Verdmont Capital

Monday, November 23, 2015

Pivot Technology Solutions (PTG.V:$0.53) - Revenues Trump Margins - Stay the Course

Pivot Technology Solutions (PTG.V:$0.53) released earnings today for the third quarter ended September 30,2015. A detailed overview of these results can be found here:

The stock has been a bit soft today after the pre-market earnings release. We would not be too concerned about the weakness and continue to believe that PTG.V should be a key holding for those active in the Canadian small cap market.

Financial Highlights Q3 2015

·         Revenues of $414.5 million, up 15.2% compared to Q3 2014, attributable primarily to strong product sales.
o    Product sales of $373.0 million, up 16.9% compared to Q3 2014.
o    Service revenues down 1.7% to $37.1 million compared to Q3 2014.
·         Gross profit up $0.5 million, or 1.3%, to $40.7 million from the same period in the prior year. 
·         Gross margin for the quarter was 9.8%, down from 11.2% in Q3 2014. 
·         Adjusted EBITDA* came in at $6.3 million, down 25.6% from Q3 2014.
·        Adjusted for changes in non-cash working capital balances, the Company generated $4.8 million in cash from operating activities, as compared to $3.7 million for the same period last year.
·         On September 15, 2015, the Company paid its first ever dividend on common shares of CAD $0.0075 per common share.
·         On September 21, 2015, the Company closed a new, $200 million revolving credit facility through JPMorgan Chase Bank ("JPMC"), and terminated the previous facilities held with PNC Bank ("PNC").
·       On July 31, 2015, Pivot paid a $1.5 million installment related to the acquisition of Sigma Solutions, and subsequent to quarter end, on October 30, 2015, paid the final earn out installment related to that acquisition.

Verdmont Capital’s Take on the Quarter

We patched into the earnings call. We don’t know what was more disappointing, the soft margins achieved in Q3 or management’s lack of enthusiasm for what remains an incredibly well-positioned story. Here is our take:

·         Big beat on revenues relative to Cantor’s estimates. PTG.V posted $415Mil in revenue during the quarter vs. estimates of $355Mil. The top-line beat of $60Mil alone, represents 70% of the company’s current market cap of $88Mil.
·        Management indicated during Q&A that the surprise in revenue does not appear back end loaded. If that is the case, we would have expected a boost to 2016 revenue guidance. We understand the need to be conservative, but we also think a good story needs to be told when due.
·         Adjusted EBITDA came in soft at $6.3Mil vs. estimates of $8-$14Mil.
·         Margin issues were driven by lower-margin product sales, pricing pressure in storage and limited service sales. Disappointing, but all-good when one considers that PTG.V’s business is “lumpy.” Big orders skew revenues to a given business segment and associated margins over the short term. Revenues / market share are the hard part, margins should work themselves out over time.
·         Strong cash flow from operations at $4.8Mil, with $12.50Mil in cash at quarter end.
·         Contingency payments associated with past purchases are now out of the way.
·         The dividend is well supported moving forward. The company currently has a gross dividend yield of 5.5%.

Verdmont Capital’s View

We continue to believe that our clients should have a sizeable position in PTG.V. Granted, margins were a disappointment, but top-line growth remains incredibly solid. In a market where companies are typically adding value by cutting costs and getting creative with their balance sheets, a company beating on revenues is very attractive.

PTG.V has the scale and end-to-end business profile to prosper in an environment where enterprise IT becomes increasingly more complex and dynamic. Furthermore, the company’s underlying business should fare well under various scenarios for the global economy given the cost saving properties inherent in their offerings.

Investing in PTG.V offers a great risk/reward profile given that the company is currently trading at an EV/Sales of 0.15X and an EV/EBITDA of 3.71X. Global VAR comparables trade at 0.30X and 6.9X respectively. When one factors in a well-supported dividend yield of 5.5%, the case for investing in PTG.V becomes that much more compelling.

Please call your Verdmont Capital Representative for more color on Pivot Technology Solutions.

All of the regular disclaimers apply. If you do not do your own due diligence before investing in small cap stocks, you should not be investing in them. Some people used to refer to this as commonsense.

Thursday, November 12, 2015

Gold is Not Cheap - Own Oil Over Gold for the Zombie Apocalypse - OSK:$41.02 Looks Good as Well

If you are looking to buy a commodity, you should be looking at oil over gold. Remember, all commodities move together over time. This time will be no different, nor will the next time.

Gold is trading close to all-time highs in relation to WTI Oil. Looking at that relative value, and balancing that against the fact that global oil demand is inelastic and supply remains relatively scarce, what do you want to own?

Gold Bullion (top), Gold Bullion vs. WTI Oil (bottom) – 1982-to-Present
Source: Verdmont Capital S.A., Bloomberg

Now sure, as various gold bulls point out, the world is going to end and the zombie apocalypse is imminent. But you know what, we have thought about this, and we still think that oil over gold makes sense.

In our opinion, in order to do the mass killing that these zombies are anticipated to conduct, they will need zombie mobiles and transports to get around. There is no way they can cover that much ground and do so much killing on foot. These vehicles will need to be powered by refined oil products, whereas the demand for gold and how to trade it under such a scenario is questionable.

Now, please be reminded, that our thesis on oil vs. gold completely breaks down if:

1)   The zombies turn out to be liberal zombies, as liberals, no matter what form, hate oil. This is a key risk to monitor. There is a good chance that the zombies will be liberal, as liberals will try to appease their attackers, instead of fight them tooth and nail. At this point they will have their brains devoured and quickly be on Team Zombie. This will not be fun for them, as Team Zombie works longer than 4 hours a day, has a performance-based culture, there are no extended holidays and you can never retire, let alone at 40 with full benefits. To add to the misery, Zombies are completely racist. In fact, they are all-consumed by this racism, as their sole mission is to devour humans as we know them.
2)   These zombies are predominantly Eastern European, are female and/ or gay males. In this case, point A is remains largely relevant, and furthermore, jewelry demand will remain robust as looking fantastic will remain important. If they are going to kill, this group will want to do it with a certain degree of panache. They will appear much like the zombies in Michael Jackson's "Thriller" video. Tremendously mean, yet at the same time, flamboyantly dressed and incredibly gifted on the dance floor. In such an environment, gold demand should remain elevated.

So, if you are dying to be involved in the commodity complex, own oil over gold. There is tremendous relative value there and oil should outperform under various scenarios.

When all Hell breaks loose, another good stock to own is Oshkosh Corp (OSK:$41.02). This is a play on our zombie transport theme outlined above. 

We have discussed OSK in the past and have attached a corporate presentation below along with a video of their JLTV. OSK’s JLTV is part of a plan by the US DOD to phase out the poorly armored Humvee . OSK is a stock that should do relatively well when the world comes to an end.

Please remember to follow us on Twitter ( where we attempt to have some fun with the state of affairs out there.

Thank you for your time.

Wednesday, October 28, 2015

Vasco Data Security International (VDSI :$19.46) - A Great Stock in an Exciting Segment of the Market

Vasco Data Security International (VDSI: $19.46) is a standout name within the very attractive cyber security sector. We believe that now is an excellent entry point and that the stock is poised for significant upside.

Vasco operates in the cyber security market and is focused on providing authentication and digital signature solutions to financial institutions. This is a tremendously attractive industry, and by all indications, it should be into the foreseeable future. Please view a recent report on cybercrime done by PWC for a an overview of the underlying themes by clicking here.

It is worth noting that more than half of the top 100 global banks rely on VASCO solutions to enhance security, protect mobile applications, and meet regulatory requirements. VASCO also secures access to data and applications in the cloud, and provides tools for application developers to easily integrate security functions into their web-based and mobile applications. VASCO enables more than 10,000 customers in 100 countries to secure access, manage identities, verify transactions, and protect assets across financial, enterprise, E-commerce, government and healthcare markets. 

A detailed overview of the company can be found in its most recent corporate presentation. To view the presentation, please click here.

The stock has sold off lately, in sympathy with the cyber security space, and on the heels of “disappointing” Q2 2015 earnings (red “E” in chart).

VDSI vs. PureFunds ISE Cyber Security ETF (HACK:$26.71) – 1 Year (normalized)
Source: Verdmont Capital, Bloomberg

We believe that the recent selloff in cyber security stocks was a rational one. This segment of the market had become frothy on the heels of some high-profile cybercrime cases. So, we are not too concerned that the sector has taken a breather.

In terms of the earnings related selloff at the end of Q2, we believe that the market overreacted. The Q2 numbers were actually quite solid, with the company beating on both revenues and earnings. The market was disappointed with the fact that VDSI only affirmed full year guidance, as opposed to boosting it. In an overheated segment of the market, this was enough to send the stock considerably lower.

All of this has worked out in our favor, as we have not had a position in the stock. The weakness in VDSI, and the cyber security segment in general, has created a nice entry point.

The company just came out with Q3 numbers today. They beat on earnings and boosted guidance for the year. This is exactly the type of event we look for to wake the market up and reverse momentum to the upside.

The potential change in sentiment is complemented nicely by the chart, which has formed a base and has been trending higher.

VDSI – 1 Year
Source: Verdmont Capital, Bloomberg

When one looks deeper into the financial performance of the company, it is hard not to get excited about the name. The company is extremely profitable and has been growing at healthy clip.

Revenues – 10 Years (quarterly)
Source: Verdmont Capital, Bloomberg

Operating and Net Income – 10 Years (quarterly)
Source: Verdmont Capital, Bloomberg

EBITDA and Net Income Margin
Source: Verdmont Capital, Bloomberg

Return on Equity
Source: Verdmont Capital, Bloomberg

The company has no debt and a significant amount of cash on its balance sheet. VDSI currently has $184Mil in cash, which represents 24% of its market capitalization. With all of that cash on hand, and a significant amount of reoccurring revenue, the company could always look to initiate a dividend.   

Cash & Equivalents – 10 Years (quarterly)
Source: Verdmont Capital, Bloomberg

Current Market Capitalization, Cash, Debt and Enterprise Value
Source: Verdmont Capital, Bloomberg

VDSI’s strong balance sheet affords management a tremendous amount of flexibility. As mentioned, this could translate into the initiation of a dividend, or, the company could look to make additional bolt-on acquisitions. VDSI has a history of acquiring companies in an effort to improve its service offerings, which includes the recent acquisition of Silanis International for $85Mil. Silanis is an e-signature provider and its technology fits well with VDSI’s existing clientele. The Silanis acquisition is a textbook “buy vs. build” transaction, and in our opinion, a great example of a synergistic acquisition.

VDSI and Acquisition History – 10 Years
Source: Verdmont Capital, Bloomberg

VDSI is trading at a steep discount to aggregate analyst earnings estimates. Obviously, analyst estimates need to be taken with a grain of salt. That said, with a straightforward name like this, it signifies that we aren’t missing anything significant about the company’s future prospects. Additionally, we have found that when a company is trading at a steep discount to aggregate analyst price targets, it is often indicative of depressed sentiment and a good time to buy.

Aggregate Analyst 12M Price Target and Price Spread – 5 Years
Source: Verdmont Capital, Bloomberg

We also like the fact that the Chairman and Founder of VDSI, Ken Hunt, has such a large position in the company. He owns 23% of the shares outstanding, which is very significant for a company of this size. This serves to create an alignment of interests with shareholders, but it also signifies that the company has maintained its entrepreneurial heritage.  If the Founder of a successful company is still there, when he could have cashed out long ago, it indicates that there is still lots of upside in the business.

Ken Hunt, VDSI Chairman, Share Holdings – 15 Years
Source: Verdmont Capital, Bloomberg

Looking at VDSI’s current valuation, it becomes that much easier to pull the trigger. The company is trading at 10 year lows in terms of its absolute and relative earnings multiple. We find it hard to rationalize the fact that VDSI is trading at a discount to the overall market given the growth profile inherent in the cyber security business and the company’s stellar financial performance.

P/E, Forward 1Yr P/E, Relative P/E vs. the S&P 500 – 10 Years
Source: Verdmont Capital, Bloomberg

In summary, we believe that an investment in VDSI at current levels represents an outstanding risk/reward profile. The company’s underlying business is supported by strong secular tailwinds and it already has an extensive list of top-tier clients around the globe. VDSI’s financial performance has been spectacular and the company has a lot of flexibility to moving forward given the strength of its balance sheet. We do not believe that VDSI’s discounted trading multiples are justified.

Thursday, October 22, 2015

McDonalds (MCD:$110.67) - Where's the Beef, Son?

We have been reading some negative news about McDonald’s (MCD:$110.67) as of late. Really bad stuff, like the brand is dead, the menu is out of touch, the new CEO is failing to turn the company around, etc. This brought our attention to the name.

We like bad news when it is associated with mega brands, as the value of a brand is next to always underappreciated. A barrage of negative news, when associated with a quality brand, is often indicative of a nice trade shaping up.

McDonald’s beat this morning, which may suggest the company’s prospects are on the mend.

The chart also looks interesting, as the stock has just broken to new multi-year highs after being range bound for the past few years. Not only is the breakout of interest, it is hard to find quality stocks that have only been treading water, as the major indices have been on a tear.

MCD – 5 Years
Source: Verdmont Capital S.A., Bloomberg

MCD vs. the S&P 500 – 5 Years (normalized)
Source: Verdmont Capital S.A., Bloomberg

Unfortunately however, it appears as if the breakout, along with the hungry alligator formation vs. the S&P 500, is not enough to get long MCD. When one takes a look at the company’s recent financial performance, and reconciles those numbers against MCD’s current trading multiples, it becomes evident rather quickly, that there is no meat in this trade.

MCD’s Q3 earnings release from this morning leaves little to get excited about. Sure, they are a step in the right direction, but they ultimately represent a beat of very depressed expectations. Same store sales in the US improved, rising 0.9% YoY, but global sales were still down -6.5% YoY and net income was up a modest +3.7% YoY based on cost cutting.

These results suggest that the turnaround of MCD is still in its infancy stages. Looking at recent trends in growth, profitability and solvency, the numbers have all been moving in the wrong direction for some time and by a wide margin.

Q Rev Gth YoY% (orange), 5yr Avg Rev Gth YoY% (green) – 10 Years
Source: Verdmont Capital S.A., Bloomberg

Qtr EPS Gth YoY% (green), 5yr Avg Qtr EPS Gth YoY% (orange) – 10 Years
Source: Verdmont Capital S.A., Bloomberg

Return on Capital, Return on Equity – 10 Years
Source: Verdmont Capital S.A., Bloomberg

Debt-to-Assets, EBITDA-to-Interest Expense – 10 Years
Source: Verdmont Capital S.A., Bloomberg

The above metrics are of course backward looking, it is the change on the margin that matters. We fully understand this, and an earnings beat by a turnaround story, along with a nice chart as outlined above, typically signifies a great long opportunity.

That said, when we look at where McDonald’s is trading in terms of various multiples, it is not priced anything like a turnaround story. With multiples close to all-time highs, on both an absolute and relative basis, investors are not being compensated for the risk they are taking in assuming the company’s fortunes have changed.

MCD:  P/E, 1 Year Forward P/E, Relative P/E vs. S&P 500 – 10 Years
Source: Verdmont Capital S.A., Bloomberg

Although we are not buyers of McDonald’s at current levels, we believe shorting it outright is fraught with its own risks.

First and foremost, it is reckless to short a stock that just broke to new highs on an earnings beat, regardless of the underlying fundamentals. The technical breakout could be enough to keep the stock elevated for longer than expected. Ideally, to short it, you would like to see it fail to hold today gains, as it would represent a false breakout.

MCD – 5 Years
Source: Verdmont Capital S.A., Bloomberg

The MCD breakout coincides with a pretty significant short position. The short interest ratio for the stock (shares short/average daily volume) is at 10 year highs. This represents depressed sentiment, but more importantly, the earnings beat may have shorts looking to cover.

MCD: Short Interest Ratio, Short Interest, Volume – 10 Years
Source: Verdmont Capital S.A., Bloomberg

Additionally, only 30% of the analysts covering the stock have a “Buy” rating on the name. This is very low for well-known company with a decent dividend yield. Shorts could be exposed to a number of upgrades as analysts try to compensate for the fact that the share price is now trading through their aggregate 12 month forward price targets.

MCD: Aggregate Analyst Ratings, 12 Month Price Target and Target-Price Spread – 5 Years
Source: Verdmont Capital S.A., Bloomberg

In summary, we had a look at McDonalds today, thinking that the breakout on the earnings beat could represent a decent trade. The stock has digested a lot of negative news associated with declining profitability, increased competition and uncertainty around its corporate strategy. Looking at the company’s trading multiples, we just don’t believe that MCD offers a good risk/reward at current levels. Once the momentum associated with the technical breakout takes a breather, the stock could represent a nice short.

Tuesday, October 13, 2015

Thoughts on the US Dollar

The US Dollar holds the key to so many markets and sectors. There are many eggheads trying to figure out where it is going to go.

Let’s consider the obvious.

If the global economy improves, which a strong USD would have to be a part of, then interest rates go up. If interest rates go up, this will begin in the US as rates are the most out of whack there and set global policy. As rates rise, this will boost the US Dollar given the relative yield advantage.

If things get worse, the US dollar goes up, as emerging markets suffer and the market moves to the US for safety and related exposure to US assets like Treasuries.

Sure, the US dollar has had a great run and the above logic has been discounted to a certain degree. That said, there are still a lot of dollar bears out there and the US dollar has only recovered from very oversold levels on a long term basis.

US Dollar – 5 Years

US Dollar – 30 Years

The above analysis will not win any prizes for being overly clever, well-written, or well-supported by 3 trillion graphs – but, does it not make complete sense?

If you see it differently, please call us.

Monday, September 21, 2015

REITS - Horrible Fundamentals, But a Good Trade on the Back of the Fed Announcement - HTA:$24.50, EQR:$72.70

REITS are disaster waiting to happen… arguably however, the timing of said disaster has been pushed back.

The Fed left their policy rate at nil last week, which caught many by surprise. Clearly, they are concerned about what a rate hike would do to the global economy. The fact that a 25bps hike is such a big deal, lends little confidence that the market is on solid footing.

That said, there should be some follow through on the Fed’s move, or lack thereof, as it surprised a big chunk of the market.

You could buy Healthcare Trust of America (HTA:$24.50) for the bounce, as you can see it had been breaking down in anticipation of rising rates. Nice technical stop there as well, if you have it at around $23/sh. This is slightly below the point where the stock broke down and is in line with recent lows.

HTA – 3 Years

Equity Residential (EQR:$72.70) is also a good candidate to play a potential bounce. Have a stop in the $68/sh range. A break below support of ~$70/sh would suggest that our call for a short term rally was a dud.

EQR – 3 Years

Wednesday, September 2, 2015

Alternative Investment Funds - Proving Their Mettle - GAM Diversity and GAM Trading Fund - Available Through Verdmont Capital

We currently employ a healthy allocation to alternative investment funds in our discretionary investment accounts.

The recent sell off in the broad equity market has highlighted the importance of utilizing alternative investments in a diversified investment portfolio. With both the equity and fixed income markets priced close to perfection, it pays to have another asset class in the mix.

We are at a unique point in history where both the equity and fixed income markets have become increasingly correlated. When interest rates ultimately normalize, by central bank design or via a riot in the bond market, a scenario in which both bonds and stocks correct in unison could easily play out. Against this backdrop, the importance of maintaining an allocation to alternative investments has never been more relevant.

Rather than allocating funds to one individual highflying hedge fund, we choose to invest in diversified multi-manager funds. Sure, this approach may not be as “sexy” as some other options, but when the markets take a hit, you want reliability, not flash.

We have had a longstanding relationship with GAM Fund Management, which has been overseeing alternative investment strategies since 1983. The two funds we maintain the largest allocation towards are the GAM Diversity and the GAM Trading Fund. The most recent fact sheets for these funds can be accessed by clicking on the following links:

Alternative investment funds as a whole had been underperforming the highflying equity markets over the past couple of years. This had been used by various pundits, who often sell traditional mutual funds, to suggest that hedge funds as an asset class has lost their luster. We took a more positive view of the underperformance, thinking that it had more to do with a measured and disciplined investment approach, as opposed to a failed investment model. The rapid pace of equity performance had always seemed somewhat engineered to us, so we were happy to sit in alternative investments which were merely trudging along.

That patience has been rewarded given the steep correction in global equity markets over the past 3 months. Our alternative investment funds have done relatively well on the downside, which was ultimately our objective when allocating cash towards them.

GAM Diversity Fund vs. the MSCI World Index – 1 Year (normalized)
Source: Verdmont Capital S.A., Bloomberg

GAM Trading Fund vs. the MSCI World Index – 1 Year (normalized)
Source: Verdmont Capital S.A., Bloomberg

We highlight this strong relative performance of the GAM Funds because we want our clients to know that there are various investment alternatives available to them. We have access to various GAM Funds that might prove a good fit for a given investor’s current objectives. Positions in these funds can be obtained via enrollment in our discretionary investment program, or, as individual holdings within existing trading accounts.

The highlights of the GAM Diversity and GAM Trading Funds as we see them are:

  • GAM has been managing alternative investments since 1983, has significant assets under management and has weathered many a storm.
  • Both the GAM Diversity and GAM Trading Funds have been tested by numerous market cycles and events.
  • These funds have a low correlation to the traditional equity and fixed income markets.
  • They are diversified by region, strategy and underlying hedge fund manager.
  • Their size enables them to access well-known and highly regarded hedge fund managers.
  • The fee structure of these funds is amongst the most competitive in the industry.
  • GAM offers a very high level of transparency through to the underlying holdings.
  • GAM monitors the performance of the underlying managers with an eye on consistency of strategy and liquidity.
  • These funds have the vast majority of their assets managed on a segregated basis with the managers they invest in. This leads to a very high level of liquidity. 
Please contact your Verdmont representative for further information about these GAM Funds, or Verdmont Capital’s managed accounts program.

***Also, please remember to follow us on Twitter @VerdmontCapital to get a glimpse of our activities and views.***