Stock Talk Podcast Episode 294 Show Notes

You are listening to KeyStone’s Stock Talk Show – Episode 294

Great to chat with you again this week. Get our Spring On-Demand webinar today – including a new, profitable picks and shovels buy to participate in the gold boom, trading around $1.00 and 50% below its true value. This week, Brett kicks off the festivities with the US bond market which, driven by Trump Tariff whiplash, had its worst week in decades. With 10-year yields moving as much as 72 basis points or 0.72% during the week – the biggest increase in yields since 2001. Brett details the action and let’s viewers know the implications. I will continue with a small snippet from that webinar defining “orphan stocks”, the opportunity, and give one real example. In our YSOT segment, Aaron answers a viewer question on Karman Space & Defense (KRMN:NYSE), a leader in the rapid design, development, and production of next-generation technologies to combat near-peer nation state threats, focused on critical, integrated systems for the hypersonic, missile defense, UAV and space sectors. Aaron looks at the company’s recently reported FY 2024 result, the growth and current valuations. Brennan answers a viewer question on ADF Group Inc. (DRX:TSX), a North American leader in the design and engineering of connections, fabrication, including the application of industrial coatings, and installation of complex steel structures for the non-residential infrastructure sector. Last week, the stock dropped 33% following its FY 2025 numbers and FY 2026 outlook which reported tariffs will impact margins. Brennan updates our thoughts on the stock following our last review which called for avoiding the business near-term.

Let’s get to the show –my cohost, Mr. Aaron Dunn is back, and we have the killer B’s, Brett and Brennan.

Poll Question

This week, we are presenting our first Live Webinar Series of 2025 – today, I will provide a very brief snippet from that Webinar where we give you 7-8 stocks to buy today, while they are on-sale.

I have detailed the 10x opportunity – great long-term capital compounding stocks that serve to form the growth “foundation” of a well constructed portfolio. In the regular course of our research, we also come across other mispriced stocks – little anomalies that present opportunities for our clients. Today, for the first time in our Webinar series, I introduce the concept of “orphaned stocks” and display why they can hold a unique place in a growth oriented portfolio.

Spring 2025 Webinar Preview: The Orphan Stock Opportunity

In this section I will define What is an Orphan Stock, how to identify one, the unique opportunity, provide a couple examples and which to buy today.

What is an orphan stock?

These are stocks, often small caps, that have been ignored by the investment community and as a result may be trading at low valuations measured against their current or future prospects.

Higher risk: Estimated to be 50 – 100% plus undervalued to compensate for the risk. So, a minimum of 50% undervalued – significant opportunity for gains if properly identified – and we will show real past examples.

What is an orphan stock?

They are extremely rare (we find about 2-5 annually after researching 5,000+ stocks) – in theory, the markets are all about efficiency, so it a stock trading at 50% of its intrinsic value is a definite anomaly – that is what we are identifying here.

Orphan stocks have the potential to provide an element of higher risk growth that can be lacking in the average Canadian stock portfolio.

Why does a stock become orphaned?

There are a number of reasons a stock can become orphaned but chief among them is a lack of value creation from a shareholder perspective.

Over the long-term – fundamentals are like gravity…if your stock creates consistent per share cash flow – often per share free cash growth, the stock price tends to stick to it like glue and rise over time. This is shareholder value creation 101 – if the business of the stock you own does not create shareholder value long-term by committing a number of KeyStone’s “Stock Sins” listed here:  including possessing no revenue or limited revenue, limited to no historic profits, weak margins, limited or negative growth per share, or poor business structures. Basically, the anti-thesis of what we look for in a great long-term stock.

If a stock displays these symptoms long-term, It can become “Orphaned” or ignored by the market.

What changes a floundering business into an “orphan opportunity”?

A fundamental change in the business that dramatically alters the company’s profitability equation. A catalyst that brings about change through a spike in profitability which is what ultimately drives stock prices.

How do we identify these orphan stock opportunities?

There is no magic button or simple formula to help you discover these market anomalies. Your best weapon is brute force and volume. We come across 2 to 5 of these opportunities annually from looking at thousands of companies.

HOW? By studying the disclosures, conference calls, presentations, financial statements, and conducting investigative interviews (when potential catalysts present themselves) of thousands of public companies – essentially to identify these anomalies, before they are broadly identified. We exploit the inefficiencies at the less followed end of the market.

The Process. Once we identify a potential Orphaned opportunity, Often, we will wait until the catalyst takes hold to confirm our thesis. Awaiting the release of at least one set of quarterly financial results before we step up and buy.

This confirmation helps allay some of the execution risk and helps prevent becoming stuck in an investment “concept” that continues to suffer from failure to launch. While one might think the release of a strong quarter would immediately become priced into the stock, in most cases, an orphaned stock, by definition has little in the way of a following and therefore, the initial stages of the catalyst opportunity are acted on by no investor of consequence. The derisking gained from the confirmation most often outweighs a slightly higher entry price and the downside of moving too early and becoming stuck in an illiquid stock that does not deliver on the potential catalyst. Once confirmed however, we act swiftly. We are ready with a buy recommendation immediately which includes a buy range, rational and a potential time frame.

For “proof of concept” in reference to Orphaned Stock Opportunities I present NTG Clarity (NCI:TSX-V), a digital transformation business providing telecommunications engineering, information technology, networking, and related software solutions to clients in the enterprise, telecom, utilities, financial, IT and government sectors. 95% of revenues come from Saudia Arabia with no exposure to tariffs at present.

The company was recommended: July 2024 – Recommendation Price: $0.78 – I will talk about its current fundamentals later, but as a Case Study, we look at the business ahead of our recommendation just nine-months ago, why it was Orphaned, the opportunity, and how it has performed since.

So why was NTG Clarity orphaned or ignored by the market? 

For the 9-years between 2014 to 2022, NTG Clarity failed to produce anything close to consistent growth. 2014 revenues were $15.5 million and by 2022, the company had grown revenues marginally to $17.7 million with a low $7.9 million in 2020. Profitability and margins were weak with more years produced a net loss than income. The profile was not that of a company that should attract investor attention. The stock was orphaned – suffering from low volumes and, rightfully so, a lack of investor interest.

Fast forward two years, and a catalyst appeared to have taken hold. Powered by a promised $1.3 trillion in investment in technology by the Kingdom of Saudi Arabia in a massive digital transformation, NTG had posted significant growth, backed by a low-cost viable labour force in Egypt, introduced strong growth guidance for 2024, backed by a record backlog and we received confirmation in the form of a breakthrough $0.06 in EPS delivered in the company’s Q1 2024 up from under a cent in Q1 2023 – higher margins, higher EPS and we had part of our confirmation.

Let’s look at the fundamental value and growth equation that led us to believe that NTG Clarity was an Orphan Stock Opportunity.

In July 2024 the stock traded at $0.78.

Based on management’s guidance our Initial earnings estimate: ~$0.13.

Based on this, the Forward PE: 6.

Our Fair value (was based on a low multiple of 10 x our 2025 initial estimate of $0.13): $1.30 a 68% potential return – falling in our return requirement for a higher risk orphan stock.

Shortly after, we issued a BUY report at $0.78.

In the less than 10 months since, the stock has posted 2 more record quarters and has jumped 133% to the $1.80 range.

And we have increased our 2024 and 2025 estimates based on the current record backlog. We will revisit NTG Clarity later, but it serves as an excellent example of the strong potential gains we can deliver investing in this special class of small-caps.

US Yields Rising

On the back of Trump Tariff whiplash, the US bond market has had its worst week in decades. With 10Y yields moving as much as 72 basis points, 0.72% during the week. The biggest increase in yields since 2001. The 30Y had the worst week since 1982. Bond markets in general, but especially the US treasury market, normally do not move quickly and are not anywhere near this volatile. The US has 28.6 trillion in outstanding treasuries as it uses it to fund its deficits, with foreign governments and private investors holding a large portion of the outstanding amount, as its been the world’s reserve currency since WW2. So volatility like this in the US bond market is a worrying sign globally.

We can see here the shift in the US yield curve since Trump’s “Liberation Day” on April 2nd. The long end of the curve has noticeably steepened, with the short end remaining relatively stable. Trump does not want higher interest rates, with him continuously pressuring the FED to lower interest rates aggressively. Trump even stated markets were “getting yipping” when he announced the pullback to the 10% “baseline” tariffs on all but China and that the bond market is “tricky”. So clearly, the Whitehouse is watching the bond market and likely is influence policy. Still overall there are higher tariffs than a month ago but less than what was on his poorly calculated tariff table expect China.

So why does a shift in US yields matter so much? First, the US dollar as a whole and, by extension, US treasuries, you might as well get paid to hold USD, is the world’s reserve currency and has long been a safe haven asset in volatile markets. We have not seen this over the last week as the stock market has been absurdly volatile with some of the biggest increases and decreases in decades. Normally a flight to the US dollar and treasuries occur. The opposite happened this time. We can see DXY, which is a basket of currencies to index the US dollar against, has fallen sharply over the same period, falling about 4% since April 2nd. This means there has been selling of US dollars, not buying like you would normally see.

So now, with higher yields and a weaker US dollar, any entity with US-denominated debt, whether US or internationally, will need to raise at a higher rate. Whether it is corporate debt or a US mortgage people who need to finance won’t be happy. International holders of US debt will be very unhappy as bond prices have decreased as well as the exchange rate a double whammy.

And further, companies which receive US dollars as revenue but have costs in other currencies, which is common for commodities and many other industries, will have lower revenue. The magnitude of change wasn’t the largest but the time period of change was fast, so if we see this level held you will see FX headwinds for some companies going forward.

Further, this will impact how we look at assets traded against the US dollar, with commodities being common. Last week, we saw gold surge as well, but in part, this was due to the US dollar weakening, where the change wasn’t as great in other currencies. I bring this up since if we do see continued debasement of the US dollar, we may see other assets rise in respect to the US dollar but not to other currencies.

So what was the cause of the yields rising?

Well, we know the initial push was obviously Trump’s tariffs, but for bond prices to fall and yields to rise, someone needs to be selling and that has had an array of speculation.

There is 28.6 trillion in outstanding US debt, with at least 8.5 trillion held by foreign entities. I say at least because these figures are only for amounts held in US-based broker-dealers, so the actual amount will be higher.  So naturally, it is easy to see central banks’ major holders of US debt to be selling, creating this pressure.

I’ve seen a wide array of speculation from Japan, which is the largest holder of US debt, to Canada to China, being sellers on the central bank side. As the world’s reserve currency US debt holding is spread out. In part, this is actually supported by having a trade deficit as it causes the US to distribute its dollars to buy goods.

Another popular speculation has been the deleveraging of basis trades, which are normally very highly levered, but with volatility needed to be toned down. Basis trades, in this case, are trades that trade the spread between US bonds and futures or swaps, which naturally converge over time. The spread is tiny, hence the use of leverage and the speculation of deleveraging from high volatility.

A couple other factors which I’ve seen brought up are long-term inflation concerns. If inflation is expectations are higher, investors want to be compensated for it, so the real yield is similar. Just general deleveraging or hedge funds deleveraging any trade.

And perhaps the most interesting in my opinion is just a general loss of confidence in the US dollar as a safe haven. Is this shift the canary in the coal mines sort of the end of the US Hegemony.

I do not believe that is the case at this time, but the fact that there is broader questioning of the US global structure does show the shift in perception since the Tariff onslaught. If we do start to see continuous outflows from US assets that would be the stronger indication of global structural change. And, I will say any perception could shift quite suddenly depending on what one man, Donald Trump, decides to do in the coming days and months ahead. With some commentary being around some sort of Mar-A-Lago Accords to restructure finances similar to the Plaza accords in 1985 to depreciate the US dollar. Generally though it will be interesting to see how the market continues to react and if this will be looked back on in years to come or  a completely forgotten blip in the market.

YSOT ADF Group Inc. (DRX: TSX) – Dog of the Week

Company Description

ADF Group is a North American leader in the design and engineering of connections, fabrication, including the application of industrial coatings, and installation of complex steel structures for the non-residential infrastructure sector.

As of Q3 2025 Management noted that its Canadian facility in Montreal is at 70-75% capacity and its U.S. Facility in Great Falls is at 65-70% capacity. The Fabrication shop in Canada can do approximately 100-120 tonnes per year while the U.S. Fabrication shop produces approximately 25-35 tonnes per year.

The stock has had a strong run since the beginning of 2023, driven by strong financial results – but Brett covered the stock on the podcast in October of 2024 and highlighted our concerns with the business continuing its strong financial trajectory within a cyclical industry. Since then we have got several comments with viewers indicating they were adding on the pull-back…. I then covered them again in January with essentially the same conclusion as Brett and this was after we wrote up a MONITOR report for clients in our Canadian Cash Rich, Profitable, Small-Cap Research Report released in late December… but again, I noted in that report that there were headwinds with the business going into FY 2026 which kept us on the sidelines.

And following the company’s Q4 2025 results posted last week, the stock is down 30%… so first of all, I am glad we conducted our due-diligence, as despite the stock looking cheap on a trailing basis, we remained hesitant to recommend the business to our clients given some uncertainty and margin headwinds.

Financials

Now looking at the recent quarter of Q4 2025 ended January 31, 2025. 

• Revenue declined 12% to $77.4 million.
• Adjusted EBITDA for Q4 was $19.2 million or 24% margin, up 24% from the same period in 2024.
• Net income declined 13% to $9.1 million or $0.31 per share from Q4 2025.
• The balance sheet remains in a net cash position of 14.4M which is down from about $19.1M (following Q3 2025) and equates to a net cash per share balance of approximately $0.47 per share.

So overall, the business remains in decent financial shape…

Now looking a little longer term at how the business has performed.

For FY 2024 Gross margin was 32% and net margin was 17%. But keep in mind, ADF group is a contract driven business, and over the long run margins have been cyclical which management equates the recent margin expansion to 1/3 automation investments coming online at its Canadian facility, 1/3 absorption of fixed costs given higher volume, and 1/3 from project pricing benefits. So margins are certainly at a historical high over the past decade….

ADF Group’s order backlog totaled $293 million as of January 31, 2025, but the bar chart that I have up on the screen includes the recent $120M contracts announced in February… which provides backlog of about $413M and compares to about $510M for the prior year period.

Outlook

Now despite the decent financial results… the kicker here for why the stock went down was due to management’s outlook, as they indicated:

“Although we announced $120.0 million in new contracts at the very beginning of the current fiscal year, the uncertainty caused by the imposition of U.S. tariffs is delaying the conclusion of new commercial agreements, and in this context, we are compelled to analyze certain contingency measures, including the implementation of the Work-Sharing Program at our plant located in Terrebonne, Quebec. In this sense, we can already confirm that revenues for the fiscal year ending January 31, 2026, will be down, mainly in the first quarters, and that our margins will also be affected by the direct and indirect impacts of U.S. tariffs,”

So prior to this, management believed that revenue would grow in the 2026 FY…. But they were working against tough comparable margins – believing that Gross Margin dollars would remain flat Y/Y. But it appears that this has now changed and Gross Margin dollars will also be down in FY 2026….

Conclusion

So to conclude here on ADF Group:

• ADF Group has performed well over the past 5 years, growing backlog to $400 million in FY2025 from $200 million in FY2019 and expanded gross and net margins from 8% and (0.5%), to 32% and 17%, respectively, in FY 2025.
• There is cyclical risk, and a majority of ADF’s revenue comes from the US (>85%), therefore U.S. & Canadian trade relations – such as tariffs imposed on Canadian goods – can impact the company’s demand and profit margins. As announced by management after their Q4 2025 Results.
• Fundamentally the business is in good shape with a Cash Rich balance sheet, Backlog elevated, and the business remains “cheap” on trailing numbers with a P/E of <3x and an EV/EBITDA of < 2x. But this is in the face of near-term tariff uncertainties which appear to be materializing, tough comparable margins, and business cycle risk.

When we spoke with management following the Q3 2025 results, they indicated that Gross Margin Dollars would likely remain flat Y/Y in 2026 (increased rev but lower margins) But with the new Outlook following the Q4 2025 results, it appears the headwinds are larger than they originally anticipated and 2026 will be a difficult year WHICH HAS MADE THE STOCK OUR DOG OF THE WEEK.