Verdmont Capital

Monday, June 29, 2015

Commodities - Back to the Future - For Now

We have been overweighting commodities in our managed accounts, to the expense of equities. 

The thought process is pretty simple - one asset class is priced for perfection and the other is priced realistically. If strength in the equity market over the past 5 years is legit, then global growth and commodities will have to follow stocks higher. If the rally has been artificial, commodities have already priced in slower growth, and will outperform on the downside.

MSCI (Green), Chinese H Shares (Purple), Bonds (Red), Commodities (White) – 5 Years
Source: Verdmont Capital S.A., Bloomberg

If you oversee a mandate that requires you to be fully invested, then commodities make a lot of sense in here. Our least favorite segment is the base metal complex, which we believe is still lofty, particularly copper. Focus on agribusiness, energy infrastructure and gold plays.

Check out wheat and corn over the past week – no concerns about Greece or overstretched equity markets here.

Wheat 3M Future – 1 Year
Source: Verdmont Capital S.A., Bloomberg

Corn 3M Future – 1 Year
Source: Verdmont Capital S.A., Bloomberg

Wednesday, June 17, 2015

AnalytixInsight (ALY.V:$0.34) - Perking Up

One of our preferred names in the Canadian small cap technology sector, AnalytixInsight (ALY.V:$0.35), has been moving higher on decent volume.

For those speculative investors who don't have a position in the company, now might be a good time to initiate one.

ALY.V – 1 Year
Source: Verdmont Capital S.A., Bloomberg

We have also seen market depth improve, which is a good sign for a stock that has been relatively sleepy as of late.

ALY.V - Market Depth
 Source: Verdmont Capital S.A., Bloomberg

There are many standout elements to AnalytixInsight as we see it. A snapshot of these are:

 A great management team with a track record of adding value and putting shareholder interests first.

 ALY.V is a big data play, in that it takes large amounts of data and creates interpretable and actionable narratives.

 In addition to big data, ALY.V is a play on many attractive segments of the technology sector, which include artificial intelligence, cloud based computing, smart phones and the internet of things.

  AnalytixInsight offerings are applicable across a diverse set of attractive and growing industries, which include finance, healthcare, online retail and biotech.

 The company currently has Samsung, Dow Jones and Yahoo Finance as clients – to name a few.

  Revenues in this segment of the market tend to be recurring.

 Management has provided guidance to the market of $5Mil in revenues for 2015.

 ALY.V has only 38Mil shares outstanding and a market cap of $13Mil.

 The company recently financed at $0.32/share, and all other raises were done higher than here (no cheap wall of stock to plow through).

 AnalytixInsight has $1.8Mil in cash, which is more than enough to fund its operations at the present time (limited financing risk).

 The current market cap of C$13Mil is very modest in light of the fact the company has forecasted revenues of $5Mil in 2015.

 We estimate that ALY.V will have an EBITDA margin of 40 – 50%, which means the stock currently trades at an EBITDA multiple of 6.5X and an EV multiple of 5.5X. Multiples for high growth, high margin, technology companies should be between 10X and 15X in our opinion.

We believe that AnalytixInsight will continue to execute on its business plan and the company is just getting started.

We have found that some of the greatest returns in the technology sector are witnessed when a company goes from a "show me" stock, to one where the market begins to discount future profitability. We believe ALY.V is on the cusp of going from a conceptual play, to one backed by solid revenue and profitability.

If the market begins to wake up to ALY.V, we see a share price north of $0.50/sh based on an EBITDA multiple of 10X. We are of the mindset that this is a modest target. We are not factoring in upside outside of the $5Mil revenue guidance provided by management, we are not using valuation per user metrics, we are employing an EBITDA margin at the low end of the range and our EBITDA multiple of 10X is relatively low. 

We believe that ALY.V has a great risk/reward profile given the company's current share price of $0.34/sh.

Remember, as with all early stage small cap investments, ALY.V is highly speculative and all of the usual disclaimers apply. Do your own due diligence on the company and if you are not prepared to lose your entire investment, you should not be looking at names like this.There was a point in time when this was referred to as "commonsense."

Wednesday, June 10, 2015

Verdmont Capital - Hug an Analyst Day - VALE : $6.80 vs. AAPL : $128.88

In conjunction with our VALE trade idea, we thought it worthwhile to highlight one of the key characteristics that differentiates a hated stock versus a loved one.

Before we start, we want to talk about investment analysts, as we believe they deserve a hug.

We have always been amazed that analysts, who are generally a well-studied and intelligent group of guys, would devote their lives to be contrarian indicators. Long trips on the tube each way, from an apartment the size of a postage stamp in Hoboken or Barrie Ontario, crazy hours and shitty bonuses compared to the investment banking guys who are pissed as farts 300 days out of the year.

Adding insult to injury for analysts, is that the regulators have prohibited them from investing in the names that they cover. Think about that. They spend their lives becoming specialists in a given area and they are not even allowed to invest in their areas of expertise. That completely blows.

Anyway, we are going to stick up for analysts a bit here, as the author of this note has been called one at various times during his career.

We believe that the main problem analysts face is touched on above. The fact that the regulators will not let them invest in the names that they cover makes their job an intellectual exercise instead of an activity to profit from. If they had their own money in the companies that they covered, they would arguably be a lot more discerning as they combed through financials and interpreted management guidance. This better serves both them and the average investor over the long run.

It has always seemed counterintuitive to us, that analysts are telling people to buy and sell things that they have no interest in. In Regulator Land, there is this crazy logic that this somehow better serves the investment public. To the contrary, we believe it creates an army of robots that fuels group think. As an investor, would you not want the guy recommending a stock to have some skin in the game? Does that alignment of interests not serve the greater good far more than the current system where analysts are pawns for their investment banking departments? Newsflash!: Yes, that is what goes on, and that is what the problem is.

So, hug an analyst today, they deserve one. Just like all of us investment hacks, they are only trying to make a living. Remember, although they work on Wall or Bay Street, they are not clinking glasses at trendy tapas bars on a bloated company expense accounts. They are in their cubicles, pumping out reports to ensure the investment banking guys can afford those Italian suits and pointy dress shoes.

The game is what it is, so we have to play it. When looking at well-covered large cap stocks, we believe that aggregate analyst earnings estimates and price targets are often great contrarian indicators.  

A great example of this popped up when we were looking at our VALE trade idea from today. Looking at VALE, compared to something like AAPL, is a shining example of what an over loved versus a hated stock looks like.

VALE – Aggregate Analyst Recommendations and 12 Month Forward Price Target
Source: Verdmont Capital S.A., Bloomberg

AAPL – Aggregate Analyst Recommendations and 12 Month Forward Price Target
Source: Verdmont Capital S.A., Bloomberg

Note how only 12% of analysts covering VALE have BUY recommendations on the stock, whereas AAPL has buy recommendations of over 80%.

History suggests, that when so few analysts like a given name, it often means that sentiment has swung too far the other way. It is worth nothing, that these ratings are not made in vacuum. They serve to swing a stock in either direction. When a company hits hard times, it is often accompanied by a wave analyst downgrades. This serves to fuel the selloff of a given stock as these downgrades work their way through to a bank’s trade desk and the large money managers that rely on analyst guidance. The flipside of this is also true, which is a bullish factor to look at when analyzing VALE. Slight improvements in a company’s operating environment, however bad it remains, can lead to upgrades in a stock. These upgrades often signify a shift in momentum.

The above graphs also illustrate that aggregate analyst 12 month forward price targets vs. the current share price, are a good indicator of sentiment.  Analysts currently have a 12 month price target on VALE of only $7.21/share, when the share price is at $6.81/share today. The difference between the two is razor thin, especially when compared to an over loved stock like AAPL (and most stocks at the present time).

These modest price targets often mean that upgrades are due to unfold. If one analyst boosts their target, the others typically follow suit in short order. Their motivation for this is twofold in our opinion. Firstly, they don’t want to be left in the dust by other analysts if the stock goes higher. Secondly, a given bank will not attract a lot of investment banking business if their analysts are forecasting that a potential clients stock is going to go down. If a potential investment banking client is looking to raise money, will they send their business to an outfit that thinks their stock is overvalued?

In summary, go and give your analyst a hug. More importantly, when analyzing stock sentiment, make sure to have a look at analyst behavior.

VALE : $6.43 - Nice Hail Mary Stock for a Trade

We have been following VALE, thinking it is a great Hail Mary stock.  

There is absolutely no reason in the world to own it and everyone hates it. Whether it is Brazil instability, Iron Ore, the commodity trade, etc., you can find so many reasons not to own it. The stock is trading like the commodity bull market of the early 2000’s never happened, or as if China has fallen into a sinkhole.

VALE – 10 Years
Source: Verdmont Capital S.A., Bloomberg

We remember the same feeling watching Alcoa, back in 2012 / 2013. There was no reason to own it. The global economy stunk, aluminum market was plagued by overcapacity, airlines were on their knees, the US consumer was dead, etc. etc. The stock came out of nowhere to post massive gains.

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

You had some positive news today that has the stock poised to open higher. .This news is coupled with the fact that spreads on VALE’s debt have been coming in. When stocks are oversold, the credit markets are typically good at sniffing out bottoms.

A solid catalyst has yet to emerge for VALE, but they inevitably do. At that point, the stock will shoot up 40%.  If you are feeling ballsy, buy VALE with a stop at yesterdays close $6.43/share. Tightening spreads and positive news against very depressed sentiment, could be the beginning of a shift in momentum. If the stock fails to hold todays pop, it means momentum has yet to swing in favor of a long position.

The main risk to trading VALE here, is that the US dollar continues to move higher, which would pinch the commodity trade. VALE would also not be immune to a stiff selloff in the broad equity market. That said, unlike other equities, VALE has digested a barrage of negative news, so it isn’t as stretched as some segments of the market.

VALE – 1 Year
Source: Verdmont Capital S.A., Bloomberg

Tuesday, June 9, 2015

Canadian Rail Stocks - Last Stop! CNR.T and CP.T are Great Short / Pair Trade Candidates

Canadian rail stocks are finally coming back down to earth. 

It has been an amazing run, especially in light of recent commodity price weakness. Rail stocks are still pretty close to all-time highs, which seems stretched. Valuations are still very high, so not much of a cushion there.

CNR.T – 10 Years

CP.T – 10 Years

CNR.T Valuations – 20 Years

CP.T Valuations – 15 Years

Keep these rail stocks on your radar screen as outright short candidates or as the denominator in a pair trade. Rail stocks vs. the Canadian energy names would represent a good trade. One sector is still overpriced and close to all-time highs, whereas the other has already discounted a barrage of negative news.

Friday, June 5, 2015

Verdmont Capital: Preferred Canadian Small Cap Tech Names : Pivot Technologies (PTG.V:C$0.54) is a Standout

The Canadian Small Cap Tech Market / Favored Companies

We have increased our exposure to various tech companies in Canada over the past year, investing in both private and public companies.

We are of the opinion that we are experiencing a mini-boom in the Canadian tech space. You have some super talented management teams executing on what we believe are very novel and timely business models. Although small cap tech stocks will always be high risk investments, we believe there is a lot of value to found in a multitude of Canadian stocks.

The inherent value proposition is spawned by a chronic under appreciation of the Canadian technology sector to the benefit of its US counterparts. This is despite the fact that the majority of Canadian tech companies have extensive, and in some cases exclusive, operations in the States. Said differently, many stocks listed in Canada are essentially US (or global) tech companies, but don’t enjoy the heightened degree of investment flows, coverage and general interest associated with the names listed south of the border.

Additionally, we believe that the carnage associated with junior resource sector sell-off in the Great White North, has led to wholesale weakness in Canadian small cap stocks. Speculators in Canada were first crushed by the metals correction, and then they took it on the chin when the oil complex unexpectedly collapsed. This has sapped a lot of risk capital and investment banking dollars out of the space and put many speculators on their heels.

We believe that the relative performance of Canadian small cap stocks versus US small cap stocks serves to underscore our view. We like to call this type of chart pattern a “hungry alligator.” If you run into a hungry alligator while skinny dipping, it is a bad thing, as you might lose your little wiener. However, when looking for investments, it typically represents a dislocation in the market.

iShares S&P/TSX Small Cap ETF vs. iShares Core S&P Small Cap ETF – 5 Years
Source: Verdmont Capital S.A., Bloomberg

Below is a list of some of the tech companies that we have an interest in. Each of the names mentioned offer differing exposure to various investment themes, but they all share some important characteristics. Most importantly, their business models are anchored by what we believe are disruptive technologies in high growth industries. The management teams of these companies also have what we believe is the know-how and relevant experience to make their businesses profitable over the long term.

Here is a list of the Canadian small cap tech names we have an interest in at the present time, along with the themes they offer exposure to:

- AnalytixInsight (ALY.V:$0.30) : big data, internet of things, cloud computing, artificial intelligence : 

- Slyce (SLC.V:$0.52) : visual search technology, internet of things, online retailing : 

- Martello Technologies (Private Co.) : cloud based solutions, communications software : 

- Bitgold (XAU.V:$4.15) : web-based payment processing, war on cash, digital currencies : 

- Vogogo (VGO.V:$2.35) : digital currencies, web-based payment processing, cyber security : 

- Graphene 3D Lab (GGG.V:$0.82) : 3D printing, enhanced materials : 

- Urban Communications (UBN.V:$0.11) : broadband technology, internet television : 

- Trace (Private Co.) : drones, visual intelligence, internet television : 

Pivot Technology Solutions (PTG.V:$0.54)

We were recently combing around looking for new ideas in the tech space and also trying to ascertain what sort of value there is in the market.

As part of this process, we did various screens on the S&P/TSX Venture index, with a focus on those names in the technology sector. Pivot Technology Solutions immediately jumped out at us. As we looked at the numbers we asked ourselves, “what is this company with C$1.5 billion in revenue and why the heck does it only have a market cap C$90 million?”

Technology Companies in the S&P/TSX Venture Index
Source: Verdmont Capital S.A., Bloomberg

The more we dove into the Pivot story, the more attractive it became. These are typically the stories that work out well.

In short, Pivot Technology Solutions is a value-added reseller that was formed through the acquisition of various companies focused on server hardware and enterprise storage. The company is positioned to benefit from the evolution in mobile, enterprise computing, big data and a switch to cloud based business models.

Doing our own legwork, in conjunction with an excellent report from Cantor Fitzgerald in Canada, we discovered some very attractive elements to the Pivot Technologies story. A brief snapshot of some of the highlights are:

- Pivot was founded by John Sculley, the former CEO at Apple and prior President of PepsiCo. He is the current Chairman and a major shareholder.

- The company has revenues of $1.5Bil and close to $40Mil in EBITDA and a market cap of only $90Mil.

- Pivot has close to 2,000 underlying customers, many of those are well-known fortune 100 companies.

- The company has a low margin business, but its profitability is stable and it is expected to have very low ongoing capex requirements.

- PTG.V is expected to pay a dividend of $.03 per share beginning in August 2015, which equates to a current yield of ~5.5% per annum.

- The company has initiated a normal course issuer bid (or share buyback program), of up to 10% of the company’s public float.

- Pivot currently trades at an EV/EBITDA of 5.1X and P/E of 39X. This is quite conservative to its peer group based on our calculations.

We believe Pivot technologies is a standout story. It is rare to find a company of this caliber employing a meager $90 million market cap. There are many tech companies in Canada with this type of valuation that have yet to make a dime. The company is generating a healthy stream of cash flow which is being utilized to the benefit of shareholders in the form of an excellent dividend yield and share buyback program.

Please note, with all of the names mentioned above, they are high risk investments. The majority of early stage technology companies fail and the names mentioned above should be looked at in that light. We only provided a brief summary of the companies above. If you are looking to invest, you need to do a significant amount of your own due diligence.

If you want more information on the above names, including Pivot Technology Solutions, please contact your Verdmont Representative.

Tuesday, June 2, 2015

Commodities Comment : The S&P 500 is Stretched Relative to Oil and Commodities

Interesting report on oil from Barry Bannister with Stifel Nicolaus. We have followed Barry for years and he is far often more right than wrong.

As 2015 unfolds, we have become increasingly aware that the disparity between oil/commodities and the general stock market is unsustainable. The Stifel report lends support to that view. Either the stock market is sniffing out future economic growth, which translates into stronger prospects for oil and commodities, or, stocks are artificially inflated and commodities represent excellent relatively value in the event of a correction.

Said differently, the stock market is pricing in a goldilocks scenario for the global economy and financial system, whereas the commodity market has digested a barrage of negative news and is already discounting slower economic growth. 

Looking at a chart of US equities vs. a basket of commodities serves to underscore this view.

S&P 500 vs. PowerShares DB Commodity Index – 10 Years (normalized)
Source: Verdmont Capital, S.A., Bloomberg

In our managed investment accounts, we have been trimming equity exposure to the benefit of commodity themed investments.

This is more of a tactical move, as we are not necessarily rosy about raw demand for commodities into perpetuity. The easy days for the commodity trade are arguably over, as the US dollar will remain relatively well bid, exponential Chinese growth is less of a certainty and the oil supply response will have far reaching reverberations. 

That said, there will be pockets of strength, especially relative strength, during a commodity market that will probably prove to be range bound over the long term.