Stock Idea…Geodrill Ltd

Stock Idea…Geodrill Ltd

Symbol : GEO

Exchange: TSX

Market Cap : 94 Million

Revenue : 76 Million
Three Year Revenue Growth : 25.4 %
Investment Type : Micro / Small Cap Value Turnaround

Price/Earnings : 12.0
Forward P/E : 3.8

Price/Book : 1.3

Price/Sales : 0.9

Price/Cash Flow : 6.2

Price : 1.98
Investment Stem : Cheap Small Caps Screen

Geodrill Ltd is a exploration drilling company. It is engaged in providing exploration and development drilling services to mining companies with exploration, development and production operations in West Africa and the African Copperbelt. 

The Company operates a fleet of Multi-Purpose, Core, Air-core and Grade Control drill rigs. The Company's geographic segments include Ghana and Outside Ghana. The multi-purpose rigs can perform both reverse circulation (RC) and diamond core (Core) drilling and can switch from one to the other. Multi-purpose rigs provide clients with RC drilling and the depth of Core drilling without the need to have two different drill rigs on site. Its drilling services also include water borehole and directional drilling. The Company's products include EDM 2000 multi-purpose, Sandvik DE 820 multi-purpose, Sandvik DE 810 multi-purpose, Sandvik DE 710 core, Austex X350 RC/Grade Control and Austex X300 Air-core. Its rigs and support equipment also include a fleet of boosters and auxiliary compressors. The Company has a fleet of approximately 40 drill rigs operating in Africa. It has operations in Ghana, Burkina Faso, Cote d'Ivoire, Mali and Zambia.

Established in 1998, Geodrill is a leading exploration drilling company with a fleet of 56 drill rigs operating in Africa. The Company has operations is Ghana, Burkina Faso, Cote d’Ivoire, Mali, and recently added Zambia.
 

Cash flow positive drilling company that serves the capital intensive gold mining industry in Africa. Its not a mining company but a drilling company that serves the mining sector. Customers include Newmont, Kinross, Centamin, Asanko, Endeavour Mining, Perseus and Semafo. Has very little debt. Weathered the bear market in the precious metals industry quite well. The company managed to keep increasing their number of meters drilled despite the down turn in that sector. Now their operational numbers are steadily improving as business is rebounding.

The dreaded metrics from Morningstar…

http://quote.morningstar.ca/Quicktakes/stock/keyratios.aspx?t=GEO&region=CAN&culture=en-CA&ops=clear

The company’s website…

http://www.geodrill-gh.com/

This is another company I ran across in my scan of the Canadian market on July 8^th of this year. It is not only operational cash flow positive but is producing free cash flow. It has a cash return of 3.9…If the market does correct in the next few months as I suspect it will, Gold related stocks like this one could very well move in the opposite direction. It could be a good ‘non-correlated’ stock to hold in an investment portfolio.

Again this isn't a stock recommendation, it is just an investment idea. Be sure to check things out for yourself. Remember this blog is a diary to myself where I can formulate my ideas and check back in on them at a later date.

Stock Idea…Gigamon Inc

Stock Idea…Gigamon Inc

Symbol : GIMO

Exchange: NYSE

Market Cap : 1.4 Billion

Revenue : 311 Million
Three Year Revenue Growth : 30.4%
Forward P/E : 36.4
Investment Type : Small / Mid Cap Emerging Growth

Price : 39.25 
Investment Stem : Disciplined Growth Investors

Gigamon Inc develops designs and sells solutions and products that deliver visibility of traffic across networks. It serves global enterprises, service providers and governments.    

  

Gigamon Inc provides active visibility into physical and virtual network traffic, enabling stronger security and superior performance. Gigamon Visibility Fabric(TM) and GigaSECURE(R), the industry's first Security Delivery Platform, deliver advanced intelligence so that security, network, and application performance management solutions in enterprise, government, and service provider networks operate more efficiently and effectively.       

          

An emerging growth stock which is cash flow positive with no debt while being the market share leader in traffic visibility solutions. Founded in 2004, IPO'ed in 2013 on the NYSE. Have global offices in 20 countries, with over 2400 customers. Serving the federal, financial services, healthcare, retail and technology markets with 46 patents issued in the US and internationally. A leader in the disruptive Visibility market. A recurring revenue 'repeat purchase multiple' of 127 times. The leader in the waves of Visibility in the Security, Mobility and Public cloud markets.

The dreaded metrics from morningstar...

http://quote.morningstar.ca/Quicktakes/stock/keyratios.aspx?t=GIMO&region=USA&culture=en-CA&ops=clear

The companies website...

https://www.gigamon.com/

Remember this is an emerging growth company so the usual value metrics will not apply. Midecap growth companies like this get more of their value from investments they expect to make in the future and less from investments they have already made. The value of their growth assets is both a function of how much growth is anticipated but also the quality of that growth. It is the return they make on the capital they have invested in their business. Remember our definition of return on invested capital (ROIC).

Check the stock out for yourself. It looks like an interesting investment idea to me. If you do decide to invest try putting on a third of your position and monitor the stock from there, if things look like there going to work out, you can always add to your position later. There is never a need to rush in and buy a stock. Take your time and have a good look at it. The market as a whole is pretty toppy right now. This stock could be going off at an even cheaper price in the autumn. The biggest problem when investing in the market is handling your own emotions. Try to think of yourself as a hard-nosed capital allocator who is patient and disciplined when investing his/her money.

And remember the risks involved when investing, especially in tech stocks where there is always the chore of attracting the best and brightest minds to come work for you. That being the case, pay attention to the corporate culture of a company, it should be an enticing place to work who values their employees (intangible assets). And keep in mind that some new company with a fresh crop of young propeller heads can come along and disrupt our disruptor stock. Remember we all face an unknowable future where anything can happen so it pays to be aware of the risks as well as the rewards when investing your money in the stock market.

                                                 

Adjusted Earnings and the importance of the Cash Flow Statement

Adjusted Earnings and the importance of the Cash Flow Statement

The Stock Market can be a confusing place with so much information to assimilate and to learn. And Wall Street doesn’t make it any easier with their lax approach to governing themselves (remember the financial mess of 2008).

A new trend is taking shape, that of ‘adjusted earnings’. Reported earnings are based on the income statement which is already filled with various estimates and assumptions of the firm’s accountants. If that wasn’t enough there is also the danger of the company manipulating its earnings to make things seem better than they actually are. With the tremendous emphasis on beating the next quarter’s earnings the senior management teams are incentivized to make their earnings seem as good as possible.

When a company uses adjusted earnings they tend to deduct anything negative from their income statements (acquisition costs, depreciation and amortization). This makes their numbers look better than they actually are. This in turn helps executives reach their incentive targets more easily to take home higher bonuses. Does any of this sound familiar? It’s the same old thing on Wall Street…the dreaded 'Greed' factor.

The DIY investor can help protect himself by putting less emphasis on reported earnings and the income statement and instead pay more attention to the cash flow statement. The cash flow statement strips away all the abstract, noncash items such as depreciation that you see on the income statement and tells you how much actual cash the company has generated.

The Cash Flow Statement is divided into three main categories as follows...

Operating Cash Flow...

This category shows operating cash flow, which in many ways is the single most important number indicating the health of a business. It tells you how much cash the company made from its business activities. This is the place to focus on as it represents the cash-generating ability of the business.

Investing Cash Flow...

Indicates the investing activities made by the company to help maintain its business.  In short anything that involves the buying or selling of the company's assets. The key line here to keep track of is the cash spent on capital investments. Companies that need a lot of capital spending can be difficult businesses to invest in as they need a lot incoming cash to help maintain their business. A good rule of thumb is to invest in companies that are the suppliers to these capital intensive companies.

Financing Cash Flow...

Involves Equity financing such stock and other forms of capital as well as Debt financing (borrowing), such as short term notes, long term loans and bonds.

And finally we come to Free Cash Flow.

When you subtract capital spending from Operating cash flow you get Free Cash Flow which is how much cash the company actually generated from its business after it paid out its expenses for running the company. Companies that have free cash flow often make good investments as they can take this cash and invest it back into their business without incurring anymore debt. If you can buy these businesses during a market downtrend when everything sells off, they can make really good investments. 

Follow-up on Hedging

Follow-up on Hedging

On April 9^th I posted a piece on how I was hedging my investment portfolio to manage my risk in the market place. I had bought an ETF on the NYSE (RWM) that shorts the Russell 2000 about two weeks before I wrote that post.

I am now down just over 11 percent on that investment. In hindsight I regret making that move as it has cost me money in the in term.  However at the time I didn’t have the benefit of hindsight. I was facing an unknowable future and felt that risk was elevated in the marketplace. Looking back I now feel I put it on a little early.

So what do I do now? My feeling is that the underlying market is continuing to weaken under the surface of the market indexes. Market tops are like that. They can continue to go up, caught up in their own momentum and mathematics.The underlying breadth of the market (momentum of breadth) is weakening even as the major indexes continue their upward move. There is also some market rotation going on as the big money shifts its positions around. I'm going to hold on to my short for now and re-evaluate later on down the road. 

This is typical of the type of decisions an investor will have to make. Faced with the uncertainty of an unknowable future he will have to make a determination as of what to do based on the present market environment. If his decision doesn't work out, he shouldn't beat himself up over it. Its just part of the game of investing and dealing with a future where anything can happen. Right now my 'short' is still a 'work in progress'. As I feel the market continues to weaken I will hold on to my short and wait. Learning how to wait is a big part of investing.

A Simple Stock Screen for Small Quality with Value

Small Quality with Value

I run a stock screen every once in awhile in my TD Discount Brokerage account. It’s a simple screen with three inputs. The screen focuses on stocks that trade in Canada.

Market Cap………………$49.2 million and up (size of company)

Price / Cash Flow Ratio…15.2 and under            (value)

Return on Capital………..9.7 % and up               (quality)

The screen turned up 35 stocks as of Saturday morning July 8 2017. I eliminated all financial stocks as return on capital isn’t the proper measure for these types of stocks. I then eliminated all preferred shares that showed up. I then checked the ‘cash return’ on the remaining stocks in the screen. The cash return tells an investor how much free cash flow a company is generating relative to the cost of buying the whole company, including its debt burden. To calculate cash return, add free cash flow (cash flow from operations, minus capital expenditures) to net interest expense (interest expense minus interest income). That’s the top half of the ratio. The bottom half is called “enterprise value”, which is the company’s market capitalization (equity) plus long-term debt, minus any cash on the balance sheet.

I cherry picked the remaining stocks insisting that their cash return was greater than the yield of the 10 year Canadian Bond. The great thing about the cash return of a stock is that you can compare its yield to the ongoing risk free rate (10 year bond) and hence get a sense of the value it is offering you as an investor.

The results…drum roll please are as below…

Magellan Aerospace Corp                   MAL

Intertape Polymer Group Inc              ITP

High Arctic Energy Services Inc        HWO

Rocky Mountain Dealerships Inc       RME

Geodrill Ltd                                        GEO

Pacific Insight Electronics Corp         PIH

PFB Corp                                            PFB

Now I’m not suggesting you run out and buy these stocks sight unseen. There is no reason to rush in and start buying immediately, especially now that the current market is looking somewhat toppy. But it might be a good idea to start researching some of these stocks as potential investment ideas. Try visiting their website and get a sense of what they are about. Is it easy to access the information you want? It should be. Put an emphasis on transparency. If you are not sure about something put it aside and try going back to it later, or just move on to the next investment idea. No one has a clock on you. Relax, in the end its just a game and money is just a way of keeping score. 

All of the numbers that were used in generating this list of stocks came from a static past. See if you can unearth a dynamic piece of information that might act as a catalyst for an investment down the road. The stocks in this list are smaller but are efficiently run and offering good value. Chances are the big investing institutions won't be able to invest in them because of their size. But we can and that is part of the edge we have on the investing establishment.


An additional insight...This screen only came up with 35 stocks, most of which were small caps (small caps fall under the market's radar more readily). That's a fairly low number for this screen indicating to me that the over all market is getting pretty pricey.