This week we will start by discussing a mixed bag of topics included the Canadian Dollar, energy prices and Warren Buffett’s Berkshire Hathaway annual meeting. In our Your Stock, Our Take segment we take a question from a listener about Computer Modelling Group Ltd. (CMG:TSX), a software technology and consulting company serving the oil and gas industry – is it a BUY in the current energy pricing environment. Our star of the week is from KeyStone’s active coverage and was one of our top US Growth Stock picks early in 2017, Applied Optoelectronics Inc. (AAOI:NASDAQ), a provider of fiber-optic access network products for the internet datacenter, cable broadband, fiber-to-the-home and telecom markets, which jumped 20% this past Friday after reporting stellar earnings and strong guidance. Our dog of the week is Resolute Forest Products Inc. (RFP:TSX), which ended down 15% this past week.
If this is your first time listening, then thanks for stopping by. This podcast is produced every week for your enjoyment and show notes are found at www.keystocks.com. Come back often and feel free to add the podcast to your favorite RSS feed or on iTunes. You can also follow us on Twitter @KeyStocks and on Facebook. Or listen to us on our 24-hour Penny-Stocks streaming radio station Pennystocks.fm for coverage of US and Canadian Small-Cap stocks.
Now, let’s dig into the show.
I would like to welcome again, myhost, KeyStone’s Senior Equity analyst, father of 1, and a man after last week’s draft lottery disaster, has officially dubbed that his Vancouver Canucks are cursed, Mr. Aaron Dunn.
First-off – you will be on Money talks this Saturday the 6th to chat, among other things, about our latest upcoming –
Do-It-Yourself (DIY) Stock Investment Seminar
with KeyStone Financial
Vancouver May 23rd, Kamloops May 24th, Victoria May 25th, Edmonton May 30th, Calgary May 31st & Toronto June 1st
Dissatisfied with high fees and meager returns from traditional big bank mutual fund and ETF investing? You are not alone.
There is a powerful movement across the country – we see it every day as we add more new clients. Canadians are taking charge of their financial future and looking for simple alternatives to help them build long-term wealth.
For the past 18-years KeyStone has been helping thousands of Canadians build simple 10-12 stock portfolios composed of cash generating and underfollowed stocks. We stress quality stocks over quantity in an effort to beat the market long-term.
In our DIY Investment Seminar, we share our strategies as well as a couple of recent stock selections to get you started on your path towards financial independence.
Our seminar is not going to sell you insurance, help you do your taxes, provide an estate plan, show you an exotic and risk futures or options strategies – all KeyStone does research stocks.
We are equity specialists focusing on the largest and most important component of your portfolio long-term – quality stocks.
How many stocks should I own?
One of the more important decisions you will make is the structure of your equity (stock) portfolio. Diversification can be your friend but it can also be your enemy. To beat the market, you cannot just be the market. Our strategy stresses quality over quantity and will give simple and effective number of great stocks to help you build two critical equity portfolios – growth and income. In the end, these two mini-portfolios will help you build a winning formula for your overall DIY stock portfolio..
What stocks to buy?
The most critical element in equity investing is knowing which individual stocks to buy and which to avoid. In this segment, we will focus on the basic fundamental criteria we use to look at any stock as a potential investment. From revenue, earnings, cash flow, and balance sheet considerations to the industry, near and long-term growth catalysts, valuations to management – we cover our successful strategies.
When to buy?
Our DIY portfolio strategy involved staggered purchases over a 12 to 18-month period. We help you build a concentrated portfolio of high quality growth and income (dividend paying) stocks. Purchasing 1-2 stocks each month over a year will help prevent you from purchasing your shares at a near-term market top.
Perhaps most importantly, when to sell?
Investing is not just knowing what stocks to buy, it is also about knowing when to sell. We take your through our sell process included the primary valuation considerations, outlook and the nature of the stocks business (cyclical vs. non- cyclical). We also review the strategy of selling partial positions – SELL HALF for example. The decision to sell can also become more difficult when you are dealing with a good company. To illustrate, we take you through a couple recent SELL examples from stocks in our active coverage.
Insight into our Methodology
We introduce you the methodology that has allowed us to uncover both unknown growth and dividend stocks that have produces tremendous returns including;
Canadian & US Growth Stocks
· The Boyd Group Income Fund (BYD.UN:TSX) – Up 3,700% and still a BUY.
· WaterFurnace Renewable Energy Inc. (WFI:TSX) – SOLD for a 2,561% gain.
· Enghouse Systems Ltd. (ENGH:TSX) – Up 600% and still a BUY.
· Janna Systems Inc. (JAN:TSX) – Taken over for a 4,185% gain.
Recent (Past Year)
· Photon Control Inc. (PHO:TSX-V) – 221% gain and counting.
· Applied Optoelectronics Inc. (AAOI:NASD) – 222% gain and counting.
Canadian Income (Dividend) Stocks
· Brookfield Infrastructure Partners L.P. (BIP.UN:TSX) – 291% and counting
· Exchange Income Corporation (EIF:TSX) – 250% and counting
About the Events
Join top stock pickers Ryan Irvine and Aaron Dunn from KeyStone Financial for a 2-hour workshop on how to build a simple portfolio designed to crush the market. Learn simple, proven, and powerful methods to identify which stocks to buy, which to avoid, and how to build an effective portfolio from the ground up. The seminar will focus on two key areas of your portfolio – growth and income (dividend).
We are an independent financial advisor offering specific BUY/SELL research reports to our client base across Canada and into the U.S. A unique research firm, KeyStone Financial has a proven track record of successfully uncovering undervalued small-, micro-, and mid-cap growth and value stocks with tremendous upside potential, before the broader financial arena.
2. Smart Strategies for Independent Investors
3. Small Cap Stocks for High Growth
4. Dividend Growth Stock Investing
5. Put it Together and Build a Portfolio
6. Open Questions from the Audience
How do we do it?
Two decades ago KeyStone’s founder read a quote from the most successful investor of all time, Warren Buffett.
Buffett was asked, if he were coming into the investment field today, what areas would you tell him to point himself in?
Buffett: “Well, if I were doing – if I were coming in and working with small sums of capital I’d tell him to do exactly what I did 40-odd years ago, which is to learn about every company in the United States that has publicly traded securities and that bank of knowledge will do him or her terrific good over time.”
Smith (interviewer): But there’s 27,000 public companies.
Buffett: “Well, start with the A’s.”
We took this idea to heart.
Three times each year KeyStone analysts look through the financial statements and outlook for every publicly traded stock in Canada (over 3,500) and 5,000 in the U.S.
Our efforts to leave no stone unturned helps differentiate our research within the Canadian market. It helps us uncover little anomalies in areas where others do not take the time to look.
Unique cash flowing businesses are reasonable prices which can make great long-term investments.
We look forward to having you at our very first DIY Investment Seminar, please feel free to contact us if you have any questions.
Buffet’s Annual Meeting:
This weekend marks the annual date when thousands of Warren Buffett’s disciples make their pilgrimage to Nebraska to spend money on ice cream, cherry cokes, candy, diamonds and doodads, while also taking the opportunity to listen to the Oracle of Omaha and his faithful sidekick, Charlie Munger, wax poetic on all things investment-related for hours on end.
The Berkshire Hathaway annual meeting festivities really get under way on Saturday with a six-hour, question-and-answer marathon for shareholders (albeit with a break for lunch). Like last year, the whole thing will be live-streamed on Yahoo Finance, beginning around 10 a.m. Eastern.
A couple of the likely topics –
Time to make a big, big deal?
With around $90 billion in cash sitting on the books, there is growing anticipation that Buffett and company are poised to make a blockbuster acquisition. After all, Buffett has long noted that given Berkshire’s immense size, it takes ever larger transactions to move the needle in terms of investment performance.
“I hate cash,” Buffett said in a CNBC interview that aired Friday, but lamented that low interest rates make it difficult because others are ready to buy with borrowed money “and borrowed money is so cheap.”
Buffett campaigned for Hillary Clinton and neither he nor Munger had much nice to say about Donald Trump in the run-up to Election Day. At last year’s annual meeting, Buffett was asked if his vocal support for Clinton could come back to hurt Berkshire if Trump won the presidency. Buffett quipped that if Trump won, the impact on Berkshire’s portfolio “won’t be the main problem.”
He then went on to say that he expected Berkshire to be just fine regardless of who won. So far, so good. As of Thursday’s close, Berkshire Class A and Class B shares were up just shy of 13% since Election Day. And Berkshire stands to benefit from many Trump proposals, including a large cut in the corporate income tax and the president’s pledge to slash regulations across industries.
Expect Buffett to stick to his long-held contention that the U.S. is poised to remain a world beater thanks to its strong institutions and traditions, ensuring a long-term bullish outlook for stocks and the economy.
Listener question – is Computer Modelling a good buy now?
Your Penny Stock, Our Take – Computer Modelling Group Ltd. (CMG:TSX)
Computer Modelling Group Ltd. (CMG:TSX)
Computer Modelling (CMG) is a computer software technology and consulting company serving the oil and gas industry. CMG, recognized by oil and gas companies worldwide as a leading developer of reservoir modelling software, has sales and technical support services based in Calgary, Houston, London, Dubai, Bogota, and Kuala Lumpur. CMG is the leading supplier of advanced processes reservoir modelling software in the world with a blue-chip client base of international oil companies and technology centers in approximately 60 countries.
Recent Developments: Reductions in budgets and activity levels by Computer Modelling’s energy customers have affected the utilization levels of the company’s software, resulting in lower revenue. Therefore, the company continues to take prudent measures, such as suspending employee recruitment and reducing discretionary spending, to control costs
Total revenue decreased by 12% for the three months ended June 30, 2016, compared to the same period of the previous fiscal year, due to decreases in both software license revenue and professional services.
EBITDA decreased by 14% for the three months ended June 30, 2016, compared to the same period of the previous fiscal year.
Keystone’s Take: We consider CMG to be a well-run company with a strong balance sheet and best in class software. Despite the decline in the company’s share price in a severely depressed energy market, the company continues to trade at relatively high valuations (partially due to the cash flow declines). CMG has historically traded at a significant premium due to its solid dividend, quality client list, and well thought of software and services.
The case could be made that as producers continue to look for ways to operate efficiently in a low oil price environment, they will continue to seek reservoir simulation solutions to enhance production from their existing and new assets, and as Computer Modelling provides some the most advanced reservoir simulation tools to assist companies with their reservoir planning, management and optimization – the company is reasonably well positioned at present. However, for us the equation is very simple, less cash flow for its clients leads to less spending overall and zero to negative growth for Computer Modelling near to mid-term.
While we see it as a strong business, at present it remains trading at levels that make the risk/reward profile too great, unless the price of oil moves sharply higher near term to US$65 or above and sustain those levels.
We MONITOR the stock for a sustained uptick in energy prices and attractive entry levels. The balance sheet remains great with $56.5 million in cash and no debt as at December 31, 2016.
Small-Cap Star of the Week
APPLIED OPTOELECTRONICS, INC. (AAOI:NASD)
Industry: Optical Manufacturing
BUY Recommendation: April 2016
Recommendation Price: $15.99
Current Price: $55.96
Market Cap: $1.07 Billion
Shares jumped 19.55% to $55.96 on Friday after the company announced stellar earnings and strong guidance going forward.
Applied Optoelectronics reported first-quarter revenue of $96.2 million, up 91% year over year and a bit more than $1 million higher than the average analyst estimate. Cable broadband revenue rose 90% to $13.1 million, data center revenue jumped 104% to $79.6 million, and fiber-to-the-home revenue contracted 77% to just $98,000.
The driver here is Internet Data centers – through customers such as Amazon, Facebook, and Microsoft – which was up 104% and accounted for 83% of revenues.
Non-GAAP earnings per share came in at $1.10, up from a loss of $0.04 during the first quarter of 2016 and $0.12 better than analysts expected. Non-GAAP gross margin expanded to 43.2%, up from 28.3% in the prior-year period. Higher revenue, a fatter gross margin, and a slow increase in operating expenses led to the surge in the bottom line.
Second Quarter 2017 Business Outlook
For the second quarter of 2017, the company currently expects:
- Revenue in the range of $106 million to $112 million.
- Non-GAAP gross margin in the range of 41.0% to 42.5%.
- Non-GAAP net income in the range of $22.2 million to $24.3 million, and non-GAAP fully diluted earnings per share in the range of $1.09 to $1.19 using approximately 20.4 million shares. This also assumes an income tax rate of approximately 20.5%.
The company expects to produce second-quarter revenue between $106 million and $112 million, up from $55 million during the second quarter of 2016. Non-GAAP gross margin is expected between 41% and 42.5% and non-GAAP EPS between $1.09 and $1.19.
Applied Optoelectronics kept growing rapidly during the first quarter. With guidance calling for this explosive growth to continue, it’s no surprise that investors bid up the stock.
The 20% jump this Friday and the 250% gain since our recommendation just over a year make APPLIED OPTOELECTRONICS, INC. (AAOI:NASD) our big star of the week!
You will have to become a client to our US Growth Stock research to get our latest BUY/SELL/HOLD advice on the stock however.