Market Buzz – “The One”

Posted by Ryan Irvine - Keystone Financial

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Market BuzzNeo” Materials Has Been “The One”

While Toronto’s main index really did little more than tread water on the week, its 34.12 point gain on Friday helped it close above the 12,000 mark for the first time in about a year. In fact, the last time the S&P/TSX Composite index closed above 12,000 was September 26, 2008, at time when stock markets the world over were tumbling as the financial crisis moved into high gear.

All told, the TSX ended up a meager 38 points on the week, as investors digested what was a sharp 3 per cent gain in the preceding week powered by stronger commodity pricing and better-than-expected earnings from the big banks.

In contrast to the U.S., there was some decent news on the Canadian job front this past week as Statistics Canada said 21,000 jobs were created last month, better than the 15,000 that had been expected by many economists, while the unemployment rate fell by one percentage point to 8.2 per cent from 8.3 per cent.

This past week, Neo Material Technologies Inc. (NEM:TSX), a company we recommended 15-months ago in December of 2008, reported solid turn-around results for 2009. The stock, which was then trading in the $1.30 range, has had a meteoric rise and closed this past Friday at $4.50, up over 245 per cent.

Neo Material is a producer, processor, and developer of neodymium-iron-boron magnetic powders, rare earths, and zirconium based engineered materials and applications, and other high value niche metals and their compounds. Rare earth and zirconium applications include catalytic converters, computers, television display panels, optical lenses, mobile phones, and electronic chips. Products from the company’s newly acquired Recapture Metals Limited are primarily used in the wireless, LED, flat panel, solar, and catalyst industries.

For the year ended Dec. 31, 2009, the company reported revenues of $187.5-million and net income of $19.7-million, or $0.17 per share on a basic and fully diluted basis. EBITDA for the year was $35.1-million. This compares with 2008 revenues of $266.6-million, net income of $23.3-million, or $0.22 per share on a basic and fully diluted basis, and EBITDA of $48.8-million. The decrease in the full-year revenues, EBITDA and net earnings is due primarily to a slowdown in demand for the company’s products in light of the global economic contraction, which commenced in the fourth quarter of 2008 and lasted well into 2009.

At Dec. 31, 2009, the company had a record $57.3-million in cash. Long-term debt was nil as at Dec. 31, 2009, and Dec. 31, 2008.

LooniversityWhat’s in a Beta?

How much volatility can you expect from a given stock? That’s well worth knowing if you want to avoid being shocked into panic selling after buying it – which, particularly in the volatile small-cap segment, is a good thing. Some stocks trend upward with all the consistency of a firefly. Others are much steadier. Beta is what academics call the calculation used to quantify that volatility.

The beta figure compares the stock’s volatility to that of the S&P 500 index using the returns over the past five years. If a stock has a beta of 1, for instance, it means that over the past 60 months its price has gained 10% every time the S&P 500 has moved up 10%. It has also declined 10% on average when the S&P declines the same amount. In other words, the price tends to move in synch with the S&P and it is considered a relatively steady stock.

The more risky a stock is, the more its beta moves upward. A figure of 2.5 means a gain or loss of 25 per cent every time the S&P gains or losses just 10 per cent. Likewise, a beta of 0.7 means the stock moves just 7 per cent when the index moves in either direction. A low-beta stock will protect you in a general downturn; a high Beta means the potential for outsize rewards in an upturn.

Of course, that’s how it’s supposed to work in theory. In practice, unfortunately, past behaviour offers no guarantees about the future. If a company’s prospects change for better or worse, then its beta is likely to change too. So, use the figure as a guide to a stock’s tendencies, not as your own personal “Kreskin.”

Put it to Us?
Q. I own shares in a company that recently sent me a package with an offer to purchase more shares through a private placement. The new shares come with warrants attached. What are warrants?

– Yazmine Erikson; Toronto, Ontario

A. While most of the “warrants” associated with the stock market of late have called for an immediate arrest, we are happy to inform you that does not apply in your case. Strictly defined, a warrant is a security entitling the holder to buy a proportionate amount of stock at some specified future date at a specified price, usually one higher than current market price. In the market, warrants are traded as securities whose price reflects the value of the underlying stock.

Corporations often bundle warrants with another class of security (i.e. free trading stock) to “sweeten” or enhance the marketability of the other class. Essentially, warrants are like call options; however, warrants are issued and guaranteed by the company, whereas options are exchange instruments and not issued by the company. Also, the lifetime of a warrant is often measured in years, while the lifetime of a typical option is months.

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