KeyStone’s 2015 Cash Rich Report Released
In the wake of the 2008 credit crisis that froze capital, cash in hand became king. With Western economies awash in debt, both public and private, the great deleveraging continues. Companies with strong balance sheets including zero or manageable debt, solid cash positions, good working capital, and good cash generation can withstand downturns and prosper in market upturns. As such, these Cash Rich stocks continue to garner strong market attention.
With that in mind, KeyStone recently released our 2015 cash Rich, Profitable Canadian Small-Cap Stock Report. Research for the 40+ page report begins with over 3,500 Canadian stocks, our research uncovers over 60 Small to-Micro Cap stocks – all profitable, cash rich (no debt) companies, many with between 10-100% of their market caps in cash. We drill down on each providing fundamental statistics and research notes from our management interviews and provide a select number of NEW BUY Reports. We provide Flash Updates with current BUYS|SELL|HOLD ratings on all Cash Rich Stocks currently in coverage. This year, our three New BUY recommendations include 2 high growth software Small-Caps, one low-priced Micro-Cap and bonus notes on our recent Specialty Pharmaceutical selection which trades at a significant discount to its peers.
The report has become an annual must read for growth and value investors. With 16 stocks highlighted in the annual report over the last 3 years receiving premium takeover bids, it serves as an excellent source of potential takeover targets. Unique research you can find nowhere else. Last year’s Top Cash Rich recommendation, Cipher Pharmaceuticals (CPH:TSX), has gained over 140% – do not miss out on this year’s recommendations.
Again, the theme with these companies has been strong balance sheets and strong cash flow. This type of pristine balance sheet can withstand and even profit from a downturn (via strategic expansion through purchase of distressed assets). We believe companies that hold this profile will continue to attract more attention from individual investors and as potential acquisition targets in 2015.
Having said this, readers must be careful to remember that not all companies included in the report meet our full criteria. In fact, a large cash balance in itself does not make a great investment. If not employed effectively, the return on investment can be low and the opportunity to create excellent long-term returns can be wasted.
To compile this report, we included micro, small, and mid-cap stocks with an eye towards the lower end. Within this report, we strove to include companies with cash balances that exceeded (in most cases) 10-20% of their total market cap as a minimum. We also looked for current profitability or profitability within the last 12-months. Our bias was also towards debt free companies or those with cash balances that significantly exceeded long-term debt. Finally, we have also included our brief research notes on each company from MD&A and management interviews. We advise clients pay close attention to these. The report can be used as a tool to put together your own watch list of companies that appeal to you at certain prices and make strategic purchases. While 9 companies in the survey are already in active coverage, we are monitoring the remainder for potential entry points – we encourage clients to reference the notes on each company for further individual details.
While our Top Pick from last year’s Cash Rich Report, Cipher Pharmaceuticals Inc. (CPH:TSX), has performed tremendously well already, the company’s strong free cash flow and cash balance provide management the fuel necessary for accretive acquisitions in 2015. We maintain our current long-term rating on the stock.
In a low oil environment and over the long term, our 2015 report highlights two energy related stock with excellent free cash flow that trade at depressed prices with very strong balance sheet. The first recently employed its cash rich balance sheet and is well positioned to benefit from the fruits of that cash deployment over the course of the next 1-3 years. The company remains a BUY in both the near term and long term even in the current energy environment based on what we expect to be solid growth in the second half of 2015 with its new drill rigs hitting active operation under 2-year contracts. The second energy service stock trades at low relative valuations with a strong balance sheet. In the near term, the company may face growth challenges in its core market if New Tanker builds decline. Having said this, the company is entering new markets in the second half of 2015 and management is focused on deploying its cash on hand towards accretive acquisitions over the next year. The stock is suitable for long-term investors with a 2-3 year time horizon.
Enghouse Systems Limited (ESL:TSX) is a long-term star on our Focus BUY list and considered a core holding for many long-term clients. The stock is an excellent example of how to generate consistent cash flow and growth via that cash flow long term. We maintain our HOLD rating on the stock near term.
Cash Rich Company Notes
This year we beefed up our individual note section providing full company summaries and written analysis with our thoughts on valuations and whether individual companies may be attractive to certain clients. We are monitoring a number of the 60+ companies for potential entry points.
Primary recommendations include our BUY (Focus BUY) on a software and hardware based technology company, which offers a good mix of both growth and an excellent balance sheet at reasonable valuations. We also initiated coverage on a unique on demand TV-based software company which also boasts a strong balance sheet, current growth and the potential for further dramatic growth via new contract wins. Finally, we initiated coverage on a semiconductor monitoring and measuring equipment manufacturer, which offers a strong balance sheet with good current valuations for long-term patient investors.
Outside of our 3 new recommendations included, we continue to closely monitor a number of stocks which we see as excellent businesses from the report that would make excellent long-term businesses if we can find opportune entry points in 2015.
Overall, 2015 is shaping up to be a very interesting year for North American markets. We see select value in information and technology-based businesses and have recently recommended a number of these including an undervalued Specialty Pharmaceutical Small-Cap which is poised to post significant cash flow growth in 2015. There will be select value in energy, but those investing here will likely have to take a long-term view as the industry adjusts to lower energy prices.
