In This Issue:

Printable PDF

WHEN DEMAND EXCEEDS SUPPLY

By Gordon Pape, Editor and Publisher

The pandemic has created a new corporate hierarchy of winners and losers.

We all know who the losers are. Any company in the travel and hospitality sector falls into that category. So do oil companies, REITs, and car manufacturers.

The winners are fulfilment companies like Amazon, big box retailers such as Walmart and Costco, and any on-line company that offers face-to-face on-line communication.

There’s also one other category that many people tend to overlook. They are the companies that make products that everyone is desperately trying to buy these days – cleaners and sanitizers.

Have you tried to buy a container of disinfectant spray lately? Or a pack of sanitizing wipes? Forget it! Amazon has a notice on its website saying they’re all reserved for front-line workers. The suppliers can’t keep up with the demand.

One of the firms in this sweet spot is The Clorox Company (NYSE: CLX), which recently reported its biggest sales increase in nearly a decade.

In addition to bleach, which was the company’s only product when it was launched back in 1913, Clorox now produces a wide range of disinfectants for both home and institutional use. They include disinfectant wipes, Spore Defense Cleaner Disinfectant, Citrace Hospital Disinfectant, and many more.

The company experienced an unprecedented 500% surge in demand for its key cleaning products after the virus hit. Despite moving to a 24/7 production schedule and sourcing more supply from third parties, it still couldn’t keep up.

“We acknowledge our products aren’t consistently in stock, and there’s more to do,” said CEO Benno Dorer. “We put Clorox disinfecting wipes on store shelves every day and find that people scoop them up almost as soon as they’re delivered. But we are partnering with our retailers to serve consumers’ needs as best we can and expect continued meaningful movement in our ability to meet demand this summer. We are also making considerable investments to increase capacity for the mid-term, applying what we’ve learned from this crisis to be prepared for a surge in demand in the future.”

Clorox produces more than disinfectants. The briquets you use on your barbeque may be from them (Kingsford). Your kitchen garbage bag may be one of their products (Glad). The product you pour in the sink to clean the drain may be theirs (Liquid Plumr). Clorox also makes Pine-Sol, Hidden Ranch salad dressings, Calm, Fresh Step cat litter, and more.

As you might expect, given the spike in demand for its products, Clorox is doing very well from a financial perspective. Third-quarter 2020 earnings released last month showed sales growth of 15% and a 31% increase in earnings per share.

The company reported net sales of almost $1.8 billion for the three months to March 31, up from just under $1.6 billion in the year-before period. Net earnings were $241 million ($1.89 per share, fully diluted) compared to $187 million ($1.44 per share) in the third quarter of fiscal 2019. (Figures in U.S. dollars.)

Year-to-date net cash provided by operations was $806 million compared to $603 million in the year-ago period, for an increase of 34%.

The company increased its earnings forecast for the current fiscal year to $6.70 to $6.90 per diluted share.

Shortly after the results came out, Clorox announced a 5% increase in its quarterly dividend, to $1.11 per share ($4.44 per year). At Friday’s closing price of $197.57, the shares yield 2.25% at the new rate.

The main negative is that Clorox stock is not cheap. The shares are up by 29.46% so far this year, from a close of $153.54 on Dec. 31. At the current price, the trailing p/e ratio is 29.95 – not outrageous for a company whose earnings appear poised to grow, but not cheap either.

We are adding Clorox to our Recommended List for current and long-term growth. However, given the high price you may wish to buy in traches – perhaps one-third of your position now and the rest on dips below $200. The closing price on Friday was $197.57.

Follow Gordon Pape on Twitter @GPUpdates and on Facebook at www.facebook.com/GordonPapeMoney

 

Top

THREE WINNING SMALL-CAPS

Contributing editor Ryan Irvine is back today with updates on three of his winning picks. Ryan is the CEO of KeyStone Financial (www.KeyStocks.com) and is one of the country’s top experts in small-cap stocks. He is based in the Vancouver area. Here is his report.

Ryan Irvine writes:

This month we update three stocks which continue to provide readers with strong gains, particularly in the cases of Viemed and XPEL. Here is a rundown.

Sylogist Ltd. (TSX-V: SYZ, OTC: SYZLF)

Originally recommended on Sept. 18/17 (#21734) at C$8.83, US$6.90. Closed Friday at C$10.64, US$7.57.

Background: Sylogist is a technology innovation company which, through strategic acquisitions, investments, and operations management, provides intellectual property solutions to a wide
range of public sector customers.

The company publishes mission-critical software products that satisfy the unique and sophisticated functionality requirements of public sector entities, non-profit organizations, educational institutions, government agencies, as well as public compliance driven and funded businesses. Sylogist delivers highly scalable, multi-language, multi-currency software solutions, which serve the needs of an international clientele.

Performance: The stock dipped in March but is now trading at close to its end of 2019 level.

Financial results: The company recently reported results for the second quarter of fiscal 2020. Recurring revenues from subscriptions and maintenance grew by 9% to $7.2 million, compared to $6.6 million for the same period of 2019. Total revenues were flat at $9.4 million versus $9.5 million last year. Reported earnings were $2.8 million ($0.12 per share), compared to $2.4 million ($0.11 per share) the year before, an increase of 19%. Adjusted EBITDA was $5.6 million, or $0.24 per fully diluted common share, an increase of 34%.

Sylogist continues to boast a very strong balance sheet with adjusted working capital increasing 35% in the quarter to $47.3 million, or $1.99 per share.

Dividend: Given the company’s strong performance and opportunities for further growth, the board of directors approved a 10% increase in Sylogist’s quarterly dividend to $0.11 per share ($0.44 per year). The yield at the current price is 4.14%.

Acquisition: On April 21, Sylogist announced the acquisition of Information Strategies Inc. (InfoStrat), for total cash consideration of approximately $3.5 million.

InfoStrat, based in Washington, DC , is a long established, profitable business and a Microsoft Gold partner. It caters to federal and state governments and not-for-profit/NGO organizations throughout the United States. It provides software solutions and professional services based on its proprietary intellectual property that uses Microsoft Dynamics 365 CRM and Sharepoint at its core.

The acquisition extends Sylogist’s public sector footprint to U.S. federal and state governments, strengthens the company’s relationship with Microsoft, and provides complementary IP and delivery capabilities to better serve customers. InfoStrat’s revenue in 2019 was approximately $5.5 million.

Management transition: Jim Wilson has announced his retirement as president and CEO, effective at the end of the company’s fiscal year on Sept. 30.

Strategic review: As a result of the forthcoming leadership transition, the board of directors has undertaken a strategic review to set the course for the future of SYZ. Strategic elements being considered include the following:

1) Recruiting a senior leader or leadership team to drive growth principally and initially in the United States, where the vast majority of the company’s customers and market opportunities reside.

2) Strengthening and diversifying the board of directors.

3) Evaluating other options and opportunities, including strategic alternatives, to maximize shareholder value. Number three typically includes the option of a business sale. In almost any other market condition this would boost the stock as investors would speculate on a takeover bid. However, capital is constrained near term.

The board has engaged Shea & Company, a San Francisco-based boutique M&A adviser, to assist in its market assessment of strategic opportunities and alternatives to enhance shareholder value. Shea specializes in enterprise software with extensive reach across North America and beyond in public sector technology,

Sylogist says it has no knowledge or expectations of what developments may occur with respect to any of its various initiatives and, except as required by law, does not intend to make any further announcements unless or until any material information becomes releasable.

Conclusion: Given the nature of Sylogist’s product offering and the importance to its customers, the average customer life is more than 10 years. Some customers have been using the company’s software for several decades and the company’s historical customer retention rate is over 90%. During a downturn, the business should be relatively sticky, but we do not expect much organic growth in the near term due to the lack of investment in sales and R&D.

Growth has been positioned to come via acquisition and the InfoStrat purchase appears to have potentially re-ignited the growth-by-acquisition potential of the business. Opportunities from this perspective should be more readily available over the coming year and at more reasonable prices than in the recent past. What we are reading from management is that all options are on the table regarding potential acquisitions from the cash on hand as well as Sylogist itself being acquired. We believe the business is listening to offers, but there are absolutely no guarantees in this regard and we do not often suggest investing on this basis.

The uncertainty surrounding management transition adds risk, but it is also an opportunity.

Action now: We maintain the rating of speculative Buy.

XPEL Inc. (NDQ: XPEL)

Originally recommended on June 4/18 (#21821) at $3.32. Closed Friday at $16.42. (All figures in U.S. dollars.)

Background: Founded in 1997, XPEL has grown from an automotive product design software company to a global provider of after-market automotive products, including surface and paint protection, headlight protection, and automotive window films. It is also a provider of complementary proprietary software. In 2018, the company expanded its product offerings to include window film (both commercial and residential) and security film protection for commercial and residential uses. Today, XPEL has approximately 180 employees and serves over 2,000 direct customers and several thousand indirect customers around the world.

Performance: The stock traded above $18 early in the year. Along with the rest of the market it dipped in March but has since recovered well.

Financial results: First-quarter revenues increased 14.8% to $28.4 million as compared to $24.7 million in the prior year. Operating expenses increased to $7.8 million or 27.5% of sales as compared to $5.7 million or 23% of sales in the prior year period. The increase was primarily due to $0.7 million in expenses associated with the company’s annual dealer conference. The 2019 dealer conference took place in the second quarter. Net income was $1.6 million ($0.06 per share, fully diluted) versus $1.9 million ($0.07 per share) in the first quarter of 2019.

As of March 31, XPEL had cash and cash equivalents of $14.8 million compared to $11.5 million at Dec. 31, 2019.

Discussion: We consider XPEL a very well-run business that we want to own long term. As we expected, the company reported a strong first quarter, outside of China. In the second quarter, North American and European operations will be significantly affected by the current stay-at-home protocols. For example, when China was in lockdown for much of February, auto sales in this market were down 80%. There was also substantial disruption in logistics, including port delays and other congestion issues. On the flipside, China will be positioned to show substantial growth in the current quarter, especially compared to the weak numbers it reported in the same period of 2019. That said, the numbers will be off the peak numbers XPEL posted in its 2019 fourth quarter.

XPEL provides a great product and a good value proposition, but its products are discretionary and will be subject to lesser demand in a shutdown environment and recession.

Outlook: XPEL is a company we will look to own long term. In the near term, given the stock is up 374% since our original recommendation two years ago, we view it as prudent to re-balance and increase cash positions given near-term uncertainty.

We expect to move to a Buy rating on XPEL once again when clarity on the length of the shut-down in North America becomes more certain. For investors looking to hold XPEL for 3-5 years or greater, the option is to hold the stock presently at 30 times earnings as there is no guarantee the stock will move lower to a more attractive range. Near term we advise selling a half position in XPEL.

This is no reflection on the quality of the business. We love XPEL’s growth, management, and business model, but we see it a prudent to “right size” positions in the stock near-term and bank some of the profits. We are holding onto a solid position in the stock long-term but find it wise to clip some profits.

Action now: Sell half for a gain of 392%.

Viemed Healthcare Inc. (TSX, NDQ: VMD)

Originally recommended on May 20/19 (#21919) at C$9.12, US$6.77. Closed Friday at C$11.54, US$8.63.

Background: 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 therapists 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. The 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 third-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 caregivers to ventilate the patient with a mask versus forcing them to be in the bed intubated. The quality of life is better, and the healthcare costs decrease.

Performance: The shares fell to $3.36 in March but have rallied strongly and are now close to their all-time high.

Financial results: Viemed released strong first-quarter results on May 4. Quarterly net revenue increased 31% to $23.8 million and non-GAAP EPS increased 48.6% to $0.107 per share. Adjusted EBITDA increased 76% to $7.9 million.

The company reported growth in its active ventilator patient base of approximately 25% compared to the same quarter last year and 3% over the fourth quarter of 2019. Approximately $1 million of first-quarter revenue was from product sales related to the ongoing COVID-19 pandemic.

Viemed ended the quarter with a reasonably healthy balance sheet consisting of $8.4 million in cash and $18.7 million in debt. Over the past four quarters, the company has generated non-GAAP earnings per share of $0.35, which at the current price equates to a price-to-earnings valuation of approximately 33 times. Viemed is in a unique position as it has been benefiting from the COVID-19 pandemic.

Conclusion: The company is one of the largest independent providers of ventilators in the U.S. and has had the opportunity to take part in fighting the pandemic by providing expertise and education, supplying ventilator machines, and freeing up hospital beds with its home healthcare solution. Viemed reports that these efforts have allowed it to establish long-term relationships with hospitals and physicians, which it expects will strengthen over time.

The company released financial guidance for the second quarter and expects net revenues of approximately $42 million to $44 million, including approximately $20 million of product sales related to the pandemic. Adjusting for one-time product sales, the guidance implies that revenue will be consistent (or flat) relative to the same period in 2019. The company attributes the lack of core business revenue growth to a temporary slowdown in hospital systems as many patients with chronic illness are avoiding hospitals and clinics have closed as a result of the pandemic

We estimate Viemed can produce 2020 adjusted EBITDA per share of $1.16. If we apply a multiple of approximately 11.5 times to this figure we arrive at a fair value in the range of $13.50. As such, and despite very strong positive gains in a down market, Viemed continues to offer an attractive investment proposition in the U.S. home healthcare industry.

The company has made a meaningful contribution to the fight against the pandemic and management believes that this has resulted in the creation of new, long-term relationships that will be an asset to it in the future. We believe the pandemic has highlighted a need for increased home healthcare infrastructure. The company also noted that U.S. healthcare regulators have removed non-invasive ventilators from the 2021 round of competitive bidding. Management’s understanding is that ventilators will be out of the program for at least three years, which helps to alleviate one of the short-term risks facing the company.

Action now: We maintain our rating of speculative Buy.

 

Top

GORDON PAPE’S ETF UPDATES

BMO India Equity Index ETF (TSX: ZID)

Originally recommended on April 10/17 (#21715) at $22. Closed Friday at $22.36.

Background: This ETF seeks to replicate the performance of the S&P/BNY Mellon India Select DR Index. It tracks 17 Indian stocks traded as American Depository Receipts (ADRs) and Global Depository Receipts (GDRs) in New York and London. These are blue chips, among the biggest and most financially stable Indian companies.

Performance: The pandemic has taken a toll on this ETF. It dropped as low as $16 in March before staging a rally. However, India has been badly hit by the coronavirus and recovery is a long way off.

Portfolio: The ETF has 36% of holdings in four banks: HDFC (13.5%), ICIC (9.2%), Axis (7.8%), and the State Bank of India (5.6%). That’s down 10 percentage points from the time of our last review so this fund has reduced exposure to the financial sector.

The largest position (20.8%) is held in conglomerate Reliance Industries, which is involved is everything from energy and textiles to retail and telecom. Infosys (16.5%) is the second largest holding. Engineering firm Larsen and Toubro (10.5%), a Canada Pension Plan Investment Board partner, occupies the number four spot.

Key metrics: The management expense ratio (MER) of 0.73% is on the high side. The fund was launched in January 2010 and has $56.7 million in assets under management, well down from our last review.

Distributions: Payments are made annually, and they are negligible. The fund’s December distribution was only $0.03 per unit. If you need cash flow, look elsewhere.

Outlook: The International Monetary Fund recently slashed India’s 2020 growth forecast to 1.9% from the January estimate of 5.8%. That’s the bad news. The good news is that India and China are the only two major economies in the world that are expected to show any growth at all this year. India’s growth rate is expected to rebound to 7.4% in 2021.

Action now: Hold. It’s going to take longer than expected because of the pandemic but this ETF should recover well over time. But don’t put money here if you can handle volatility.

iShares MSCI EAFE Index ETF (CAD-Hedged) (TSX: XIN)

Originally recommended on March 18/13 (#21311) at $19.68. Closed Friday at $25.27.

Background: This ETF is the Canadian-dollar hedged version of a U.S. fund (NYSE: EFA) that tracks the MSCI EAFE Index, which covers Europe, Australasia, and the Far East. Most of the assets are invested in the U.S. version of this ETF.

Performance: Like everything else, this ETF took a hit in March, falling all the way to $18.16. But it has regained a lot of ground as world markets have steadied in anticipation of an economic recovery. Over the five years to May 31, the fund generated an average annual compound rate of return of just over 1% but the 10-year number is a more respectable 6.04%.

Portfolio: This ETF is highly diversified, with more than 1,000 underlying positions. Interestingly, the top three positions are all Swiss-based, headed by Nestle at 2.37% of the total portfolio. Roche Holding is at 1.82%. No other stock has a position of over 1.5%. Japanese stocks make up 25% of the assets, with just over 14% in the U.K.

Key metrics: The fund was launched in September 2001 and has just over $1.1 billion in assets under management. The MER is 0.48%.

Distributions: They are paid semi-annually, in June and December. The December payment this year was $0.334 per unit.

Outlook: We should see a slow recovery in the second half of the year. The major downside risk is a second wave of the coronavirus that forces governments to lockdown their economies again. Investors who want long-term exposure to the countries that are covered by this ETF should maintain positions.

Action now: Hold.

iShares Core S&P/TSX Capped Composite Index ETF (TSX: XIC)

Originally recommended on March 25/12 (#21212) at $19.58. Closed Friday at $25.34.

Background: This fund is designed to replicate the performance of the Capped S&P/TSX Composite Index, net of expenses. In other words, in invests in a broad portfolio of Canadian stocks.

Performance: The fund was hit by the twin shocks of the coronavirus and the oil price slump (13.6% of the portfolio is in the energy sector). The price dipped as low as $17.92 in March but, like the rest of the market, has rebounded.

Portfolio: The fund holds 229 positions. Royal Bank is number one at 6.2% of the assets but tech darling Shopify (5.2%) has replaced TD Bank (5.1%) at number two. Enbridge is at 4.2%. No other company has a weighting of more than 4%. Almost 30% of the portfolio is in financials, with 13.6% in materials.

Key metrics: The fund was launched in Feb. 2001 and has $6.2 billion in assets under management. That’s about $500 million more than at the time of our last review. The management expense ratio is very low at 0.06%.

Distributions: Payments are made quarterly. The March distribution was $0.218 per unit. The trailing 12-month yield is 3.5%.

Outlook: In its statement last week, the Bank of Canada said the impact of the coronavirus on the economy has not been as bad as its worst-case scenario, despite the historic loss in output and jobs. The Bank predicted growth would resume in the third quarter but did not offer a projection of magnitude.

Action now: Hold. If you want to have a position in the broad Canadian economy, this is the best way to do so.

iShares Core S&P U.S. Total Market ETF (TSX: XUU)

Originally recommended on March 2/15 (#21509) at $20.42. Closed Friday at $32.32.

Background: This ETF tracks the entire U.S. market, including small, medium, and large cap stocks. It comes in both a hedged version (XUH) and an unhedged version (XUU). We have recommended XUU.

Performance: The fund traded as low as $23.70 in March but is now performing well as markets rally.

Portfolio: The fund invests in four U.S. ETFs, the largest of which are the iShares Core S&P 500 (51.5%) and the iShares Core S&P Total U.S. Stock (41.5%). The rest of the portfolio consists of small positions in Small Cap and Mid Cap ETFs and a limited amount of cash.

Key metrics: The fund was launched in February 2015 and has just over $1.1 billion in assets under management. The MER is a very low 0.07% so almost all your money is working for you.

Distributions: Payments are made quarterly and the amounts vary considerably. The latest was $0.119 per unit in March. Over the past 12 months, distributions have totaled $0.535 per unit, for a trailing yield of 1.7% at the current price.

Conclusion: This is an all-stock ETF so returns will reflect what is happening in the U.S. equity markets. That explains the big rebound since the March lows. I regard it as a core long-term holding for anyone wanting on-going exposure to the broad U.S. market, however at this time I would hold current positions and wait for a market dip to buy in.

Action now: Hold.

Horizons Marijuana Life Sciences Index ETF (TSX: HMMJ)

Originally recommended on Jan. 15/18 (#21803) at $19.90. Closed Friday at $7.56.

Background: This ETF invests in a portfolio of cannabis stocks. It seeks to replicate, to the extent possible, the performance of the North American Marijuana Index, net of expenses. The Index is designed to provide exposure to the performance of a basket of North American publicly listed life sciences companies with significant business activities in the marijuana industry.

Performance: There were high hopes for the cannabis sector when marijuana was legalized. And in the early days stocks like Canopy Growth did well, helping to boost returns on this ETF. But all that is history. The sector has been a disaster, and losses continue to pile up. This ETF closed on Friday at $7.56, down 62% from the original recommendation. As of May 31, the fund was showing an annual loss of 2.25% since inception.

Portfolio: There are 32 stocks in the portfolio, down from 63 at the time of the last review. The heaviest weightings are in Canopy Growth (13.2%), GW Pharmaceuticals (12.9%), Cronos Group (12.3%), Aphria (9.2%), and Scotts Miracle-Gro (9.1).

Key metrics: The fund was launched in April 2017 and was an instant hit with investors. But the excitement has long since faded. At one point the fund had about $900 million in assets. Now that’s down to less than $400 million. Given the performance, the surprise is that there is still that much left. The management fee is high at 0.75%, with an MER of 0.85%.

Distributions: Payments are made quarterly and can vary significantly. The March distribution was about $0.27 per unit.

Outlook: When I first wrote about this ETF, I stressed it was only suitable for aggressive investors who are willing to gamble on a fledgling industry that was having a lot of teething problems. The gamble did not pay off. Nothing has provided a spark for the sector and there’s no reason to believe that will change in the coming months. That said, the fund has staged a meaningful rally from its March low of $4.79.

This remains a highly speculative security. The only reason to hold is if you feel the sector will turn around in the near- to mid-term. If not, take the loss and sell.

Action now: Sell.

Top

LAST CALL FOR CRISIS WEBINARS

IWB contributing editor Ryan Irvine and his colleagues at KeyStone Financial will host two more live stock market investment webinars titled Crisis Portfolio Building 2.0 – Strategies to Survive, Then Thrive.

Each three-hour live webinar will include a one-hour interactive Q&A session.

Ryan and his team KeyStone will show you how to act during a crisis and start building a simple 15-25 stock portfolio designed to enrich you now and in the future. They will explore how the current crisis could be a tipping point for technological change in areas such as work from home, cloud computing, cybersecurity, artificial intelligence, the internet-of-things, and more. They will suggest specific opportunities in healthcare, U.S. technology, gold, and alternative energy. They’ll provide five current Buy recommendations to add to your portfolio today.

There are two types of tickets as follows.

1) Early Bird Tickets – ($29.95). Includes KeyStone’s Canadian Dividend All-Star Report ($599 value)

2) VIP Tickets – ($79.95). Includes the Dividend All-Star Report ($599 value), Your Future Portfolio Today in 10 Stocks Seminar Video ($79 value), and KeyStone’s 2020 Cash Rich/Debt Free, Profitable U.S. Stock Report ($599 Value)

To order, go to: https://keystocks.com/live-stream-2020-covid-19-crisis-portfolio-building-2-0/

Here is the schedule.

  1. June 9 @ 7:00 pm MDT
  2. June 16 @ 7:00 pm EDT

 

In This Issue:

Printable PDF

WHEN DEMAND EXCEEDS SUPPLY

By Gordon Pape, Editor and Publisher

The pandemic has created a new corporate hierarchy of winners and losers.

We all know who the losers are. Any company in the travel and hospitality sector falls into that category. So do oil companies, REITs, and car manufacturers.

The winners are fulfilment companies like Amazon, big box retailers such as Walmart and Costco, and any on-line company that offers face-to-face on-line communication.

There’s also one other category that many people tend to overlook. They are the companies that make products that everyone is desperately trying to buy these days – cleaners and sanitizers.

Have you tried to buy a container of disinfectant spray lately? Or a pack of sanitizing wipes? Forget it! Amazon has a notice on its website saying they’re all reserved for front-line workers. The suppliers can’t keep up with the demand.

One of the firms in this sweet spot is The Clorox Company (NYSE: CLX), which recently reported its biggest sales increase in nearly a decade.

In addition to bleach, which was the company’s only product when it was launched back in 1913, Clorox now produces a wide range of disinfectants for both home and institutional use. They include disinfectant wipes, Spore Defense Cleaner Disinfectant, Citrace Hospital Disinfectant, and many more.

The company experienced an unprecedented 500% surge in demand for its key cleaning products after the virus hit. Despite moving to a 24/7 production schedule and sourcing more supply from third parties, it still couldn’t keep up.

“We acknowledge our products aren’t consistently in stock, and there’s more to do,” said CEO Benno Dorer. “We put Clorox disinfecting wipes on store shelves every day and find that people scoop them up almost as soon as they’re delivered. But we are partnering with our retailers to serve consumers’ needs as best we can and expect continued meaningful movement in our ability to meet demand this summer. We are also making considerable investments to increase capacity for the mid-term, applying what we’ve learned from this crisis to be prepared for a surge in demand in the future.”

Clorox produces more than disinfectants. The briquets you use on your barbeque may be from them (Kingsford). Your kitchen garbage bag may be one of their products (Glad). The product you pour in the sink to clean the drain may be theirs (Liquid Plumr). Clorox also makes Pine-Sol, Hidden Ranch salad dressings, Calm, Fresh Step cat litter, and more.

As you might expect, given the spike in demand for its products, Clorox is doing very well from a financial perspective. Third-quarter 2020 earnings released last month showed sales growth of 15% and a 31% increase in earnings per share.

The company reported net sales of almost $1.8 billion for the three months to March 31, up from just under $1.6 billion in the year-before period. Net earnings were $241 million ($1.89 per share, fully diluted) compared to $187 million ($1.44 per share) in the third quarter of fiscal 2019. (Figures in U.S. dollars.)

Year-to-date net cash provided by operations was $806 million compared to $603 million in the year-ago period, for an increase of 34%.

The company increased its earnings forecast for the current fiscal year to $6.70 to $6.90 per diluted share.

Shortly after the results came out, Clorox announced a 5% increase in its quarterly dividend, to $1.11 per share ($4.44 per year). At Friday’s closing price of $197.57, the shares yield 2.25% at the new rate.

The main negative is that Clorox stock is not cheap. The shares are up by 29.46% so far this year, from a close of $153.54 on Dec. 31. At the current price, the trailing p/e ratio is 29.95 – not outrageous for a company whose earnings appear poised to grow, but not cheap either.

We are adding Clorox to our Recommended List for current and long-term growth. However, given the high price you may wish to buy in traches – perhaps one-third of your position now and the rest on dips below $200. The closing price on Friday was $197.57.

Follow Gordon Pape on Twitter @GPUpdates and on Facebook at www.facebook.com/GordonPapeMoney

 

Top

THREE WINNING SMALL-CAPS

Contributing editor Ryan Irvine is back today with updates on three of his winning picks. Ryan is the CEO of KeyStone Financial (www.KeyStocks.com) and is one of the country’s top experts in small-cap stocks. He is based in the Vancouver area. Here is his report.

Ryan Irvine writes:

This month we update three stocks which continue to provide readers with strong gains, particularly in the cases of Viemed and XPEL. Here is a rundown.

Sylogist Ltd. (TSX-V: SYZ, OTC: SYZLF)

Originally recommended on Sept. 18/17 (#21734) at C$8.83, US$6.90. Closed Friday at C$10.64, US$7.57.

Background: Sylogist is a technology innovation company which, through strategic acquisitions, investments, and operations management, provides intellectual property solutions to a wide
range of public sector customers.

The company publishes mission-critical software products that satisfy the unique and sophisticated functionality requirements of public sector entities, non-profit organizations, educational institutions, government agencies, as well as public compliance driven and funded businesses. Sylogist delivers highly scalable, multi-language, multi-currency software solutions, which serve the needs of an international clientele.

Performance: The stock dipped in March but is now trading at close to its end of 2019 level.

Financial results: The company recently reported results for the second quarter of fiscal 2020. Recurring revenues from subscriptions and maintenance grew by 9% to $7.2 million, compared to $6.6 million for the same period of 2019. Total revenues were flat at $9.4 million versus $9.5 million last year. Reported earnings were $2.8 million ($0.12 per share), compared to $2.4 million ($0.11 per share) the year before, an increase of 19%. Adjusted EBITDA was $5.6 million, or $0.24 per fully diluted common share, an increase of 34%.

Sylogist continues to boast a very strong balance sheet with adjusted working capital increasing 35% in the quarter to $47.3 million, or $1.99 per share.

Dividend: Given the company’s strong performance and opportunities for further growth, the board of directors approved a 10% increase in Sylogist’s quarterly dividend to $0.11 per share ($0.44 per year). The yield at the current price is 4.14%.

Acquisition: On April 21, Sylogist announced the acquisition of Information Strategies Inc. (InfoStrat), for total cash consideration of approximately $3.5 million.

InfoStrat, based in Washington, DC , is a long established, profitable business and a Microsoft Gold partner. It caters to federal and state governments and not-for-profit/NGO organizations throughout the United States. It provides software solutions and professional services based on its proprietary intellectual property that uses Microsoft Dynamics 365 CRM and Sharepoint at its core.

The acquisition extends Sylogist’s public sector footprint to U.S. federal and state governments, strengthens the company’s relationship with Microsoft, and provides complementary IP and delivery capabilities to better serve customers. InfoStrat’s revenue in 2019 was approximately $5.5 million.

Management transition: Jim Wilson has announced his retirement as president and CEO, effective at the end of the company’s fiscal year on Sept. 30.

Strategic review: As a result of the forthcoming leadership transition, the board of directors has undertaken a strategic review to set the course for the future of SYZ. Strategic elements being considered include the following:

1) Recruiting a senior leader or leadership team to drive growth principally and initially in the United States, where the vast majority of the company’s customers and market opportunities reside.

2) Strengthening and diversifying the board of directors.

3) Evaluating other options and opportunities, including strategic alternatives, to maximize shareholder value. Number three typically includes the option of a business sale. In almost any other market condition this would boost the stock as investors would speculate on a takeover bid. However, capital is constrained near term.

The board has engaged Shea & Company, a San Francisco-based boutique M&A adviser, to assist in its market assessment of strategic opportunities and alternatives to enhance shareholder value. Shea specializes in enterprise software with extensive reach across North America and beyond in public sector technology,

Sylogist says it has no knowledge or expectations of what developments may occur with respect to any of its various initiatives and, except as required by law, does not intend to make any further announcements unless or until any material information becomes releasable.

Conclusion: Given the nature of Sylogist’s product offering and the importance to its customers, the average customer life is more than 10 years. Some customers have been using the company’s software for several decades and the company’s historical customer retention rate is over 90%. During a downturn, the business should be relatively sticky, but we do not expect much organic growth in the near term due to the lack of investment in sales and R&D.

Growth has been positioned to come via acquisition and the InfoStrat purchase appears to have potentially re-ignited the growth-by-acquisition potential of the business. Opportunities from this perspective should be more readily available over the coming year and at more reasonable prices than in the recent past. What we are reading from management is that all options are on the table regarding potential acquisitions from the cash on hand as well as Sylogist itself being acquired. We believe the business is listening to offers, but there are absolutely no guarantees in this regard and we do not often suggest investing on this basis.

The uncertainty surrounding management transition adds risk, but it is also an opportunity.

Action now: We maintain the rating of speculative Buy.

XPEL Inc. (NDQ: XPEL)

Originally recommended on June 4/18 (#21821) at $3.32. Closed Friday at $16.42. (All figures in U.S. dollars.)

Background: Founded in 1997, XPEL has grown from an automotive product design software company to a global provider of after-market automotive products, including surface and paint protection, headlight protection, and automotive window films. It is also a provider of complementary proprietary software. In 2018, the company expanded its product offerings to include window film (both commercial and residential) and security film protection for commercial and residential uses. Today, XPEL has approximately 180 employees and serves over 2,000 direct customers and several thousand indirect customers around the world.

Performance: The stock traded above $18 early in the year. Along with the rest of the market it dipped in March but has since recovered well.

Financial results: First-quarter revenues increased 14.8% to $28.4 million as compared to $24.7 million in the prior year. Operating expenses increased to $7.8 million or 27.5% of sales as compared to $5.7 million or 23% of sales in the prior year period. The increase was primarily due to $0.7 million in expenses associated with the company’s annual dealer conference. The 2019 dealer conference took place in the second quarter. Net income was $1.6 million ($0.06 per share, fully diluted) versus $1.9 million ($0.07 per share) in the first quarter of 2019.

As of March 31, XPEL had cash and cash equivalents of $14.8 million compared to $11.5 million at Dec. 31, 2019.

Discussion: We consider XPEL a very well-run business that we want to own long term. As we expected, the company reported a strong first quarter, outside of China. In the second quarter, North American and European operations will be significantly affected by the current stay-at-home protocols. For example, when China was in lockdown for much of February, auto sales in this market were down 80%. There was also substantial disruption in logistics, including port delays and other congestion issues. On the flipside, China will be positioned to show substantial growth in the current quarter, especially compared to the weak numbers it reported in the same period of 2019. That said, the numbers will be off the peak numbers XPEL posted in its 2019 fourth quarter.

XPEL provides a great product and a good value proposition, but its products are discretionary and will be subject to lesser demand in a shutdown environment and recession.

Outlook: XPEL is a company we will look to own long term. In the near term, given the stock is up 374% since our original recommendation two years ago, we view it as prudent to re-balance and increase cash positions given near-term uncertainty.

We expect to move to a Buy rating on XPEL once again when clarity on the length of the shut-down in North America becomes more certain. For investors looking to hold XPEL for 3-5 years or greater, the option is to hold the stock presently at 30 times earnings as there is no guarantee the stock will move lower to a more attractive range. Near term we advise selling a half position in XPEL.

This is no reflection on the quality of the business. We love XPEL’s growth, management, and business model, but we see it a prudent to “right size” positions in the stock near-term and bank some of the profits. We are holding onto a solid position in the stock long-term but find it wise to clip some profits.

Action now: Sell half for a gain of 392%.

Viemed Healthcare Inc. (TSX, NDQ: VMD)

Originally recommended on May 20/19 (#21919) at C$9.12, US$6.77. Closed Friday at C$11.54, US$8.63.

Background: 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 therapists 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. The 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 third-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 caregivers to ventilate the patient with a mask versus forcing them to be in the bed intubated. The quality of life is better, and the healthcare costs decrease.

Performance: The shares fell to $3.36 in March but have rallied strongly and are now close to their all-time high.

Financial results: Viemed released strong first-quarter results on May 4. Quarterly net revenue increased 31% to $23.8 million and non-GAAP EPS increased 48.6% to $0.107 per share. Adjusted EBITDA increased 76% to $7.9 million.

The company reported growth in its active ventilator patient base of approximately 25% compared to the same quarter last year and 3% over the fourth quarter of 2019. Approximately $1 million of first-quarter revenue was from product sales related to the ongoing COVID-19 pandemic.

Viemed ended the quarter with a reasonably healthy balance sheet consisting of $8.4 million in cash and $18.7 million in debt. Over the past four quarters, the company has generated non-GAAP earnings per share of $0.35, which at the current price equates to a price-to-earnings valuation of approximately 33 times. Viemed is in a unique position as it has been benefiting from the COVID-19 pandemic.

Conclusion: The company is one of the largest independent providers of ventilators in the U.S. and has had the opportunity to take part in fighting the pandemic by providing expertise and education, supplying ventilator machines, and freeing up hospital beds with its home healthcare solution. Viemed reports that these efforts have allowed it to establish long-term relationships with hospitals and physicians, which it expects will strengthen over time.

The company released financial guidance for the second quarter and expects net revenues of approximately $42 million to $44 million, including approximately $20 million of product sales related to the pandemic. Adjusting for one-time product sales, the guidance implies that revenue will be consistent (or flat) relative to the same period in 2019. The company attributes the lack of core business revenue growth to a temporary slowdown in hospital systems as many patients with chronic illness are avoiding hospitals and clinics have closed as a result of the pandemic

We estimate Viemed can produce 2020 adjusted EBITDA per share of $1.16. If we apply a multiple of approximately 11.5 times to this figure we arrive at a fair value in the range of $13.50. As such, and despite very strong positive gains in a down market, Viemed continues to offer an attractive investment proposition in the U.S. home healthcare industry.

The company has made a meaningful contribution to the fight against the pandemic and management believes that this has resulted in the creation of new, long-term relationships that will be an asset to it in the future. We believe the pandemic has highlighted a need for increased home healthcare infrastructure. The company also noted that U.S. healthcare regulators have removed non-invasive ventilators from the 2021 round of competitive bidding. Management’s understanding is that ventilators will be out of the program for at least three years, which helps to alleviate one of the short-term risks facing the company.

Action now: We maintain our rating of speculative Buy.

 

Top

GORDON PAPE’S ETF UPDATES

BMO India Equity Index ETF (TSX: ZID)

Originally recommended on April 10/17 (#21715) at $22. Closed Friday at $22.36.

Background: This ETF seeks to replicate the performance of the S&P/BNY Mellon India Select DR Index. It tracks 17 Indian stocks traded as American Depository Receipts (ADRs) and Global Depository Receipts (GDRs) in New York and London. These are blue chips, among the biggest and most financially stable Indian companies.

Performance: The pandemic has taken a toll on this ETF. It dropped as low as $16 in March before staging a rally. However, India has been badly hit by the coronavirus and recovery is a long way off.

Portfolio: The ETF has 36% of holdings in four banks: HDFC (13.5%), ICIC (9.2%), Axis (7.8%), and the State Bank of India (5.6%). That’s down 10 percentage points from the time of our last review so this fund has reduced exposure to the financial sector.

The largest position (20.8%) is held in conglomerate Reliance Industries, which is involved is everything from energy and textiles to retail and telecom. Infosys (16.5%) is the second largest holding. Engineering firm Larsen and Toubro (10.5%), a Canada Pension Plan Investment Board partner, occupies the number four spot.

Key metrics: The management expense ratio (MER) of 0.73% is on the high side. The fund was launched in January 2010 and has $56.7 million in assets under management, well down from our last review.

Distributions: Payments are made annually, and they are negligible. The fund’s December distribution was only $0.03 per unit. If you need cash flow, look elsewhere.

Outlook: The International Monetary Fund recently slashed India’s 2020 growth forecast to 1.9% from the January estimate of 5.8%. That’s the bad news. The good news is that India and China are the only two major economies in the world that are expected to show any growth at all this year. India’s growth rate is expected to rebound to 7.4% in 2021.

Action now: Hold. It’s going to take longer than expected because of the pandemic but this ETF should recover well over time. But don’t put money here if you can handle volatility.

iShares MSCI EAFE Index ETF (CAD-Hedged) (TSX: XIN)

Originally recommended on March 18/13 (#21311) at $19.68. Closed Friday at $25.27.

Background: This ETF is the Canadian-dollar hedged version of a U.S. fund (NYSE: EFA) that tracks the MSCI EAFE Index, which covers Europe, Australasia, and the Far East. Most of the assets are invested in the U.S. version of this ETF.

Performance: Like everything else, this ETF took a hit in March, falling all the way to $18.16. But it has regained a lot of ground as world markets have steadied in anticipation of an economic recovery. Over the five years to May 31, the fund generated an average annual compound rate of return of just over 1% but the 10-year number is a more respectable 6.04%.

Portfolio: This ETF is highly diversified, with more than 1,000 underlying positions. Interestingly, the top three positions are all Swiss-based, headed by Nestle at 2.37% of the total portfolio. Roche Holding is at 1.82%. No other stock has a position of over 1.5%. Japanese stocks make up 25% of the assets, with just over 14% in the U.K.

Key metrics: The fund was launched in September 2001 and has just over $1.1 billion in assets under management. The MER is 0.48%.

Distributions: They are paid semi-annually, in June and December. The December payment this year was $0.334 per unit.

Outlook: We should see a slow recovery in the second half of the year. The major downside risk is a second wave of the coronavirus that forces governments to lockdown their economies again. Investors who want long-term exposure to the countries that are covered by this ETF should maintain positions.

Action now: Hold.

iShares Core S&P/TSX Capped Composite Index ETF (TSX: XIC)

Originally recommended on March 25/12 (#21212) at $19.58. Closed Friday at $25.34.

Background: This fund is designed to replicate the performance of the Capped S&P/TSX Composite Index, net of expenses. In other words, in invests in a broad portfolio of Canadian stocks.

Performance: The fund was hit by the twin shocks of the coronavirus and the oil price slump (13.6% of the portfolio is in the energy sector). The price dipped as low as $17.92 in March but, like the rest of the market, has rebounded.

Portfolio: The fund holds 229 positions. Royal Bank is number one at 6.2% of the assets but tech darling Shopify (5.2%) has replaced TD Bank (5.1%) at number two. Enbridge is at 4.2%. No other company has a weighting of more than 4%. Almost 30% of the portfolio is in financials, with 13.6% in materials.

Key metrics: The fund was launched in Feb. 2001 and has $6.2 billion in assets under management. That’s about $500 million more than at the time of our last review. The management expense ratio is very low at 0.06%.

Distributions: Payments are made quarterly. The March distribution was $0.218 per unit. The trailing 12-month yield is 3.5%.

Outlook: In its statement last week, the Bank of Canada said the impact of the coronavirus on the economy has not been as bad as its worst-case scenario, despite the historic loss in output and jobs. The Bank predicted growth would resume in the third quarter but did not offer a projection of magnitude.

Action now: Hold. If you want to have a position in the broad Canadian economy, this is the best way to do so.

iShares Core S&P U.S. Total Market ETF (TSX: XUU)

Originally recommended on March 2/15 (#21509) at $20.42. Closed Friday at $32.32.

Background: This ETF tracks the entire U.S. market, including small, medium, and large cap stocks. It comes in both a hedged version (XUH) and an unhedged version (XUU). We have recommended XUU.

Performance: The fund traded as low as $23.70 in March but is now performing well as markets rally.

Portfolio: The fund invests in four U.S. ETFs, the largest of which are the iShares Core S&P 500 (51.5%) and the iShares Core S&P Total U.S. Stock (41.5%). The rest of the portfolio consists of small positions in Small Cap and Mid Cap ETFs and a limited amount of cash.

Key metrics: The fund was launched in February 2015 and has just over $1.1 billion in assets under management. The MER is a very low 0.07% so almost all your money is working for you.

Distributions: Payments are made quarterly and the amounts vary considerably. The latest was $0.119 per unit in March. Over the past 12 months, distributions have totaled $0.535 per unit, for a trailing yield of 1.7% at the current price.

Conclusion: This is an all-stock ETF so returns will reflect what is happening in the U.S. equity markets. That explains the big rebound since the March lows. I regard it as a core long-term holding for anyone wanting on-going exposure to the broad U.S. market, however at this time I would hold current positions and wait for a market dip to buy in.

Action now: Hold.

Horizons Marijuana Life Sciences Index ETF (TSX: HMMJ)

Originally recommended on Jan. 15/18 (#21803) at $19.90. Closed Friday at $7.56.

Background: This ETF invests in a portfolio of cannabis stocks. It seeks to replicate, to the extent possible, the performance of the North American Marijuana Index, net of expenses. The Index is designed to provide exposure to the performance of a basket of North American publicly listed life sciences companies with significant business activities in the marijuana industry.

Performance: There were high hopes for the cannabis sector when marijuana was legalized. And in the early days stocks like Canopy Growth did well, helping to boost returns on this ETF. But all that is history. The sector has been a disaster, and losses continue to pile up. This ETF closed on Friday at $7.56, down 62% from the original recommendation. As of May 31, the fund was showing an annual loss of 2.25% since inception.

Portfolio: There are 32 stocks in the portfolio, down from 63 at the time of the last review. The heaviest weightings are in Canopy Growth (13.2%), GW Pharmaceuticals (12.9%), Cronos Group (12.3%), Aphria (9.2%), and Scotts Miracle-Gro (9.1).

Key metrics: The fund was launched in April 2017 and was an instant hit with investors. But the excitement has long since faded. At one point the fund had about $900 million in assets. Now that’s down to less than $400 million. Given the performance, the surprise is that there is still that much left. The management fee is high at 0.75%, with an MER of 0.85%.

Distributions: Payments are made quarterly and can vary significantly. The March distribution was about $0.27 per unit.

Outlook: When I first wrote about this ETF, I stressed it was only suitable for aggressive investors who are willing to gamble on a fledgling industry that was having a lot of teething problems. The gamble did not pay off. Nothing has provided a spark for the sector and there’s no reason to believe that will change in the coming months. That said, the fund has staged a meaningful rally from its March low of $4.79.

This remains a highly speculative security. The only reason to hold is if you feel the sector will turn around in the near- to mid-term. If not, take the loss and sell.

Action now: Sell.

Top

LAST CALL FOR CRISIS WEBINARS

IWB contributing editor Ryan Irvine and his colleagues at KeyStone Financial will host two more live stock market investment webinars titled Crisis Portfolio Building 2.0 – Strategies to Survive, Then Thrive.

Each three-hour live webinar will include a one-hour interactive Q&A session.

Ryan and his team KeyStone will show you how to act during a crisis and start building a simple 15-25 stock portfolio designed to enrich you now and in the future. They will explore how the current crisis could be a tipping point for technological change in areas such as work from home, cloud computing, cybersecurity, artificial intelligence, the internet-of-things, and more. They will suggest specific opportunities in healthcare, U.S. technology, gold, and alternative energy. They’ll provide five current Buy recommendations to add to your portfolio today.

There are two types of tickets as follows.

1) Early Bird Tickets – ($29.95). Includes KeyStone’s Canadian Dividend All-Star Report ($599 value)

2) VIP Tickets – ($79.95). Includes the Dividend All-Star Report ($599 value), Your Future Portfolio Today in 10 Stocks Seminar Video ($79 value), and KeyStone’s 2020 Cash Rich/Debt Free, Profitable U.S. Stock Report ($599 Value)

To order, go to: https://keystocks.com/live-stream-2020-covid-19-crisis-portfolio-building-2-0/

Here is the schedule.

  1. June 9 @ 7:00 pm MDT
  2. June 16 @ 7:00 pm EDT