Market Buzz – Opportunity

Posted by Ryan Irvine - Keystone Financial

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Market Buzz – Look to Selectivity For Opportunity, Not Liquidity

The current rallying cry for a continued up-tick in the markets is liquidity, liquidity, liquidity. Fundamentals should take a back seat because there is so much liquidity (capital) to be put to work and it will eventually find its way all in on equities.

So with all this money parked in money market accounts just ready to pounce on the markets, they could not go anywhere but up. The problem is we heard the same liquidity talk during the peak of the bubble in late 2007. The reality is that the mountain of money is no higher or lower than it was when the market was scraping to new lows in 2008. Money market funds back then held relatively the same $3.5 trillion that they do today. Curious is it not?

We believe investors should continue to invest long term, but remain cautions, get great advice, and do not speculate. Invest based on fundamentals – strong, cash flow producing companies with solid businesses and real earnings.

If you are looking for growth, try to uncover companies that continue producing above-average earnings growth, not just those that are producing what some analysts call “better-than-expected” earnings that actually compare very poorly year-over-year. Moreover, while we recognize it is currently difficult, look for companies that have recently upped their earnings guidance and possess solid balance sheets with limited to no debt, giving them protection and staying power if the predicted “V” shaped recovery turns into an “L” or double dips.

It remains a stock pickers market and these types of companies do exist, one just has to dig a little deeper, but the rewards can make the effort more than worth it.

Specifically, from our Canadian Small-Cap Universe (, we highlight Bridgewater Systems Corporation (BWC:TSX), a communications software provider which has been our top rated Small-Cap tech in 2009, which has seen its shares jump 172 per cent year-to-date from $2.50 to close this week at $6.80.

Why the jump you ask? Bridgewater has upped its revenue and earnings guidance twice this year, boasts a pristine balance sheet with over ($2.30 per share) and no debt. This past week, Bridgewater announced US$18.8 million in additional orders from Verizon Wireless (VZ:NYSE), one of its major wireless customers.

While our outlook remains cautious given the market’s strength since early March in the face a tepid (at best) economic background, there remain some excellent select opportunities to profit long term. We urge you to stick with trusted advice and remain very selective.  

Looniversity – Capital Pool Company Program 101

The Capital Pool Company (CPC) Program is a unique listing vehicle offered exclusively by TSX Venture Exchange. The program is generally thought to cut the costs of access to the public markets when compared to a traditional initial public offering (IPO) and brings together an experienced team of directors in a public company with an emerging company that needs financing/strategy and management expertise.

In the CPC program, a capital pool company is created through a quazi-IPO on the TSX Venture Exchange. This company looks for a promising private company or asset to acquire. The capital pool company must acquire a company or asset within 24 months of listing on TSX Venture. This is called a qualifying transaction. After a successful qualifying transaction, the capital pool company becomes a regular listed company on TSX Venture. Generally, at least one of the directors of the initial CPC stays on the board of the combined entity once the QT has occurred. Depending on the needs of the situation, several directors will continue on with the new board.

Put it to Us?

Q. When I review stocks for selection in my portfolio I often use the price-to-earnings ratio (PE) as criteria. However, I find many stock websites list the PE on a stock as N/A. Why is that?

– Charlie Soles; Calgary, Alberta

A. Basically, a reported reading of “N/A” for a stock’s PE ratio typically means one of two things. Depending on what web service you are utilizing, the simplest explanation is that there is no data at time of reporting to calculate this ratio. This will be the case with a newly listed company that have yet to release earnings or have not reported four quarterly reports (four quarters are required to calculate a trailing annual PE). The second reason could be that the earnings number is negative (loss). Negative P/E ratios are mathematically possible, but because they are generally not accepted by the financial community, they are usually reported as “N/A,” or not applicable. The P/E ratio is calculated as the stock’s current price divided by its earnings per share (EPS).

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