KeyStone’s Stock Talk Show Episode 274.
Back from a 10-day adventure in Orlando, it is great to chat with you again – I will start this week with a quick look at 5 traits we look for to help us identify potential 10x stocks. Aaron reviews the Top 5 Ideas from Ben Graham’s legendary book, The Intelligent Investor, including Investment vs. Speculation, Value and Margin of Safety, the Importance of Fundamental Analysis, Avoiding Market Timing Strategies, and the Importance of Emotional Discipline. In our Star & Dog segment Brett takes a look at Star, BrightMinds Bioscience (DRUG:NASDAQ) and Dog, Lucid Group (LCID:NASDAQ). BrightMinds, an early stage drug development company, has had an astronomical rise over the past month from around a $1 to the $55 range, Brett will let you know if the jump is justifiable or pure speculation and if the stock is vulnerable to a collapse. The Dog, Lucid Group (LCID:NASDAQ) designs, engineers and manufactures Electric Vehicles. The stock is down 26% over the past month and over 95% since its all-time high set in late 2021. Brett let’s you know if this Dog should be taken behind the barn and shot or if there is a potential opportunity. In our YSOT segment, Brennan answers a viewer question on BluMetric Environmental Inc. (BLM:TSX-V), a micro-cap which provides clean technology and (Environmental Consulting) professional services in the fields of environmental geosciences and engineering, industrial hygiene, occupational health and safety, renewable energy, water and wastewater treatment, environmental contracting and environmental management. Brennan looks at BlueMetric’s current fundamentals to see if the company fits our growth-at-a-reasonable-price criteria.
Let’s get to the show – my cohost, Mr. Aaron Dunn – and the killer B’s, Brett & Brennan.
Back from our stint in Florida at the Orlando Money show.
Our sessions were well attended – overall, it appears the attendance at the event was impacted by the hurricane fears.
Happy to annouce the launch of our last Live Webinars of 2024!
The New Stock Portfolio – Dividend Growth Stars as Rates Fall & the Next 10x Stocks.
Dates: November 7th @ 7:00 pm Pacific and November 12th @ 7:00 pm Eastern.
OR
Or purchase The Complete VIP Stock Portfolio Building Package (live or on-demand).
November 16th at 11 am Pacific time/ 2 pm Eastern time
The Complete VIP Stock Portfolio Building Package includes a one-year VIP Membership, a 5-hour live/on-demand webinar, 15 high conviction growth and dividend growth stocks to buy.
Who should attend – the Nov 7th and 12th Live Webinars? Investors looking for unique profitable stock recommendations (Dividend & Small-Caps), & advice on building a better 15-25 stock portfolio.
What is included?
- 9 Traits to help you uncover the Next 10x Stock – the simple formula that allows KeyStone to identify and recommend 10x and even 200x stocks including Hammond Power (HPS.A:TSX) up over 24,000%.
- With Rates Falling Dividend Stocks are Rising – do not miss out! Get our Top 3 Dividend Growth Stocks for 2025.
Proof is in the Results – Fall 2023 Keystone recommended 2 Cash-Rich Stocks:
- Cipher Pharma (CPH:TSX), a profitable, growing specialty pharma stock at $3.89. Today, the stock trades at $16.54, up 325.19% – the best performing TSX stock.
- VitalHub (VHI:TSX), a profitable, growing healthcare software stock at $3.24. Today, the stock trades at $9.47, up 192.28%
Do not miss out on this Fall’s Top BUYs – Attend the Live Webinar and Get 6 profitable small-cap stocks to BUY today; 1) our top cash-rich SaaS stock, 2) top dividend growth stock (5% + dividend), 3) cash-rich profitable gold stock, 4) the 2 top performing unknown digital financial stocks in Canada, and 5) two cash-rich small-caps trading under $3.00.
Tickets sell out – get the Early Bird option now or the VIP and get those three bonusses:
KeyStone’s Fall 2024 Top 4 Dividend Growth Report ($599). (2) Fall 2024 U.S. Mid-Cap Growth Stock BUY Report ($599). (3) On-Demand DIY Stock Investing Webinar – “How to find the next 10x stock” ($79.00).
Poll Question.
When we are looking for stocks like these:
10 to 200x stocks from our research such as Hammond Power, Boyd Group, XPEL, Water Furnace or Janna Systems – what are some of the core criteria in the profile we are using to identify these stocks.
The following is 5 of the 10 criteria we presented in a recent Live Webinar.
The profile of a potential 10x stock – most companies will not check off all of these boxes – but the more stocks you add with 7, 8 or 9 of these elements, the better chance we have to uncover the next 10x stock.).
Profitability – real cash flow and earnings.
Why do we require every small-cap, and every stock for that matter (small or not) to be profitable from current operations before we invest in the stock – it is because the data is heavily on our side.
- 87% of all global equities that went up 1,000% (10x) or more over the past ten years started as small-caps.
- 82% of those were profitable at the start of their ascent, and 91% had some history of profitability.
- Make sure you are looking at cash flow and real earnings not analyst or management’s favorably adjusted figures.
Low (or No) Debt and a Strong Balance Sheet. Best case scenario, the company has a significant net cash position (more cash than debt) and is able to fund operations and grow with cash on hand. With plenty of cash on hand, the company doesn’t always need to be asking bankers or shareholders for permission to expand. Plus, when times get tough—a strong balance sheet provides a cushion, exactly when those bankers (and shareholders) are most reluctant to provide more capital. A strong balance sheet also gives a company power and flexibility in down times to not only whether the storm, but play offence and make acquisitions when other great businesses are on sale. Finally, the company can continue to make the necessary investments to stay ahead of competition.
Attractive valuations.
Not necessarily the cheapest stock on the market, but you are able to buy the stock at a discount to intrinsic value.
Whether using past and future earnings, book value, discounted cash flow analysis, or hopefully all of the above, does the business trade at a valuation that is significantly lower than its current and future value and is there a reasonable indication the growth is sustainable.
Strong management team
How do we measure management strength – there are a number of ways – from the fundamentals look at the companies ROIC or ROE can give you and idea how well management allocates the capital under its control to profitable investments – there are limits, and one has to look at each company on a case-by-case basis.
Overtime we like to track whether management hits targets with a high degree of frequency – this increases our confidence in their future guidance and in our forward estimates on the company. For example, if a company continually hits or exceeds its earnings guidance, the management is upgraded in our ratings. The opposite is also true.
(stress team – not just one individual if possible – as key executive can exit)
Significant Ownership of Stock by Key Executives.
A high level of ownership by top executives ensures that the interests of shareholders are aligned with the interests of management. Management is then less likely to due many of the stupid things poor management teams do, such as chase top-line revenue growth for the sake of growth, but not increased profitability – this bad for shareholders.
It aligns management to produce “per-share” earnings and cash flow growth – this drives stock prices higher long-term.
The ideal amount of insider ownership might be between 5% and 40% – but it can vary based on the size of the company. If it’s more than 50%, the principals(s) might reward themselves with lucrative compensation packages rather than serving the interests of shareholders. And if it’s less than 5%, there might not be enough alignment with shareholders.
This metric can not always be achieved, at times, a founder who owns a significant stake is not a great leader, so a better leader with less stake in the company can actually do a far better job – aligning this person overtime with shareholders would be a goal – insider ownership should be investigated on a case-by-case basis.
These are 5 of the core criteria – there are many more – that we use to help us identify good stocks or the next potential 10x stocks to invest in.
YSOT – BluMetric Environmental Inc. (BLM:TSX-V)
Price: $0.74
Market Cap: $24.5M
Description:
BluMetric provides clean technology and (Environmental Consulting) professional services in the fields of environmental geosciences and engineering, industrial hygiene, occupational health and safety, renewable energy, water and wastewater treatment, environmental contracting and environmental management.
And if we look at the breakdown of revenue by market in the last quarter, 42% comes from Commercial & Industrial, 18% came from Government, 21% came from Military, and 19% came from mining.
The company is really the go-to water expert for the Canadian National Defense and the Royal Canadian Navy.
Slide 2
This is a stock that we followed for some time and interviewed management back in 2021 while the stock traded in the $0.60 range and had a price to earnings multiple of 4.7 times. But while the company did trade with low valuation multiples and maintained a healthy balance sheet, the growth outlook going forward remained in question and the CEO had very little inside ownership. Which resulted us to stay on the sidelines…
Slide 3
Looking at the Financial results for Q3 2024 ended June 30, 2024:
- Revenue increased 17% to $8.1M.
- Adj. EBITDA was $302 thousand up from a loss of ($674K) for Q3 2023.
- Net income was $26K or $0.00 per share compared to a loss of ($729K) or ($0.02) per share in Q3 2023.
And if we look longer term, we can see that there really hasn’t been a good trajectory of growth in revenue or EPS… as since 2014 revenue has grown with a CAGR of just 2.8%… and EPS has been very volatile.
Looking at the trailing valuation, the stock trades at about 23x earnings.
Slide 4
And looking at the Balance sheet, it had $2.2M in cash, with $3.1 million in debt and leases, providing a net debt position of $1.0 million. And the company has a trailing net debt to EBITDA multiple of 0.5x which is reasonable..
If we didn’t include leases as a part of debt the company would have a net cash position of approximately $1.7M.
Slide 5
Now some operational updates….
On September 24th BluMetric announced the acquisition of Gemini Water which designs, builds, installs, and commissions large-scale desalination and wastewater treatment systems across 22 locations in the Caribbean and Texas. The purchase price was CAD$4.1M and issued 2.35 million shares. For the TTM period ending June 30, 2024, Gemini’s revenue stood at CAD$9.8 million with EBITDA margins exceeding 10%. So… note that the balance sheet will be impacted by this deal considering it was closed after the last quarter.
And if we use the forward EBITDA margin of 10% on its revenue of approximately $10M and including the $4M purchase price, I get an approximate forward EV/EBITDA multiple of 10x.
On September 3rd, BluMetric provided an update and growth initiatives include focusing on the cleantech side of the business, expanding its geographic footprint outside of Canada and they are also looking for potential acquisitions (such as the one they made of Gemini Water).
On October 14th, the company also began trading on the OTCQX under the ticker symbol BLMWF. And the CEO indicated that the trading debut coincides with the company’s strategic expansion into the U.S. market through its recent acquisition of Gemini Water.
Slide 6
Conclusion:
- BluMetric is a decent business, but growth has been minimal over the years.
- The company has a solid balance sheet and remains profitable.
- But given the minimal growth over the last decade, fundamentally the business remains pricey on trailing numbers, but if growth can increase, its 10x EV/EBITDA multiple looks more reasonable.
- Overall, I think that BluMetric is a good company, but the growth remains under question which I believe is a show me story. The geographic expansion strategy looks good on paper, but we need to see management execute on this. As in 2021 when we spoke with management the growth story we heard was focused on expanding its mining revenue… If an investor wanted to take a bit of a flyer and bet management will be able to ramp growth, there could be an opportunity. But this is what they would be betting on which of course there is no guarantee.
- I also would like to see the CEO have larger insider ownership. As he only holds 61K shares which is minimal, and his last purchase in the open market was in September 2022. I will also note, that when we spoke with Scott in 2021, he had just exercised over 500K options at $0.24 but immediately sold them into the market at $0.72 cents which was a bit of a red flag to us at the time.. given if he held onto the shares it would have been a much better vouch of confidence for future growth.
Star of the Week – BrightMinds Bioscience DRUG
1)
The star of the week is BrightMinds Bioscience symbol DRUG on the Nasdaq as well as CSE. The stock is up from just over a dollar to now approximately $55 US, over a whopping 4500% over the last month with the surge beginning on Thanksgiving Monday in Canada.
2)
So what does the company do?
The company is a pharmaceutical development company with a handful of preclinical study treatments and one, BMB-101 a treatment for rare epilepsies is in phase 2 clinical studies. The company is pre-revenue so it is running at a loss, nothing abnormal. No news releases prior to the surge.
3)
So why did the stock surge…
The company states that it had no material change that could result in the surge, they did however take advantage of the surge raising US$35 million in proceeds which is substantially greater than what the entire company was worth last month.
One of the speculations is that a company developing a similar drug, Longboard Pharmaceuticals was acquired for an over 50% premium. Which then in turn caused a short squeeze, further pushing the share price higher in addition to more investors piling in as the news spread. Whether a short squeeze is the direct cause is by no means the sole reason but has likely played a major part, as the stock is currently extremely hard to borrow, with borrow fees in the hundreds of percent.
Really what I want to highlight with an event like this is that the market can be inefficient in valuing an underlying company when the company can go up 45 times, with no actual changes with the company’s operations. But for now, it is our Star of the Week.
Dog of the Week- Lucid Group LCID
1)
Our Dog of the Week is Lucid Group, LCID on the Nasdaq. The company designs, engineers and manufactures Electric Vehicles. The current share price is $2.54 with a market cap of just under $6 billion. The share price is down 26% over the past month, and down over 95% since its all-time high set in late 2021.
2)
So, first a look at why the company has been on a decline since 2021. First and foremost the company’s valuation was extremely high at the time. On top of the general feverous broad market valuations at the time, the company was just beginning to start customer vehicle manufacturing at its Arizona facility. Optimism was high. The market cap was at its peak of $91 billion with an order book of $1.3 billion, so huge growth was baked in.
3)
Now just under 3 years later, what has the company done?
They were able to have commercial production and deliveries in 2022, but growth has not been there. As of the last quarter, Q2 2024, the company delivered 2,394 vehicles, resulting in revenue of $200 million. On a per-share basis, that’s only $0.09 per share lower than the $0.15 per share set in Q4 2022. Roughly the same since Q1 2023 even with rising absolute revenue the share dilution has further hindered any per share metric. So over the last few years, the company just has not been able to keep up with the implied expectations of growth.
4)
Now looking at the last month, the reason we saw a stock offering for another 262 million shares and a further 374 million private placement for the majority shareholder the Saudi Public Investment Fund, which owns 59% of the company. Together raising approximately $1.67 billion and raising the share count by over 27%.
So overall you have poor financial performance burning large amounts of cash, and the need for cash injections through dilution in a significantly poorer environment for capital raising compared to a few years ago. All together the poor performance has devastated the share price and made Lucid our Dog of the Week.
