Michael Campbell: My guest today is Ryan Irvine of Keystone Small Cap Research Services that looks for companies that may not be large enough at this point to be owned by an insurance company, a major mutual fund or a pension fund that needs buy millions of shares. Ryan looks for companies that aren’t there yet. They maybe on somebody else’s radar screen but they haven’t been initiated as a big buy for some of these major pools of capital. If they meet his criterion of cash flow and profitability and he doesn’t have to pay too much for them then the Keystone small cap research service is interested.
Ryan, lets start with your overall view of the market?
Ryan Irvine: We really fundamentally look at the broader market and for the last year I’d say, since a year ago September, we have really found the markets were not attractive at any given point. We’ve think they’ve been relatively fairly priced. So if we look broadly we haven’t really been buying the market but we’ve been buying some select situations within the markets. Geographical areas such as within China where we see some growth, we’ve bought in some. Specific gold stocks, some specific tech stocks and some other stocks that we see specific value in. In a lot of markets it hasn’t been really cheap.
Michael: I think it was January of 09 and you were saying to us that you really thought it would be a stock picker’s market going forward. I think the market’s proven your anticipation to be absolutely correct.
Ryan: We still feel it’s really a stock picker’s market right now. And that does excite because exactly what we do is pick stocks. You really could have, literally after the March lows of 2009 you could have literally thrown a dart at the dart board and done pretty well. It when our job really becomes interesting is where we think the markets will be flat and in that type of environment what we endeavor to do is beat the market. Its a time where we can prove our worth to our clients over time and we think we’ve done that this last year and we’ll continue to do it.
Michael: I remember a stock that you’ve been recommending for quite a while on a show called Cash Store Australia Holdings Inc. on the TSX.
Ryan: Yes the specific companies are the Cash Store and Cash Store Australia. We had bought both of them just last summer this time. A good way to buy the Cash Store Australia too was to buy the Cash Store because of the fact that it owns 20% of that company. We like both companies still. To start with Cash Store Australia is the smaller one which has about 61 stores in Australia. The Cash Store is a pay day Loan Company and its Symbol is AUC on the TSX venture. It is a company that we bought at a $1:25. Three months ago sold it at $3.75. It now trades around $2.80 and right now we have a hold on it. Its parent company which we ought last year just around $7 is the Cash Store Financial symbol CSS on the TSX. It is a company that we sold half our positions at around $18 and now it’s trailed down to the $16, 16.50 range. We still like it at these levels, it’s trading at reasonable PE, good solid cash in the bank and we like the value there so we’d hold that.
Michael: One of the things I like there is that sometimes you’ll say hold this stock, other times you’ll say sell half of your stock. The Cash Store is a great example where you had more than doubled the money but you sold half of it to protect your original capital. I really, really encourage people to take what I call partial decisions like that. Don’t get frozen like a dear in the head lights saying I’m all in or all out as I think that’s a huge mistake that a lot of people make. And I hope people are listening very clearly and keep in mind when I talk about these mistakes is because I’ve made them myself so regularly. It’s been drilled into me and I just find when you start making what I call partial decisions you go okay the stock still meets my criteria, I’ve got a 1000 shares maybe I’ll sell 500. That way I’ve still got a foot in the water, I still like the company but I’ve got capital out that I can deploy else where. Your service obviously does that and I really like that approach.
Ryan: The math is simple on that. We had a stock that doubled so we sold half our position to take away all of the market risk to our original capital. Yet we can still participate in the upside going forward because we believe the company still has good values and growth for the future. We just think the Cash Store is trading at a reasonable price in the market right now and it’s fairly valued at this time.
Michael: Ryan do you have other words for us?
Ryan: Yes, a company that was part of our portfolio at the world outlet conference and a company we recommended about three months ago on the show is a gold producer named Orvana Minerals Corp it’s ORV on the TSX. the company was part of our recommended portfolio at the world outlet conference when it traded around a $1:00. We’d made a timely buy on this at 52 cents for our clients back in 2008 and we’re happy to report that on Friday the stock closed above $1.90. It is a junior Gold producer that operates in three regions, one in Bolivia, one in Spain which is its main asset and another project in Michigan. Now Orvana for us is a bit of a departure in the junior mining business having built its business and portfolio through internally generated cash well not by constantly tapping the market with shares and diluting shareholder value. We do not like companies that build themselves that way. Since 2002, this company has operated a low cost gold mine in Bolivia which given the geopolitical environment there is no small feat in itself.
Subsequently the company has used this strong cash flow base where it generated $150 million in cash to buy a gold mine in Spain at a very opportune time following the 2008 credit crash. This mine in Spain is now set to produce around 100,000 ounces of gold in 2011 and will pay back the purchase of that asset in just over two years, which is a very effective payback period. Most importantly the company has now transformed itself from a single mine producer in a poor geopolitical region into a multi-mine producer in more stable political arenas, in just a over years timeframe. Shareholders are beginning to reap these rewards in the market and the share price has nearly doubled this year. In the calendar 2011 we think the company will earn between 30 and 40 cents, a large earnings range but it’s due to the fact that two new mines are coming online during the year and there is a lot if moving parts. The company has been part of our fall 2011 junior gold and metal survey of all of producers which looks at over a thousand mining companies based on production growth, asset based revenue earnings growth and comparative evaluations. We run the numbers on about 50 producers and rank the top five to ten recommendations and we can tell you that Orvana, despite its rise, still ranks in our top five in terms of evaluation. So it’s a good company, despite its rise and we still like it here. We are not taking any profits at this point as we think it’s still cheap.
Michael: Where do we get a hold of that Junior Gold and Metal Survey. Do we go to www.keystocks.com?
Ryan: Yes, it will be released in about 10 days as we’re just finishing it up. If you go our website all of our current clients will get access to that in about ten days and there is actually a special offer for it there for new customers.
Michael: Do you have another one for us?
Ryan: There is a value growth stock that we are looking at right now. It’s a company that we’ve mentioned once in the past when it was at higher levels than it is now. It’s come down now to price point where we think it’s very much on sale. Zuni Holdings Inc. symbol ZUN on the TSX Venture. It’s a China based athletic apparel manufacturer that basically makes athletic shoes and casual leather footware. What we like about the company is the numbers. This company trades at a $1.90 and it will post annual revenues of $150 million and we believe it will earn around 40 cents per share this year. Now that it’s trading at a $1:80, will earn 40 cents per share that’s under five times earnings. On top of that this company has a pristine balance sheet. There is over a $1:00 per share in cash which translates to about $58 million. It has no debt, so if we strip out that cash, that $1:00 per share, you’re actually paying about 90 cents for the 40 cents in earnings that we believe this company will make this year.
This company fits what we call our classic investment portfolio. No debt is one thing, a history of growing earnings, revenue and a strong cash position. It does not need to go to the market deluding shareholders; it’s fully funded for growth initiatives and ready for opportune acquisition. It’s selling into a growing market in China, it’s basically a play on the domestic economy there and it’s trading at low valuations relative to its peers. Again, after saying all of this this does not guarantee the stock will be a successful investment but for us we believe is the more companies you add to your portfolio with a similar profile the more successful you will be over time. Conversely the more companies you add with a opposite profile to this loaded with debt, not good earnings relative to its peers those type of positions are the least successful you’ll be over time so we’ll add this as part of our diversified growth stock portfolio.
Michael: How do you factor in geographical risks because certainly in the case of the mining Bolivia isn’t considered one of the top places to have my money.
Ryan: In a specific case with a company like Orvana Minerals Corp we were originally very cautious specifically because it was operating in Bolivia. We wouldn’t think it would have been a good choice except it had 90 cents per share in cash and we could buy it at 50 cents. It actually was trading at a discount to its cash value. That cash was actually not held in Bolivia either it was held in a North American bank account. If that cash had been in Bolivia it wouldn’t have been a situation that we’d invest in. Now their main asset is now in Spain which is a mining friendly district an area of the world that we’re confident investing in a mine. About 85% of production will now come from Spain and we believe that it is a safe region to be in. As far as your broader question, diversifying geo-politically across the world is definitely something that we always suggest within a diversified portfolio. So when we mention one company like Orvana or one company like ZUN, that cannot make up the sole position within your gross stock portfolio, they have to be intermingled with 8 to 12 other companies that operate in all regions of the world. We still have a bias towards Canada and safer regions like that but right now we feel to get extreme growth or good growth we’re looking to other areas of the world.
Michael: I’m personally more comfortable with companies who’ve got a cash position, companies who are not going to the credit markets all the time.
Ryan: I agree completely. We always look for solid net cash. They can have a good cash position but if they’ve got a lot of debt there it’s something that doesn’t attract us as much. We are looking at companies with that good cash position and limited to no debt as well so not only can they weather a storm but they can take advantage of like Orvana did. Orvana had that solid cash position and when the credit siezed up there was no money to fund that mine in Spain and they were in ideal position to buy it. Now they’re going to earn the purchase price back in just over two years which is a very fast pay back period.
Michael: It’s a time to be nimble on our feet and be disciplined with companies financial foundation going forward. Ryan I really appreciate you’re taking the time and my apologies for keeping you a bit longer.
Ryan: No problem love to be here and if anybody needs to get a hold of us it’s 1-888-27-STOCK across the country or www.keystocks.com. You can also or go to our income stock research, it’s www.incomestockreport.com.