KeyStone Financial’s Ryan Irvine says his firm evaluates about 3,500 companies per year to find “the best growth and value-type small-cap stocks.”
Speaking at the Vancouver Resource Investment Conference, Ryan Irvine, president and CEO of KeyStone Financial, explained how to choose small-cap stocks, noting that his firm evaluates about 3,500 companies per year to find “the best growth and value-type small-cap stocks.”
Irvine said the list of companies gets narrowed down to between 10 to 12 “individual gems” every year for KeyStone’s clients. While the firm doesn’t focus primarily on resource companies, he noted that investors can “play an uptick in gold through a company called Dynacor (TSX:DNG).”
Irvine said the company’s share price could go to around $3 in 2018, up from its current price of $1.80. “That would be a tremendous return and a way to play the gold market, which is different from just buying a resource exploration play or even a producer that has single-mine exposure,” he said.
He also highlighted technology licensing company Sylogist (TSXV:SYZ) for its “consistent track record of growth — compound annual growth in terms of revenue is over the last five years about 29 percent.” Irvine said the company has no debt, and upped its dividend in 2018. He added, “we think that it has 40 percent upside from where the shares are trading this year.”
His advice for investors building a portfolio involves a strategy called “focused diversification.” That means picking 10 to 12 stocks from varying sectors, and buying them over the course of a year. Overall that equates to buying one to two stocks per month.
Watch the video above for more insight from Ryan Irvine. The transcript for this interview is available below.
INN: I want to talk you a little bit about how you do research and how you pick out stocks for people?
RI: Well I’ll tell you we have absolutely no lives. We sit in front of a computer and we literally look at 3,500 companies per year. We look at their balance sheets, their financial statements. We find the best growth and value type small-cap stocks. We specialize in that area, there’s a couple area of our business. But I’m going to focus today on the small-cap area of our business. We look at all profitable based businesses in Canada. So when we go through about 3,500 companies a year, we’re literally just looking to find 10 to 12 companies for our clients. Every year that match our specific criteria of growth. We look at a growth at a reasonable price type model.
INN: And do you classify these in any way or sort of tailor them for the specific client?
RI: Yeah, I mean, well it’s not for the specific client they’re subscribing to our service within that area of research which would be small-cap growth stocks. We classify them as you know, a market cap typically in Canada of under 2 billion which would be a small cap but it is on the lower end of that that we slant towards because we think that is an area of the market where we can actually add value through discovery research. Looking through all those financial statements that we do and uncovering you know, 10 to 12 individual gems every year for our clients.
INN: Can you talk about a couple of stocks that are looking good this year?
RI: Yes, well we are at a resource conference today. So I’m going to mention a company that is in this segment. I’m going to put a warning on that: we do not look at many resource companies generally because like I said when we look through those 3,500 companies every year we find that resource exploration companies are great destroyers of capital and it’s blasphemy to say that at a conference like this. But it’s not a segment that we like to position our clients in and having said that I’m going to give you a way to play an uptick in gold through a company called Dynacor, the symbol is DNG on the TSX. What they do is provide milling operations in Peru. They don’t have a deposit there they actually have a lot, hundreds of small-scale miners. They provide the feedstock for their mill in terms of mining operations. They provide the ore and they mill it for them. Now they’ve had some exciting announcements that we’ve seen lately. At the start of this year, Dynacor paid off all its debts so they’re in a net cash position. They have a new mill in Peru, The Chala Mill that is processing now since November 25th at 300 tons per day. Which is at capacity. They announced record quarterly production in the last quarter of just under 25 thousand ounces in that quarter. If you annualize that – well, we’re not saying that they can do that next year but if you annualize that the projected production is in the range of 100 thousand ounces coming this year. We look at value, we look into what the company, the fundamentals behind the business. It has great fundamental value right now. Enterprise value to EBITDA for next year based on is under 4, which for its segment is very low and it typically trades at 10 to 12 times cash flow. Right now it’s trading well below that expected level. If it did just 10 times our expected cash flow next year we could see the share price go to around $3 this year. Its trading at a $1.80 right now so that would be a tremendous return and a way to play the gold market which is different from just buying a resource exploration play or even a producer that has single line exposure.
INN: Do you have any predictions to offer for the gold market for 2018?
RI: We don’t do predictions in the gold market.
INN: Okay, no problem.
RI: No problem. It’s good to ask but we don’t do any predictions in that area. We just look for great businesses trading at low prices. The price of gold is going to do what it’s going to do. We just focus on the core operations of the business and look for low debt great growth and reasonable valuations.
INN: So that’s a resource stock obviously. What about, there’s a lot of excitement about cannabis, bitcoin and other cryptocurrencies. Do you have any kind of advice or picks for those spaces?
RI: Excellent question, nothing right now that we can find that will meet our criteria. I mean there’s some, there’s growth in cannabis right now but what we don’t see is the profitability. There are a couple companies like Canopy (TSX:WEED) and Aphria (TSX:APH) that are actually producing a marginal profit or you can see a profit there. In the future, it could happen, but it doesn’t meet our strict criteria and we do our clients a disservice when we deviate from our criteria. I can talk about another company if you want, Sylogist (TSXV:SYZ) is a company we’ve talked about here in the past it’s SYZ is the symbol. The enterprise-level management software, we think it’s a valuation play for us. Consistent track record of growth, compound annual of growth in terms of revenues over the last five years. About 29 percent EBITDA growth over that period of 28 percent. Trades it very reasonable valuations relative to US peers. They traded about 10 time EBITDA next year where or it’s about 11 times sorry, where the US comparable straight at 30. There’s no debt like a $1.20 per share cash in the bank 28-29 million. Those are the companies that we like to invest in. They’ve upped their dividend significantly. They just upped it again this year. We think that it has 40 percent upside where the shares are trading right now. So you can buy a company with a solid business, good growth pays you a dividend and has upside in terms of the share price. There’s a business that we like to buy for our clients.
INN: Great, and do you have any advice for investors looking to build a portfolio?
RI: That’s a great question. I don’t get that often. We have a strategy called focused diversification. We don’t want you to buy is 2 or 3 of the stocks you recommend even if they’re our highest conviction stocks because that’s too much company-specific risk. But we don’t want you to buy 30 or 40 individual companies for your portfolio because you just become the market. We want to beat the market, if you want to beat the market you can’t just be the market right? So we find the sweet spot in your growth area your portfolio is 10 to 12 individual stocks. We would buy those from varying sectors. We would not buy them all at one time in a given year if you’re starting your portfolio we would build them on a year basis. So, you’re buying 1 to 2 stocks per month. Prevents you from buying at a market top within a given year. And we find that if you allocate your funds this way it’s a great way to build a portfolio for an individual investor. We give seminars on this all the time.
INN: Great, I’m pretty much out of questions is there anything else that you’d like to touch on?
RI: No. We’re good, I think you did a great job. I just like to, I’d just like to say, is come out to some of our seminars. You can go to our website at www.keystocks.com.We teach the individual investors how to build portfolios and then give you the research to fill those portfolios with great individual stocks. That’s what we do.
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Securities Disclosure: I, Melissa Shaw, hold no direct investment interest in any company mentioned in this article.
Editorial Disclosure: The Investing News Network does not guarantee the accuracy or thoroughness of the information reported in the interviews it conducts. The opinions expressed in these interviews do not reflect the opinions of the Investing News Network and do not constitute investment advice. All readers are encouraged to perform their own due diligence.