Stock Talk Podcast Episode 286 Show Notes

You are listening to KeyStone’s Stock Talk Show – Episode 286

Great to chat with you again this week. We are back from another great World Outlook Conference in Vancouver – chatting with hundreds of clients and new investors. Aaron will kick off this episode with a piece on the tariff situation – providing some details, historical context, impact on investors and in his view what may happen. I provide a small excerpt from my talk at the 2025 World Outlook conference detailing some commonalities in KeyStone’s past 10x stocks. In our “Star & Dog” segment, Brennan begins with a “quazi” star in Converge Technology Solutions (CTS: TSX), a software-enabled IT & Cloud Solutions value-added reseller, which saw its shares rise after announcing it will be acquired by private equity firm H.I.G. Capital. His Dog of the Week, Fluence Energy Inc. (FLNC:NASDAQ), dropped 50% on Tuesday, after it reported weaker Q1 2025 results and lowered its full year 2025 guidance. Brennan will let you know if the drop for the company, which delivers intelligent energy storage and optimization software for renewables and storage, is justified. Finally, in our YSOT segment, Brett will review a viewer question on Celestica (CLS:TSX|NYSE), which provides electrical manufacturing services, broken into two segments Advanced Technology Solutions (ATS) and Connectivity & Cloud Services (CCS). The stock has performed extremely well over the past year, up 240%, and Brett will let you know what is driving the move and if it is sustainable.

I put these up because they make me look smart.

Haha. The real reason we examine these past successes’ is because finding the commonalities  in each success story can guide our future investment decisions.

generally, what can say about this group of 5 truly portfolio changing stocks.

Size – by market cap, even a decade or so back, they were considered small companies – below see that not one had a market cap above $55 million Canadian –

Commonality 1) Each company started small before their share prices took off.

Let’s check industries to see if there are any commonalities here?

So we have,  Electrical Equipment & Parts, Automotive repair services, Paint protection (auto), Engineering – Geothermal H&C, and Software. And if you think Auto repair services and auto paint protection are the same industry, you are stretching the truth. The correct takeaway here is, there is no commonality in their industries – in fact, the wide breadth or the industries appears to suggest there are far more important general factors at play.

Let’s take a look at basic financial metrics to see if we can find commonalities there.

The first…revenues – Did the businesses have any sales at the time of the recommendations –before they started their ascent?

Ding, ding, ding, we have a winner – or 5 winners in this case.

Using a more stringent financial metric – were the businesses producing net income at the time of the recommendation – before they started their ascent? 

Once again, 5 real winners.

Now because net income is a more stringent and specific criteria, financially speaking, and all match the criteria, we are going to take profitability as a more statistically impactful commonality.

So Commonality Number 2 is profitability.

Let’s examine whether any of the businesses or stocks were well know to investors or covered widely or even at all at the time of KeyStone’s originally recommendation on the stocks.

In terms of coverage, Hammond, Xpel, and WaterFurnance had zero coverage on our recommendations, in fact it took over a decade for any real coverage to show up on Hammond Power – XPEL final got coverage years later when it jumped to the NASDAQ. Boyd had previous coverage but was abandoned, and Janna had a singular non independent analyst.

Generally, unless they were clients of KeyStone, the average investors had no idea these portfolio changing stocks even existed on our initial recommendation.

Basic commonality number 3 is that each of these stocks were significantly underfollowed or unknown at the time of recommendations.

There are many other factors including strong growth paths, good management, limited share dilution etc. that are relative commonalities between these 5 stocks, but for the purpose of simplicity and time today I will summarize the 3 basic commonalities of potential 10x stocks (from our 5 examples).

At recommendation (prior to ascent):

Small (small-caps).

Profitable (net income positive).

Unknown (no big bank buys).

I then went on to see if the “data” matched our anecdotal examples – hint, it does.

I will note on Converge, the company also issued its Q4-2024 Preliminary Results on February 10th.

Q4-2024 Preliminary Results:

Gross sales1 is expected to be approximately $1.1 billion, an increase of 2.5% year-over-year.

Revenue is expected to be approximately $680.8 million, an increase of 4.6% year-over-year.

Gross profit is expected to be approximately $178.6 million, a decline of 1.6% year-over-year.

Adjusted EBITDA is expected to be approximately $47.9 million, an increase of 3.0% year-over-year.

Cash from operating activities is expected to be approximately $57.0 million, representing 119% of Adjusted EBITDA.

Loss before income taxes is expected to be approximately $21.2 million, an increase of $16.8 million year-over-year, primarily driven by loss from investment in Portage CyberTech Inc. (“Portage”) of approximately $24.0 million due to impairment charges.

Star of the Week – is Converge Technology Solutions 

but really… despite the stocks recent jump up 52% – the company really isn’t much of a star to us and more of a dog… as we have covered the company several times on the podcast and have always given it a poor review given the company’s low margins, growing debt load and growing share count – leading us to believe that despite its low valuations the stock was in fact a value trap….

Slide 1

Converge Technology Solutions (CTS: TSX) 

Current Price: $5.40

Market Cap: $1.0B

Dividend Yield: 1.10%

Description:

Converge Technology Solutions Corp. is a software-enabled IT & Cloud Solutions value-added reseller (VAR) focused on delivering advanced analytics, application modernization, cloud, cybersecurity, digital infrastructure, and digital workplace offerings to clients across various industries. The company supports these solutions with advisory, implementation, and managed services expertise across all major IT vendors in the marketplace.

Slide 2

Like I said we have covered Converge several times on the podcast now…

1. The first time was in October 2020:

1. 1. EV/EBITDA: 3x
   2. Adj. EBITDA Margin: 5%
   3. Net Debt: $207M
   4. Net Debt to EBITDA: 5x
   5. Shares: 122M

2. The second time was in March 2022:

1. 1. EV/EBITDA: 22x
   2. Adj. EBITDA Margin: 7%
   3. Net Cash: $229M
   4. Shares: 215M

3. The 3rd time was May 2023:

1. 1. EV/EBITDA: 7x
   2. Adj. EBITDA Margin: 6%
   3. Net Debt: $321M
   4. Net Debt to EBITDA: 2.1x
   5. Shares: 210M

And again every time my conclusion was essentially along the lines of the business having great growth driven by acquisitions which was funded by both debt and equity dilution… but the stock had very thin margins which made it difficult to justify gaining a substantial EBITDA or price-to-cash flow multiple.

Slide 3

Company Updates: 

The last time I discussed the stock in May 2023 management had just concluded a strategic Review process to evaluate a full range of alternatives… but decided to continue as a public company and execute on its business plan.

However, a year and a half after this strategic review – the stock is up due to H.I.G Capital announcing that it would acquire Converge in an all-cash transaction and take it private, where shareholders will receive $5.50 per share in cash, which values Converge at an enterprise value of approximately $1.3B and a EV/Adj. EBITDA multiple of 7.4x………

The transaction will be subject to court and regulatory approvals and clearances and the Transaction is expected to be completed during the second quarter of 2025. And once completed Converge’s stock will be delisted from the TSX..

Slide 4

A few takeaways after following converge for the past several years:

• Revenue growth was tremendous – driven by an aggressive cadence of acquisitions which were funded by debt and equity….. a much harder growth strategy to execute  on compared to a pure organic growth story….
• The company has always traded with quite low valuation multiples but Adj. EBITDA margins continue to be very thin, debt has been high, and again share issuances were a common occurrence – making us believe the stock was in fact a value trap.
• Back in 2020 I highlighted that several of Converge’s executives were originally from the publicly traded company, Pivot Technology Solutions (PTG:TSX). Like that of Converge, management rapidly grew top line revenue through a growth by acquisition strategy funded by debt…. But management was never able to generate accretive EPS growth which I warned may repeat with Converge.

So despite me listing the stock as our star of the week given its recent takeover announcement and jump in share price… the company’s fundamentals were never to our liking…

Dog of the Week is Fluence Energy

, as the stock is down about 50% today. Now this is a stock that I have had on my radar for some time as I wrote a monitor report on it back in July 2023 and noted in that repot 🡪 “Generally, Fluence is not a company which we would write an in-depth report on due to its lack of profitability. However, seeing the business is well capitalized with net cash of approximately $350 million, has grown revenue at a CAGR of 135% from 2019-to-2022, has improved margins and is guiding toward positive Adjusted EBITDA by Q4 2023 – we believe it is a name to place on our watchlist and monitor its path toward profit.”

So lets dig into the stock a little here and see why its down…

Slide 1

Fluence Energy Inc. (FLNC:NASDAQ) 

Current Price: $6.81

Market Cap: $1.6B

Dividend Yield: NA

Description:

Fluence Energy, Inc. is a global market leader delivering intelligent energy storage and optimization software for renewables and storage. The company’s solutions and operational services are helping to create a more resilient grid and unlock the full potential of renewable portfolios.

Fluence Energy was formed in 2017 as a joint venture between two massive global energy companies, power producer AES (AES:NYSE) and German energy equipment giant Siemens AG (SIEGY:OTC).

Slide 2

Now the stock is down 50% today (Feb 11), and this is due tooooooo the company reporting weak Q1 2025 results and lowering its full year 2025 Guidance… despite reporting record backlog of $5.1B.

Slide 3

So looking at these Q1 2025 results which are driving the stock lower……

• Revenue was down approximately 49% from the same quarter last year, primarily driven by the pronounced backend nature of expected revenue for full year 2025 compared to the revenue distribution seen in full year 2024. SO CLEARLY THE BUSINESS IS CONTRACT DRIVEN AND CAN BE LUMPY….
• Net loss was $57.0 million, compared to a net loss of approximately $25.6 million for Q1 2024
• The company is still in a net cash position with total cash of approximately $654 million. But in December 2024, the company issued $400 million of 2.25% Convertible Senior Notes due 2030…. Which given the company is not profitable… will likely need to continue to raise additional capital going forward….
• BUT THE REAL KICKER IS THAT the company lowered its fiscal year 2025 guidance:
  • Lowering Total revenue guidance range to $3.1-$3.7 billion (midpoint $3.4 billion) from its prior guidance of $3.6-$4.4 billion (midpoint $4.0 billion). The $600 million reduction in revenue from the previous midpoint is primarily due to the timing of certain contracts in Australia that the company now expects to sign later this year.
  • Lowering its fiscal year 2025 Adjusted EBITDA range to $70-$100 million (midpoint $85 million) from its prior guidance of $160-$200 million (midpoint $180 million). The decrease in Adjusted EBITDA is primarily driven by lower expected revenue and lower expected gross margins on recently signed contracts.

Management commented – “We have experienced customer-driven delays in signing certain contracts that, coupled with competitive pressures, result in the need to lower our fiscal year 2025 outlook. While these delays are disappointing, we continue to see a very robust utility scale battery storage market globally and strong interest in our U.S. domestic content product offering in particular, as evidenced by our record $5.1 billion backlog. Importantly, we are executing plans to maintain our leadership position, differentiate our product, and optimize our cost structure, which we expect will drive improved financial performance in fiscal year 2026 and beyond,”

Now I will continue to monitor the business, I like the space that it operates in, but it is still VERY early…. the business is certainly struggling to work toward profitability and its drop today makes it our dog of the week.