Mike Campbell asked me, as an Inside Edge guest columnist, to write a short piece about the “most interesting places to invest for the remainder of 2019”.  As you may know, HRA confines itself to a specific, and often benighted, market sector – the junior resource space – so I’ll answer the question as it applies to that sector.

Of course, we can’t ignore the impact of the broader economy and market on the resource space.  How the world’s major markets trade, and what happens in the US, Chinese and world economy has a huge impact on investor sentiment and more directly on metal prices.  Gradual reductions in economic growth rates in most of the main trading blocks since the middle of 2018 has been weighing on base metals.  Base metals are “pro cyclical’ meaning both metal prices and demand will wax and wane with perceptions about future growth rates.

Currently, the US is putting up the best growth numbers, but the Eurozone and China, particularly, are more important by far when it comes to base metal demand.  The US-China trade negotiations hang over all of this.  There has already been some impact on Chinese exports, but traders are more worried about future effects if the talks fall apart.  Trump has just increased the amount of Chinese imports to the US under 25% tariff to $200 billion, and is threatening to move that figure to $525 billion

Incredibly, this situation is not impacting Wall St, thanks to “it’s all good” tweets by Trump, who clearly doesn’t understand how tariffs work.  It may be a tempest in a tea pot, but I assume the fight will drag on and that the US may impose the 25% on everything, coming from China.  China’s main stock market, and base metals, aren’t taking the situation so lightly.

There will be a trade deal at some point, but I don’t know how long tariffs will last so I’ll assume that will be part of the backdrop.   Tariffs are borne by consumers, and if the US does move to 25% on all Chinese imports, we’ll see margins and profits squeezed hard in the US, and more price increases from importers that can’t “eat” a tariff that large.  Worse, if Trump decides tariffs are “working” (his MAGA base is cheering them) there’s a real risk he’ll lengthen the list of countries he’s fighting with.  This late into an economic cycle, that won’t end well unless this mess is solved fast. Remember, 40% of Fortune 500 profits come from exports. It’s not small.

The chart above is a recent version of the NY Fed Recession Probability Index.  Currently, it estimates about a 25% chance of a US recession in the next 12 months (I’m not showing one for Canada but, if they go, we go).  Few indexes successfully predict recessions, and none of them do very far in the future. 25% is a pretty high reading, a level that has rarely been a “false positive” in the past.  You’d better believe the Fed knows this. There’s a reason they keep mulling over rate cuts when rates are already so low, and the US economy seems to be doing so great.  And this reading hasn’t accounted for a trade war yet. If Trump follows through, this reading is going higher.

With that backdrop, a trade war and high odds of recession in the US in the next 12 months, its tough for me to get excited about base metals, which are pro-cyclical.  Traders sell base metals if they smell a recession.  That doesn’t mean you should ignore them though. Most base metal resource pipelines are weak. Miners need new deposits. High quality base-metals developers will get bought, but timelines might be longer. They are a good place to be but should be stink bid, not bid, unless this trade war gets fixed fast.

Markets tend to look best and traders, especially retail, are at their bravest just before things turn ugly. Right now, bullish sentiment is very high. That’s a negative for gold unless and until the big markets roll over.  Since I think that will happen, I expect the gold price and gold sector will improve later in the year. It’s ugly right now, which means there are some great gold developers on sale. Those with high margin resources will also get bought and gold stocks are one of the few counter-cycle sectors so there’s an insurance argument to me made for them.  Finally, high quality explorers with new discoveries are rare. That means they are also always in demand.  Keep a lookout for new discovery stories. The good ones can weather even terrible markets.  HRA focuses all above in the resource sector.  Good luck and good trading.

While we research and position clients for many economic themes, one we continue to see playing a pivotal long-term role in investor portfolios is the escalating cost of healthcare. The U.S. healthcare system has 11,000 new people qualifying for Medicare every day for the next 19 years. The reality of this demographic cost burden is forcing the U.S. to find and embrace more cost-effective value based health care solutions.

Over the past several years, we have conducted significant research into unique healthcare equipment and service providers. Our goal has been to uncover companies that have been and will continue to benefit from this powerful trend. In the past 2-years we have selectively recommended three stocks. The first was Nasdaq-listed home healthcare provider, Almost Family, Inc. (AFAM:NASDAQ). KeyStone recommended the stock at $36.91. Within a year, Almost Family was acquired at a 67% premium by LHC Group, Inc. (LHCG:NASDAQ).

Our next recommendation, via our discovery research in the U.S. was a smaller, profitable and growing business Zynex Inc. (ZYXI:NASDAQ). Zynex is a developer and marketer of medical equipment specializing in doctor prescribed electro-therapy devices. At the time (late 2017/early 2018), the stock traded at $3.00 and on the OTCQX market.

Since this time, the company has posted two consecutive years of record revenues and profitability, graduated to the Nasdaq, paid us a solid dividend, and its shares have jumped to close in the $7.15 range, up 138%.

While the stock is no longer cheap, the growth path ahead for the business remains robust. In 2018, Zynex added approximately four new sales reps per month, mostly in the last quarter of the year. In 2019, the company is on track to add 10 new reps every month. That pace should have the company boasting 250 sales reps by the end of 2019, with 100 reps being independent pre-2018 sales reps and 150 being new direct sales reps, all added in 2018 and 2019. The company targets roughly $1.0 million in revenues annually from each rep, once they are up and running (approx. 3-6 months). Over the next 5-years, management is targeting 400 reps in total.

If the company hits these targets, Zynex has the potential to increase revenues from the current $32 million range to between $200 and $400 million. There are plenty of risks on the way to these type of gains and the increase in cost structure will likely shrink margins as new sales reps take time to be productive near-term. But, the balance sheet is strong, the market is ripe for continued growth, and the structure of the business is solid.

The company has already issued solid growth guidance for its next quarter estimating revenues growth of roughly 28% to between $9.5 million and $10 million, EBITDA between $2.3 million and $2.8 million and earnings per share around $0.07.

We see the shares as attractive on 10% pullback. Despite more than doubling in 2019 alone.

The final company we highlight is Viemed Healthcare Inc. (VMD:TSX).

Viemed is a company we have recommended at lower levels to Insider Edge clients, to our clients in May of 2018 at $3.85 and twice on Money Talks at $5.00 and $5.75.

Industry: Medical Equipment Service Provider

Recommended: May 2018
Recommendation Price: $3.85
Current Price: $7.90

Market Cap: $300,813,252

Shares Outstanding: 37,838,145

Fully Diluted: 40,130,590

Operational Summary

Viemed, through its wholly-owned subsidiaries, Sleep Management and Home Sleep, is a participating Medicare durable medical equipment supplier that provides post-acute respiratory care services in the United States.

In layman’s terms, the company places respiratory therapist inside the home to treat patients with very sick lungs. Many of these patients are unfortunately at the end stage of their life, at a time when they are most likely to visit the hospital. Our service prevents these hospital readmissions from occurring. The primary disease treated is (COPD) or chronic obstructive pulmonary disease. With almost 25 million Americans reporting that they have been diagnosed with COPD, it is the country’s 3rd largest killer behind cancer and congestive heart failure. The company provides a solution for people who suffer from this debilitating disease. Viemed uses non-invasive ventilators (NIV) which allows us to ventilate the patient with a mask versus forcing them to be in the bed incubated – the quality of life is better, and the healthcare costs decrease.

Quick Update

Viemed recently reported another record set of quarterly results with revenue growing 45% $20.4 million and EBITDA rising 27% to $4.8 million. The 45% growth rate was an acceleration from the previous year. Revenue was primarily driven by a 36.5% growth in the active patient count. Ancillary revenue (beside NIV) helped drive revenue per patient to a record level ($12,800 annualized).

Q1 2019 Notes

• From a EBITDA perspective, Viemed reported a 23% margin. The figure was slightly lower than in previous quarters. However, VMD continues to hire in advance to prepare for future growth. To this end, payroll and employee benefits were 34.9% of sales versus 30.3% in Q4 and 30% average for the year. As revenue grows throughout the year, management expects this ratio to drop and EBITDA to expand. In fact, management guided to a higher Q2 margin profile and expects to average the year closer to historical averages (approx. 6% margin).
• Viemed’s balance sheet remains strong with $7.4 million in cash and an unused $10 million credit facility.
• Veterans Hospital (VA) Opportunity – Viemed has made its initial inroads into the VA. The company believes there are likely 200,000-600,000 patients who could benefit from NIV therapy (veterans have a higher likelihood of COPD than the general population). While Viemed has roughly 10 patients at 4 VA hospitals, it is believed this huge opportunity could come to the fore in the mid-term future.

Risks – Viemed operates in a highly-regulated segment.  The company subject to all the risks and uncertainties of companies competing in the health care market. The business is highly regulated and government entities provide reimbursement for a portion of the services provided to Viemed’s customers. In recent years, all payors have sought ways to control the rapid growth of health care spending. These have included restrictions on health care utilization and efforts to reduce prices charged for services. We would expect these pressures to continue in the future and it is impossible to predict the impact they will have on Viemed’s business. Medicare/Medicaid Concentration – Medicare and Medicaid currently account for about 75% of Viemed’s business and a combined total of 56% of accounts receivable. Although there are significant benefits around Viemed’s service in the interest of Medicare and Medicaid, there is still risk of losing these revenue streams resulting in a significant decrease in recurring revenue.

Conclusion

The potential market for NIV is large and, despite its growth, Viemed is only scratching the surface. In fact, the entire NIV market penetration is less than 10% of its potential. As physicians and care givers become aware of the clinical efficacy of the therapy, there is potential that the referrals from them could snowball. A recent clinical study undertaken by KPMG showing the positives of the company’s in-home NIV strategy has just been started to be marketed by Viemed. Dissemination of that report should dramatically accelerate awareness and recruitment of patients. Additional products (outside of NIVs) offered by Viemed including vests are starting to contribute to revenue. With its infrastructure in place (Respiratory Therapists and Registered Nurses), it appears the company can provide more in-house services to the same client. The product diversification strategy could not only reduce risk but grow its brand as a one-stop service company.

Given the emerging track record of strong organic growth, from an Enterprise Value to EBITDA or EV/EBITDA basis, we believe Viemed should trade in the range of 12.5 times 2019 EBITDAe. We model for a base case of 28% adjusted EBITDA growth in 2019 producing roughly US$24.14 million, or CND$29.82 (CND$0.79 per share). As such, given the company’s clean balance sheet and solid net cash position, we increase our fair value over the course of the next year to the range of $10.25 (up from $9.50 in our latest update report BUY report), or 28% higher than its current share price.

Ryan Irvine is the founder of Keystone Financial and www.keystocks.com