talked the markets – why we like small-caps, updated some stocks and made a couple recommendations – we can put the link in show notes below on Yotube.
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.
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.
One theme we have been positioned to take advantage of over the past year has been the relative valuation gap between small & large cap stocks – this is up to the last week of September from yardeni research charts – showing the relative forward PE valuations currently for US Mega Cap, Large Cap and Small to mid-cap stocks.
let’s take a quick look back to Fall (which was a great time to buy high quality, profitable small-caps for a number of reasons – one was relatively valuations) – in the early November range we see the significant valuation gap between Large and Small-cap Stocks here – large caps represented by the S&P 500 and small to mid caps represented by the S&P 600.
(S&P 500 Large Cap forward PE was then 17.4. Vs. Small-Cap: 11.5 – a greater than 50% premium – large caps vs. small-cap on average PE). Again, there were some excellent opportunities in higher quality earnings basis micro to mid cap stocks.Now I often see analysts take a retrospective look at great buying opportunities in the past – which is frankly easy. The key is, how did you react at the time. What recommendations did you make at that time – this is the key for clients.
Basically a year ago to the day – seeing the small-cap valuation opportunity, we recommended Cipher Pharma – $3.89 this time last year – bought for under 5 times earnings and 50% of its market cap in cash – it trades at $16.90 today – it is the best performing stock on the Toronto Stock exchange up 334.44% – by quite a margin.
We acted on this opportunity – an literally picked the best performing stock on the TSX over that time.
While the valuation gap has narrowed slightly – the Forward PE on the Large Cap S&P 500 is 20.9. vs. the Small-Cap S&P 600 Forward PE of 14.9. (40% premium).
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 continues to create an opportunity. If this multiple 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.
Now not all small-caps are created equal – the universe we are using for this comparison is profitable small-caps vs. profitable large caps – which aligns with our coverage universe – if you were to use a small cap measure that does not use profitability as a criterion – such as the Russell 2,000 index which holds a great deal of unprofitable companies, small-caps can look expensive to large caps at present. What this tells us is that unprofitable small-caps are expensive, proftitable small-caps on average are less expensive – so not all small growth companies are created equal –
In our webinars over the next couple of weeks we will focus on why you want profitable small-caps in your portfolio to help you find the next 10x stock and give you some current recommendations.
Your Stock Our Take Sprott Trusts
Slide 1
We got a question from a client who says “What is KeyStone’s view of using a Sprott Trust (Ex. PHYS or PSLV) or equivalent to hold physical gold as a portion of one’s overall portfolio”
Slide 2
Sprott Physical Gold Trust (PHYS:TSX)
Current Price: CAD$26.40
Market Cap: $10.8B
MER: 0.41%
The Trust seeks to provide a secure, convenient and exchange-traded investment alternative for investors interested in holding physical gold bullion without the inconvenience that is typical of a direct investment in physical gold bullion. The Trust invests primarily in long-term holdings of unencumbered, fully allocated, physical gold bullion and will not speculate with regard to short-term changes in gold prices. And the physical gold is held with the Canadian mint or a custodian.
Sprott Physical Silver Trust (PSLV:TSX)
Current Price: CAD$13.74
Market Cap: $6.8B
MER: 0.60%
The Silver Trust is the same but invests primarily in long-term holdings of unencumbered, fully allocated, physical silver bullion.
And to answer Steve’s question, generally, I do not think that either trust are a bad way to gain exposure to Gold or Silver. But a few things to note are:
- If you do plan to invest directly in Gold or Silver with these trusts, I would make sure that it is a smaller amount of your portfolio. Perhaps around 1-3% as commodities are highly speculative in our opinion and can be quite volatile.
- There are also some important concepts to understand which may make your returns different than what you expect to receive if you held the physical commodity.
Slide 3
Here is an example of a person on Reddit, asking “How they go so screwed on his Sprott gold trust investment”.
He says, I set aside $22K for my son’s new car when he graduated college. When he got out, his mom put him in a pretty new truck so we parked his $22K at Ameritrade and he decided to buy PHYS on my recommendation….. [Just to make a comment here…. FIRST THING I WOULD NOTE IS AN ISSUE WITH PLACING THE FULL $22K IN PHYS – this clearly goes against our strategy of diversification and I would say is far too much exposure to a commodity in this individuals portfolio]…..
Anyways….. he continues “We bought PHYS shares on Oct 14th, 2021. Looking at the chart of gold on Trading Economics the gold price closed at $1,767 on Oct 11th and it closed at $1,792 on Oct 18th. I could’ve sworn we bought his PHYS when gold was $1,787, so the now the $22K should be up 1.5%…. but hes down 0.14%. My god, that’s a $27 per ounce over a 2 year period.”
So taking a look at what’s happening here.
Slide 4
The trading price of the trust units may become more volatile relative to the actual Net Asset Value (NAV) and could continue to be impacted by various factors which may be unrelated or disproportionate to the price of silver OR gold, including market trends and the sentiment of investors towards silver.
As such, you can see here directly from Sprott, the market price return of the Gold trust, its underlying net asset value, and the Bloomberg Spot price return of gold ALL differ. And as such, if you purchase trust units at a premium to the NAV, you may incur losses if the factors that have contributed to the increase in premium to NAV were to disappear. So keep in mind that the actual return of gold may be different from your investment in the trust given both the premium or discount of the trust’s market price compared to the NAV.
As you can see since inception the Premium/Discount to the NAV has ranged from a premium of 24% to a discount of 3.6%. So, the market price may have been trading at a premium when this individual bought it, causing their actual return to be different from what the underlying commodity has actually done when/and/if that premium disappears.
And you can see, over the past 10 year, 5 year, 3 year, 1 year and 1 month period… the spot gold price return outperformed the actual return of the trust… with the one exception of the YTD period.
On top of this, its important to note that each trust has a MER which will also eat into an investors returns…
So while I do not think that it’s a bad way to gain exposure to either Gold or Silver and is certainly a more liquid way to gain exposure given the ease of buying/selling it in the open market.. keep in mind the potential discount or premium that you will be paying over the Net Asset Value, and how it may impact your actual returns compared to the actual commodity. Today if we look at PHYS, in Canadian dollars, its trading at a discount to the NAV of around 1%.
YSOT Poet Technologies POET:NASDAQ PTK:TSX
1)
We got a question on Poet Technologies symbol PTK on the TSXV and POET on the NASDAQ asking if it has 20x potential.
Poet Technologies is a designer and developer of optical interposers. The company’s Optical Interposer is an optoelectronic solution that allows for the integration of electronic and photonic devices onto a signal chip for usage in high-speed communication for data-intensive applications. Effectively the goal of the product is to scale down existing optical transceiver solutions into a smaller design allowing for cost savings.
2)
The stock is currently $3.18 on the Nasdaq down 15% over the past year, but has recovered significantly from its low of roughly $0.80 late last year, causing a 6-month increase in price of 132%. So, clearly a volatile stock price. The market cap is at $209 million at this time.
3)
A quick look at the financials, there is not much substance to it at this time. For Q2 2024, the company had no revenue with low inconsistent revenue in prior quarters, but nothing substantial at this time. The company does have non-consolidated revenue in a joint venture
Unsurprisingly a significant cost is R&D expense at $2.6 million which includes a notable stock compensation component of about $0.5 million.
SG&A came in at $4.1 million with stock compensation being $1.1 million of that.
Total operating expenses came in at $6.8 million for the quarter and $11.9 million for the first 6 months of the year.
The net loss of the quarter was $8.0 million or $0.14 a share.
4)
The company balance sheet is comprised of $21.2 million in cash, no debt but leases of $$0.4 million resulting in a net cash position of $20.8 million. Not bad right? However, as I said the company is not producing any material revenue as far as financials go
For the first six months operating cash flow before working capital was a deficit of $8.1 million, so the cash is from raising capital.
5)
Notably the company was effectively out of cash run way at the end of Q1 and then proceeded to conduct private placements and at the market issuance to raise capital. The company at the end of Q2 now has 61.7 million shares outstanding, 11.8 million warrants, all in the money and 9.5 million stock options – all in the money, meaning if they are all exercised the the company has diluted outstanding shares of 83 million. I will note only 2.6 million of the options are exercisable at this time. Through all this, the company has raised $29.5 million in the first 6 months of the year, more than its existing cash balance. If fully diluted the company would get in the ball park of $40 million in additional cash.
Additionally, after quarter’s end on July 19, the company raised another $10 million US through issuance of 3.3 million of both shares and warrants, so further dilution.
The summary of all this is the company needed cash, significantly diluting the company since the start of the year. Just for comparison the non-diluted outstanding shares at the end of 2023, was only 41.3 million.
6)
Bringing back to the initial comment of” is this a 20x stock”, to give a rough idea the company would be at a $4.0 billion market cap with its current share structure, but if it were to rise to even a much lesser degree it would be fully diluted putting it at a $5.5 billion market cap, and that is not counting for further dilution which would likely occur in the meantime. Just the sheer size of the market cap for a zero-revenue company which is currently relying on significant dilution is absurd. Even optimistically valuing a computer hardware company at 5 times sales, you’re already looking at $1 billion in revenue, which is a massive leap, to say the least. This would mean Poet would need to take a significant portion of the competitive optical transceiver market.
Going back to reality the company has massive risks in front of them first they need to get a product to market, on mass at commercial volumes, which in itself requires customer uptake which is a hurdle to scaling, further the product needs to be profitable at scale. And this needs to be done before the company gets diluted into oblivion. We always get comments along the lines that to get a high-return stock you need to take risks, yes you do but your job as an investor is to find the best risk and reward tradeoffs and just looking for the risky pre-revenue stocks is not a substitute. As well, the company is having most of its near-term projects through a joint venture of which it owns
So let’s say a year from now they start to get revenue and start to build a customer base, then it may be worthwhile, as yes the price may have increased but if the company can have a pathway to profitability past quoting the expected market size of various industries total addressable market and saying if we only capture 1% of this market.
It may be worthwhile someday, but I would not count on it as the current fundamentals are so far off of being appealing.
