KeyStone Financial CEO Ryan Irvine talks about the criteria for choosing small cap stocks, the trend he is seeing in 2017, and his stock pick.
KeyStone Financial is an independent research firm that has been providing its clients with small-cap and income/growth stock research since 1998. Based in Vancouver, BC, KeyStone has a small-cap service return of 38.46 percent over the past 17 years.
INN spoke with KeyStone Financial CEO Ryan Irvine to ask about the company’s criteria for choosing small cap stocks, the trend he is seeing in 2017, and his stock picks, specifically in the technology space.
Irvine said that in choosing small cap stocks, his analysts look at company earnings, good, solid business, and growth at a reasonable price. He said, “[I]t’s really fundamental analysis, then we dig in with management, and look at the business underlying it and if it has that strong growth going forward you pair that value with growth. You don’t find that often and they’re kind of strange bedfellows to see growth in value in the same bed together. When you find that, it’s a beautiful thing.”
KeyStone has several stock picks in different sectors, but one technology pick is Photon Control (TSXV:PHO), a manufacturer, designer and distributor of optical sensors and instruments. Irvine says Photon provides, “the backbone for the Internet of Things which is a trend that we really believe has a tremendous growth profile ahead of it.” He added that the company has had a record year last year, and he sees that continuing to next year, “They have a record backlog right now. And the balance sheet is tremendous which is what we love: $30 million in cash for a company that trades at a dollar.”
We also asked Irvine for his thoughts on the Trump administration. He pointed out that Trump’s proposal for tax cuts will be good for any company, and will result in “an uptick in earnings.” For tech companies specifically, Irvine believes that Trump will, “help a lot of tech companies particularly the larger ones that have money overseas to bring it back.”
Watch the video above for the full interview, or read on below for the full transcript.
Investing News Network: Can you tell us a little bit about KeyStone Financial?
Ryan Irvine: KeyStone is an independent research firm. So by independent I mean we are not paid by the companies that we do research on which are the stocks that we cover, nor do we have a financing wing in our company that does financing for the companies that we cover, so we’re fully independent. We have clients across Canada and the US who are individual investors and institutional investors. We give recommendations to them through research reports, particularly in the small cap area, that’s where we started 18 years ago. We also do income and dividend based stocks as well. They pay us to give them and build them portfolios so they pair our service with a discount brokerage, so they trade for around $10 a trade. We build them portfolios over year to year and a half basis, or we buy one stock basically one or two stocks a month because we can only find really one or two that we really like through our extensive research at that time, and we build — we don’t say buy two or three stocks in the small cap sector that’s too much sector or individual company specific risk. We don’t want to buy thirty, because then you just bought the market. So the sweet spot is to buy eight to twelve companies over that period. High quality cash flow based investments that we have done extensive research on where management own, and you’ve got good cash in the bank and a good balance sheet and you have a growth outlook going forward.
INN: What are your criteria for choosing small cap stocks?
RI: Well we touched on that a little bit. We’re looking at companies with earnings, solid businesses, and then growth at a reasonable price as our criteria. So you’re looking at growth in a company, and is it trading at a reasonable price and we value that based on the cash flow of the company, the business. We love companies that have a ton of cash in the bank, no debt, and have a growth outlook going forward. So it’s really fundamental analysis then we dig in with management, and look at the business underlying it and if it has that strong growth going forward you pair that value with growth. You don’t find that often and they’re kind of strange bedfellows to see growth in value in the same bed together. When you find that, it’s a beautiful thing, and we get really excited about companies and recommend them to our clients for long term investments.
INN: What trends are you seeing in the investment space right now?
RI: Well it’s harder right now to find value. In the US, we do find some value for Canadian investors. We’ve actually been invested largely in the US for our Canadian investors in part for a couple of years now because the currency play has been excellent there. But it’s a harder time in the US to find value because you’ve seen markets up for consecutive years. We do find really specific individual businesses where we find value and that’s really what we’re looking for. We don’t look completely at the total market. We’re looking more at individual companies to find a little tiny gem that’s been overlooked, that has great value and growth. So some of the trends we’re seeing right now — largely you’re seeing some of the market overvalued. But you’ve got to find those little pockets of growth that we look for and we’re seeing some of those and really specific companies that have growth long term.
INN: Do you have any favorite tech stocks?
RI: We looked at an orphan company in Canada called Photon Control. PHO is their symbol on the TSX Venture. This is a company, two and a half years ago, we recommended at around 20 cents. We recommended just last year around 45 cents, again this year at 60 cents. They’re trading around a dollar. Now, what do they do–they kind of provide the backbone for the Internet of Things which is a trend that we really believe has a tremendous growth profile ahead of it. So they provide optical sensors for the companies who builds or put together semiconductor, and semiconductors are a huge part of the Internet of Things. Your toaster talking to your fridge saying we need toast and then ordering it online for you from Amazon.com… apparently that’s going to happen at some point and you’re going to get your toast delivered to your door. So those things are going to talk together… so interconnection of devices. Well, semiconductors are on all of those devices, so a company like Photon which builds and has optical sensors that are used in the production of semiconductors is doing tremendous business right now. We saw a record year last year, a record year this year and going forward we see a record year. They have a record backlog right now. And the balance sheet is tremendous which is what we love: $30 million in cash for a company that trades at a dollar. That’s 30 cents per share in cash. So you’re really only paying you take that dollar you take 30 cents out you’re paying 70 cents for the business outside of the cash. Eight cents in earnings this year, we see growth next year about nine times earnings. Tremendous growth ahead of it. We see a business that’s really a backbone for an industry with growth which is what we like and it’s completely unknown. There’s no analyst covering it right now which is what we love. So you get to buy before analyst funds will start to look at it now that it’s crept above a dollar, and we think he can get an uptick and turn of the multiple that investors pay for the stock. Those are some of the things we love to see.
INN: Interesting. So do you think the new Trump administration is going to be good for tech?
RI: That’s an excellent question. I think there are a lot of tech companies some of the larger companies like in Apple of a ton of cash overseas that they can repatriate back. So if you take that tax out you could see money coming back to North America which is an excellent thing. Tech or non-tech, if the tax cuts that he’s proposing for business come through, you immediately get an uptick in earnings. So that’s going to be good for any sector. Trump is going to be a wildcard and we’re going to watch it closely. But for Tech I think it’s going to be good overall. There’s some areas that we think that maybe he’s not as forward looking on tech, but I mean as far as the tax situation that would help a lot of tech companies particularly the larger ones that have money overseas to bring it back.
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Securities Disclosure: I, Pia Rivera, 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 contributed article. 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.