KeyStone’s Stock Talk Show Episode 268.
Great to chat with you again – we have a busy show just ahead of the second instalment of our New Small-Cap 10x Stock Investment Live Webinars starting this week – after a sold out show last week. I will kick off the festivities with a quick look at Small-Cap Stocks – quite simply what the heck they are and why invest in them stocks. On the heals of our just released Canadian REIT report Aaron returns with a segment all about investing in Canadian REITS. With Canadian rates moving lower, the REIT sector may hold some intriguing options over the next year. In our Star & Dog segments, Brennan reviews (and answers a listener question in the process) our Star, Zoomd Technologies Ltd. (ZOMD:TSX-V), a marketing technology company, which is up huge in 2024, and 150% over the past month, utb this follows a horrible 2022 and 2023. Brennan takes a look at the recent growth and whether the business is worth another look. Brett has our Dog of the Week, Super Micro Computer (SMCI:NASDAQ), a provider of application-optimized high-performance server and storage solutions. We previously reviewed stock on the show in March and at that time it was trading at $1,085 a share being up 283% year to date. Six months later, the stock is down 58% – Brett let’s you know why the shares have been on such a roller-coaster ride to start 2024 and where the ride may be headed.
Let’s get to the show – my cohost, Mr. Aaron Dunn is back and in the flesh, it’s not just flat Dunn – and the killer B’s, Brett, and Brennan are here as always.
We were extremely pleased with the attendance at last week’s inaugural 10x Stock Investing Webinar – there is one session left this Thursday the 5th at 7:00 pm Eastern – 4:00 pm Pacific – get you tickets I believe it is almost sold out – we do have a room limit and are almost there.
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.
POLL QUESTION
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.
What? Defining small-cap stocks.
Market capitalization: a measurement of a company’s size – total value of a company’s outstanding shares of stock (stock price x shares out.)
U.S. market cap tiers.
Mega-cap stocks: stocks with a capitalization or market value over $200 billion
Large-cap: market value between $10 billion and $200 billion
Mid-cap: market value between $2 billion and $10 billion
Small-cap: market value between $250 million and $2 billion.
Micro-cap: market value of less than $250 million.
Canadian market cap tiers.
Large-cap: market value above $10 billion.
Mid-cap: market value between $1 billion and $10 billion
Small-cap: market value between $150 million and $1 billion.
Micro-cap: market value of less than $150 million.
Defining KeyStone’s small-cap universe.
Canadian Small-cap Coverage (micro to mid): market value between $5 million and $2.5 billion – roughly 2,200 stocks.
U.S. Small-cap Coverage (micro to mid) coming soon: market value between $5 million and $10 billion – roughly 10,000 stocks.
Why the outperformance?
While the data shows small-caps outperform and, in particular, are the arena to find potential 10x stocks within, but there is no silver bullet on why the outperformance – but here are the top reasons.
Higher Growth Rates (Prospects): Due to their size alone, small caps typically have higher growth rates than larger companies. At a basic level, it is easier to double earnings of $1 million to $2 million then to double earnings of $1 billion to $2 billion. (law of large numbers) However, the market often under prices small caps relative to similar larger companies. That means investors are typically getting better value for their investment dollar with the type of small-cap companies we recommend through our research service due to their growth potential, often not fully recognized by the market because of lack of analyst coverage.
Why the outperformance?
Lack of Coverage = greater chance of a mispriced stock.
In many cases, when Keystone discovers a small-cap stock, we are initially the only official research coverage on the stock and almost always the only independent analysts covering the stock.
Compare this to many large-cap stocks which have hundreds of analysts analyzing and following their every move. You can immediately see why the potential to find an undervalued and undiscovered gem is far more likely in the small-cap segment of the market. This is one of the primary reasons why we apply our fundamental research to this area of the market, where we can truly add value and find the best growth and value stocks for your portfolio.
Also – big players and some funds are restricted or just unable to buy at the micro to small-cap level – like the Buffet quote stated – you have an advantage and can buy before institutions and often end up selling to them.
Why the Outperformance.
But it goes deeper than that – I will let you in on a dirty little secret, the financial industry is most often acting in their own interest, not yours as an individual client – their biggest clients are big companies and this is a primary reason – Small-caps are generally less covered than mid to large caps:
Banks / Boutique Brokerages (those that raise capital for public companies) see more money in funding large cap stocks (why not take a commission on raising $500 million or $1 billion for a large cap vs. $5 – $10 million from a small-cap) – this equals less coverage, less coverage equals less knowledge of the stock which creates the opportunity for a mispriced security or stock.
(additionally, because the big keep getting bigger (big banks for example), they are historically less interested generally in small-caps so this end of the market has been the domain of boutique or mid-sized brokerages which is an area that has been shrinking considerably through consolidation over the past several decades, so the number of analyst is shrinking, again leading to less coverage and the chance to find a mispriced stocks – we will note – great growth stocks do not stay mispriced forever –Hammond Power and XPEL for example literally had no bank or brokerage coverage period when we put initial buy reports on the stocks –here is the initial coverage in September 2017 at $1.42 not that long ago – and again one of our quarterly updates– the stock trades today over $46.00, up over 3,200%. The stock did not ever receive any big bank coverage in Canada – it has now gradated to the NASDAQ.
Boyd had basically no coverage on this recommendation at $2.30.
Often profitable small-caps receive the least coverage – this create our best opportunity to find potential 10x stocks – and the reason is simple – it is just the big banks, being the big banks – I encourage you to follow the money. The more profitable a small-cap is, the less likely it is to need capital. If it does not need to raise money, the big banks and often even the shrinking boutique brokerages will not cover the companies until they reach a significant size and are too hard to ignore. Again, these are great opportunities – opportunities that continue today.
How about a very recent example – and it is very timely – One year ago, virtually to this date, when we issued a Focus BUY report, this focus buy report on Cipher Pharmaceuticals (CPH:TSX) – there was no coverage on the stock – there had been in the past, but it was abandoned. In fact, the last broker report on the stock called for a significant decline in the core business – something that has not happened.
Cipher was recommended after extensive research to our clients one year ago at – $3.89– bought for under 5 times earnings and 50% of its market cap in cash – it trades at $16.90 today – Cipher is the best performing stock on the Toronto Stock exchange up 334.44% over the last 52 weeks and by quite a margin.
Why was it not covered extensively? Again, the balance sheet was great – roughly $50 million in cash, with a cash flowing business – no need to issue stock, so no money in it for the big banks – but a great opportunity to find a mispriced stock that could become the next 10x stock. It has already gain 334% in one year and serves to illustrate my point.
The Star of the week is: Zoomd Technologies Ltd. (ZOMD:TSX-V)
A company we have been monitoring for several years now, and initially appeard in our 2022 Canadian Cash Rich Small-Cap stock report as a monitor. Today the stock trades at:
Price: $0.39
Market Cap: $38 million
Description:
And Zoomd is a Marketing Technology company (or MarTech) which helps advertisers manage performance of user-acquisition and engagement.
Slide 2
The stock is up 457% YTD, and 156% over the past month… but this follows a horrible 2022 and 2023..
And as I mentioned we have monitored the company for quite some time, and over the past few years there was an issue as they went through several CEO changes, and ended up revising their fiscal 2022 guidance lower from $74M-$80M to $65-$70M (eventually achieving $72M in the year).
| Initial Guidance | Growth over 2021 (%) | Revised Guidance | Growth over 2021 (%) | |
| FY 2022 Revenue Guidance | $74M-$80M | 40%-50% | $65-$70M | 23%-32% |
We also saw growth continue to decline in 2023, where they only produced revenue of $42.5 million, a decline of 41% from 2022. And over this time, we continued to see the company struggle to generate profitability.
Slide 3
But anyways, lets take a look at what’s driving the recent increase:
The company posted strong Q2 2024 financial results on August 28th, with revenue up 59%, and most importantly EPS was up to $0.02 per share from a loss of $(0.01) per share in Q2 2023. According to management the reason for the increase in profitability was due to the company making some strategic decisions including focusing on core user acquisition activities and implementing cost reduction measures to improve efficiency.
We will be reaching out to management to see if we can work through the past issues and whether they can continue to maintain growth while preserving the Q2 margin expansion.
We had a few companies in different industries that recently posted breakthrough quarters which are far less risky, as one of these names had a backlog we could extrapolate growth into the future, and the other is in an industry which Is less volatile – which gave us more confidence in management. So we will see if we can build the same confidence with Zoomd.
Dog of the Week – Super Micro Computer SMCI
1)
Super Micro Computer symbol SMCI on the Nasdaq is a provider of application-optimized high-performance server and storage solutions. The company develops and builds server solutions at scale with its Building Blocks Solutions.
2)
We previously covered the stock in March and at that time it was trading at $1,085 a share being up 283% year to date and 965% over 1 year. Now over the past 6 months, we’ve seen the opposite. The stock is now down 58% over the past 6 months trading at $452 a share, and a $26.5 billion market cap.
3)
So what has changed?
The company was extremely expensive at its peak price during the year, when I previously covered it had a PE of 85 times, compared to a historical average of 19.5 times, and forward price to sales of 4.2 times the growth had expanded but the market still had high hopes for the company. The GAAP PE has now fallen to 22 times, just above historic values and price to sales has fallen to 1.8 times, still well above historical values.
This was the core gripe I had with SMCI at the time, as it was just priced to perfection, for not just the coming fiscal year but would require growth well above prior growth levels in years to come. The company was and still is pushing the AI narrative if the general market consensus loses interest the stock price tends to follow for story or thematic stocks.
4)
Since then we’ve had two quarters, fiscal Q3 and unaudited Q4 results which is an important point we’ll get to in a minute. For both quarters sales were within guidance, and for fiscal Q3 non-GAAP EPS was above guidance and for fiscal Q4 non-GAAP EPS was well below guidance. After both quarters we saw a decline and a short-term negative reaction to the stock price. Something we bring up relatively consistently is sales growth does not matter until it hits the bottom line and cash flow, as at the end of the day that is what drives growth for the business and what ultimately dictates the value of the stock.
Speaking of cash flow it was negative for both Q4 and the year at a deficit of $0.6 billion and $2.5 billion respectively, causing the company to fall into a now net debt position of $0.5 billion.
5)
Last the company had a short seller report issued by Hindenburg Research, last week. The core points of the report which Hindenburg Research alleged are:
- Channel stuffing and early recognition of revenue, which inflates sales figures.
- Rehiring of previously senior staff who were removed due to SEC charges due to premature recognition of revenue.
- Related party transactions worth $1 Billion between family members of the CEO as well as undisclosed related party transactions
- Product issues such as incomplete products received bad reliability as well as increased competition from the likes of Dell and HP
- Evading sanctions against Russia through various shell companies
It isn’t uncommon for short reports to have a myriad of reasons with varying validity and importance and this report is no exception.
However, the company has now delayed its 10-k or audited results which were meant to be released only a few days later, the day after the short report was issued. Following all this the stock fell 19%, leaving it in the current price range.
A quick aside as well when you do see fraud cases involving accounting manipulation normally the cash flows are not impacted to the same degree as cash is harder to manipulate it is effectively in the bank or it isn’t
6)
Just to summarize, the stock was in my opinion very overvalued 6-months ago and the following quarters were not the same explosive growth that the market was really expecting even if it was in guidance, which is what we mean when we say that the stock is priced to perfection. You can’t have not just average results you need great results quarter after quarter. Further, the AI thematic boom seems to have waned driving less money into the theme. And last but not least the accusations of fraud which I would say with the delay of the 10-k have at least some validity.
Overall, not just the share price but potentially the entire business was built on a house of cards which now appears to be collapsing making Super Micro Computer our Dog of the Week.
