4 Hot Undervalued Growth Stocks with Solid Financials

Posted by Ryan Irvine & Michael Campbell

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Michael: For six consecutive weeks the market has been going down. What advice you’d have for people how to play this kind of a market.

Ryan: If we look anecdotally over the first six months of this year we’ve released the least number of reports that were positive on a company than we have since around 2008. Now, that’s not to say that we believe the markets are as over valued as they turned out to be then, but and we look at the markets on a revenue basis, a cash flow basis , the S&P 500 ‘s PE in the range of 16 based on as reported earnings, and the markets are not really historically cheap here but not outrageously expensive on an earning basis either. But given the recovery that we’re seeing we believe that a lower earnings multiple may be warranted and we think we’re in that process right now. There is a level of a multiple that is we think should be lower right now in the market and we think that’s warranted. You really should do your shopping,  and look for very undervalued companies right now.

Michael: What about Sell Signals?

Ryan: We had taken some profits heading into this year in a number of companies as we believed at the start of this year that the markets were a bit overvalued and needed a correction. Now we are going to position ourselves to be relatively aggressive over the summer and start buying some assets that are on sale after we’ve seen the markets correct somewhat.  We see some assets that come on sale during the course of the summer when people are away at cottages, the brokers aren’t in the office as much, so in the lighter volumes we can pick up some bargains.  When we buy we are looking long term, how it will react to its earnings over six months to three years.

Michael: Have you put a buy list together and what prices you want to accumulate them at?

Ryan: Right now if we find a stock that we like we suggest you use a strategy to layer into a position. If you find the stock that you like add half of your position right now at the current price, and I’ll give you an example of a company we talked about on this show a number of times. We like the company long term it’s called Glentel Inc the symbol is GLN on the TSX. It’s a wireless retailer operating in Canada and they’ve recently entered into the US. This stock it’s trading at around $19 right now, but we originally bought this stock at $2.93 about five years ago. Then we bought in again last fall at 9.70, and it trades at $19 so it may sound expensive relative to that.  But it’s all relative to its earnings and as they increase over time we still think it still offers good value. In the near term with uncertain markets  it’s probably fair value for the next three to six months, but we could layer in. Say we want to buy $10,000 worth of this company, we may buy our first $5,000 right now, and if the markets continue to correct and the stock itself corrects, we could buy more of our position at a later averaging down . Now if the company or the market continues to go up or the company itself continues to go up, the worst thing we have here is we are left with a good company and a solid position in that company.  

Michael: What I like about the kind of approach you’ve just suggested is I put a foot in the water right now, take a third to half of my position and I wait to see what happens. If it goes up I’ve made some money , if it goes down I was hoping to get a better buy anyway.

Ryan: What it comes down to for us is really stock specific, and we don’t want to think that we can outsmart the market and completely buy at the bottom. It’s the company we are buying that’s the most important, we are layering the positions over time particularly when you have some uncertainties in the market.

Michael: Have you anything that’s caught your eye or we should put on our radar screen?

Ryan: Yes there’s about three or four companies we can look at. We’ve seen junior gold producers after a strong run at the start of this year have sold off and are becoming attractive are attractive right now. If we are looking at where the price of gold is right now and the price it costs these companies to take that gold out of the ground, the first company is Orvana minerals ORV on the TSX. This a company we originally bought into at about $0.53 in 2008 it’s traded as high as just under $4. We’ve sold half our position at around $3.50 and now it’s back down in the $2.45 range and we think that’s a great long term opportunity right now. The company is a gold producer in Spain primarily but it also has operations in Bolivia. We love the cash flow that this company is bringing online. In 2012 our earnings estimate for this company is beyond the $0.50 level, so if you’re looking at buying it right now in around $2.50 that’s about five times 2012 earnings if gold stays in the $1,400  or above. That’s growth at a  reasonable price and it’s a mining friendly district so we like it.

Michael: With Orvana Minerals what their cost of extraction of Gold?

Ryan: It’s around $550 in that range. They are a relatively low cost producer.

Michael: So they have a lot of room in other words.

Ryan: The next company we are going to talk about is really a low cost producer.  It’s on a smaller scale but we definitely like the low cost producers. Monument Mining Limited it’s MMY on the TSX venture  is a profitable low cost junior gold producers operating two principle gold projects, one is currently producing in the mining friendly country Malaysia. With current production it has solid cash flow, limited to no debt, a good cash position, lowcost of production, production that is expanding and it has upside from some promising projects. I is on track this year from its primary mine to produce around 40,000 ounces of gold. Now its estimated cash cost on that production is around $317 which is very low. It’s an open pit, it has good recoveries and low labor rates. This is over an initial five year mine life and that generates very excellent cash flow for this company. In fact in this last third quarter it produced revenues of 15 million up from basically zero in the same period last year. The cash costs in that quarter were only $238 per ounce, so it’s net income was 10.4 million or $0.04 per share in the quarter alone and that’s fully diluted. This company trades at around $0.61 right now, so it’s got some good solid earnings and it’s trading at a relative low price relative to those earnings. We also see management planning to grow production to about 75,000 to 100,000 ounce of gold by the end of this calendar year and will be in full operation of those rates we believe by April 2012. The balance sheet looks good with 33 million in cash, working capital is 52 million, and its long term debt is only five million. So we like the metrics on that. we like the production expansion and we like the evaluations right now.

Michael: Monument Mining seems like a poster child for your approach for people not familiar with your services at Keystone Financial.

Ryan: We believe the more companies you add like that to your small account portfolio the better you will do over time Now not every one of those companies is going to be a success, but if you continue to add companies with that profile you’ll  do well on a broad basis over time.

Michael: tell us about a company that you for their cash situation?

Ryan: The company’s name is Enghouse Systems Limited a communication software company, symbol is ESL on the TSX. They are what we call cash rich. Essentially they make software that helps clients interact with their clients through multiple channels which would include their website,  their call center,  fax, any contact point. They are very large in the call center software side of the business. But what we like about this company, as always, are the numbers. This company in terms of cash have around 75 million, and that’s after making a 20 million dollar acquisition in the last quarter. Now that 75 million equates to around $3 per share in cash while this company trades around $9.90 in the market, so it has an incredible war chest that it can use for strategic acquisitions and has been doing that over the course of the last couple of years, even in uncertain times, and we expect it to continue to purchase companies within its industry at relatively low valuations right now.

Now revenues for the second quarter this company came in at around 30 million up from 21 million, it’s earnings were up around 50% to $0.12 per share from $0.07 per share in the same period last year. This company isn’t, if you just look at the numbers at a glance, not as cheap as some of the companies we look at as it’s trading at about 19 times trailing earnings. But if you strip out that cash, we going on $3 per share,  it’s around twelve and a half times earnings. We really value this company based on its cash flow, and we think this year the company will earn around a dollar per share in cash. So it’s about seven times cash flow when we take out that cash in the bank which is a relatively low valuation. We definitely have a long term outlook on this stock we believe over the next three years it will drive revenues to above the 200 million on an annual basis range.

So we believe you purchase at these levels and if it comes down we’d use the methodology we were speaking earlier to layer into a position at lower levels. Its dividend is around 2% which is good but we believe once it hits that 200 million range in revenues it really becomes a legitimate success story within Canada and you’ll see a lot more fund buying. Whether that happens in six months from now,  a year or two years from now we’ll buy into this cash rich company with no debt, growing its earnings, making good acquisitions, trading at reasonable valuations and we’ll pocket a 2% dividend in the mean time. 

Michael: Just very quickly Ryan do you look at the management of a company like that and past track record?

Ryan: It’s good you bring that up. The CEO of the company actually is part of the board of Open Text which is a large tech company in Canada, and he has basically helped in many of the major acquisitions. So he has a good degree of familiarity with the growth by acquisition strategy. This company was criticized with when it had about 100 million in cash in the bank back in 2006, 2007 for not making acquisitions at that time. But management found the companies it was looking at were just too expensive. Now in 2009, 2008 and into this year it has made more acquisitions over the past 18 months than it has in any time in its history because they are cheap now. So management was patient, and they are making acquisitions at opportune times. We like that and we like the track record of its success with these acquisitions, and the CEO success with Open Text as well.  

Michael: As always Ryan we really appreciate you taking the time.

Ryan: Excellent thank you very much and there’s a special offer for Money Talks’ listeners in our website if you just go to www.keystocks.com and look at the media appearances page and you can see our appearance here and there’s offers for our service here and also our income stock services a special offer for that.