3 S&P/TSX Venture Stocks That Will Outperform on Stimulus: OML.V, LM.V, PHM.V

James West
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The S&P/TSX Venture Composite Index (INDEXTSI:JX) is suffering from a wide range of fundamental maladies, not least of which is the dual effects of oil and metals prices. The leap toward the stimulus lever on the part of Mario Draghi and Zhou Xiaochuan prodded markets into a display of effusiveness not yet seen in 2016, and the TSX Venture was a beneficiary.

Last week’s pump, however, is next week’s dump, gushing calls for an newly stimulated bull market notwithstanding. So unfortunately, the 52-week highs set on Friday in the artificial lift of a ‘rising tide lifting all boats’ stimulus rally were of no consequence, and were as much the result of fortuitous timing of press releases. In a word, that falling knife is even more dangerous when its somersaulting through the air.

So really, the posture and perspective that will serve and protect us retail investor types is the 50,000 foot view of the market, which from this great height, us seen to have been artificially inseminated with capital fabrication coupled with Zero Interest Rate Policy. That in turn has underwritten record stock performance, allowing companies to buy back shares and thus juice earnings per share. But that’s an old story now, and the ‘lift-off’ instigated by the Fed has put that strategy on hot idle pending further policy clarity.

While it has been generally understood that if markets lost 10 percent in value, a reversal of interest rate normalization might be expected, and possibly with some newly launched stimulus thrown in to boot. The fact that it is China and Europe who are bellying up to the stimulus bar as if by magic is highly suggestive of the collusive communications that must now be ubiquitous amongst the central bankers. The obviousness of their cooperation in attempting to stabilize each other’s currencies and markets is moot, and one wonders if its just a matter of time until they decide what the closing number on their respective indices will be by mutual consent.

But central control of global markets is an oligarchical ambition, and so these puppets of the elite financial class are responding more or less as to be expected by the subordinates of the real world leaders, who are not elected but occupy the apices of wealth inherited through the ages. They are anonymous, for the most part…and no, not that Anonymous.

But I digress.

What are the TSX Venture stocks that are likely to outperform in the current environment of unprecedented volatility?

3 Top TSX Venture Stocks for Volatile Times

What are the characteristics of a stock that is likely to perform well in times of general market mayhem? Well, as a market player, you’ve got two options when it comes to the TSX Venture. You can either try to time the window between when a company closes a private placement and is going to promote the stock to prices way above the financing price and try to hold it there up to and beyond the four months plus one day hold mandated by regulators, and then sell 10 days before the hold expiry. Or you can look for a structure with no overhang in a sector with some insulation from broader market trends that has a good list of catalysts that are not likely to be affected by financial market turmoil.

  1. Omni-Lite Industries Inc:

    (TSX.V:OML)

  2. Omni-Lite Industries Inc. (CVE:OML)
    Omni-Lite Industries Inc. (CVE:OML)

    Its a popular refrain currently: “It takes years of hard work to become an overnight success.” Omni-Lite Industries is a perfect example. Founded in 1992, the company fabricates precision components from advanced composite materials using computer-controlled cold forging processes.  Cold forging involves the formation of parts from slugs or blanks under extreme pressures and without added heat.

    Originally a provider of ‘spikes’ for athletic shoes, the company’s revenue is increasingly derived from small specialty components used in aerospace, military, and automotive applications. Customers include Boeing, Airbus, Bombardier, Embraer, the U.S. Military, Chrysler, Ford, and Nike.

    The company combines engineering and design expertise with high capacity manufacturing capability making them a one-stop shop for major Fortune 500 manufacturers.  As stated on the company’s website, “The Company’s future depends on it’s ability to develop new components and materials for the large existing customers that form the backbone of its revenue base. The Company’s engineering, materials and R & D expertise has lead to the development of over 75 components for which Omni-Lite has received seven U.S. patents. The Company also has several patents pending that cover both products and manufacturing processes developed.”

    The Market
    Forged parts are present in an estimated 20 percent of the products representing the entire GDP of the United States alone. Technavio predicts the global forging market to exhibit a healthy CAGR of around 8% to 2020. Forging is an appropriate substitution to the casting methodology as it ensures greater efficiency, reliability, and precision. Custom forging accounts for the largest segment in North America, achieving sales worth $6 billion annually.

    Competitive Landscape

    There are thousands of companies worldwide who provide cold forged products to major manufacturers like Airbus and Caterpillar. Airbus, for example, has 7,700 suppliers in its supply chain. Fortune 500 manufacturers are extremely sensitive to ‘single supplier’ risk, and so most large companies maintain relationships with multiple suppliers of the same part to avoid such exposure.

    Entities like Omni-Lite Industries, who has developed long lasting relationships over time with major manufacturers, differentiates itself from other cold forging operations through specialization and reliability in delivering orders.

    While barriers to entry are few in the cold forging landscape, it takes a long time to earn the trust of Fortune 500 manufacturers to the point where they become regular customers. Their ever-evolving product lines require agility on the part of suppliers like Omn-Lite to provide short design/build cycles that don’t impede new product development. In this sense, the competitive barrier is experience and a track record of innovation, dependibility, quality control, and cost-effective pricing.

    Financial Snapshot

    Two flashing signals for me in the financial statements. First, net profit margin  is increasing Year on Year in the 9 month period window. Second, the company’s structure is so tight that the slightest peep of this company’s performance and it could be a $20 stock in no time. In fact, both a strength and a weakness is the fact that this will never be an institutional story with only 12 million shares out. But that means it will never be subject to the volatility of an instution’s liquidation. They are exceptionally frugal with options, have zero overhang from warrants (last financing was in 2011), and the CEO takes no salary. (His family collectively control 10 percent of the company, and so his interests are rather perfectly aligned with those of the investor.)

    Nine
    Months
    Ending
    Sep
    30

    2015

    2014

    2013

    Total Sales (USD 000,000’s)

    6

    4.8

    4.1

    Net Income

    1.25

    .55

    .39

    EPS (Fully Diluted)

    $0.10

    $0.05

    $0.03

    Growth Catalysts
    The company has implemented a 5 year plan it calls “Vision 2020” that seeks to grow sales by 20 – 25 percent annually through ongoing product development. It took delivery of a new seven station progressive forging system that it has custom modified with its own patented OD-Plus System, which provides for the opening and clsoing of the forging tooling in real time and under high pressure. It plans to incorporate a total of 36 Progressive cold forging systems in that time frame, enhancing capacity significantly. The company is trading at approximately 9 times 2015 estimated earnings of 0.133 per share based on the last 8 quarters.

  3. ***Lingo Media Inc.

    (TSX.V:LM)

    Lingo Media Corp. (CVE:LM)
    Lingo Media Corp. (CVE:LM)

    The global market for digital English language learning products reached $1.8 billion in 2013. The worldwide five-year compound annual growth rate (CAGR) is 11.1% and revenues will surge to $3.1 billion by 2018. [Source: Ambient Insight]. The British Council suggests that there are 1.6 billion people learning English globally. The worldwide language learning market (all languages combined) was a $56.3 billion industry in 2013. The overall worldwide language learning market is gradually shrinking due to the adoption of cost-efficient technology-based products and the migration away from classroom and print products. Lingo Media is poised to capture a growing share of that market thanks to its proprietary digital learning objects library, developed by former Research in Motion engineers, who have now joined Lingo Media.Lingo Media’s two distinct business units include ELL Technologies and Lingo Learning. ELL Technologies is a global web-based educational technology (“EdTech”) English language learning training and assessment company that creates innovative Software-as-a-Service eLearning solutions Lingo Learning is a print-based publisher of English language learning textbook programs in China. Lingo Media has formed successful relationships with key government and industry organizations, establishing a strong presence in China’s education market of more than 300 million students. The Company is extending its global reach, with an initial market expansion into Latin America and continues to expand its product offerings and technology applications.

    In the last quarter, the company has made a series of announcements that herald an acceleration of the company’s succes in penetrating markets, and more importantly, the company has achieved profitability, reporting EPS of $0.04 in Q2 2015. For the second quarter ended June 30, 2015, Lingo Media earned revenue of $1,794,659 as compared to $877,879, recording a 104% increase. As a result of the increased revenue, the company recorded a net profit for the period of $979,103 as compared to $217,633, an increase of 350%. The increase in revenue and net profit are primarily attributed to the company’s sales and marketing efforts in the Online English Language Learning segment of its business.

    The more substantial developments include:
    August 13, 2015: The company announced a contract with the municipal government of Palestina in Caldas Department, Colombia to provide its Campus general English language learning program to junior high school students;
    August 6, 2015: Lingo announced the awarding of a contract by the Peruvian Navy, a branch of the Peruvian Armed Forces, to provide its English language training products;
    July 23, 2015: Lingo announced an agreement with the University of Guadalajara in Mexico to provide its full suite of English language learning products.

    Students attending English Language Training (“ELT”) classes in Latin America accounted for approximately 14% of worldwide revenues, or $321 million in 2013. Growth has been very rapid in the region, and represents a particularly strong opportunity moving forward relative to other geographic regions. The remaining market for ELT is largely concentrated in Europe, the Middle East and Africa (45% of revenues or $1.036 billion) and the Asia Pacific region (35% of revenues or $825 million).

    Lingo is focusing on the Latin American market, and Mexico in particular, where the population of 122 million are able to spend increasingly on English Language Learning due to increasing wages and a robust economy. But the company has a long history of operation in China through its Lingo Learning legacy textbook publishing subsidiary, providing materials to 60% of the Chinese market. The company will use this foundation to build its ELL market there.

    Lingo Media has sales to a major customer in 2014 and 2013, a government agency of the People’s Republic of China. The total percentage of sales to this customer during the year was 65% (2013 – 75%, 2012 – 66%)and the total percentage of accounts receivable at December 31, 2014 was 84% (2013 – 68%, 2012 – 87%).

  4. Patient Home Monitoring Corp.

    (TSX.V:PHM)

    TSX-Venture-Patient-Home-Monitoring-Chart-CVE-PHM
    Patient Home Monitoring Corp. (CVE:PHM)

    Patient Home Monitoring Corp. has a business model made possible by the increasingly aging population and the advances of technology in health care. The company provides in-home monitoring and disease management services for patients in the US cardiology, diabetic, Medicare Part B medications, flu and pulmonary markets, and seeks to expand its offerings to include the management of other chronic disease states.

    In simple terms, PHM can provide you with a device or devices to monitor and collect data relative to one or more chronic conditions, and transmit that data to the patient’s health care professional without the need for a hospital visit. It’s a cheaper and far more convenient way to manage
    chronic conditions such as diabetes or other diseases which require ongoing monitoring but only occasional treatment or treatment modification.

    The company touched a high of $2.01 in April 2015, then fell right out of bed when management decided to use their new TSX Venture clout to launch three additional projects simultaneously – Convalo Health International Corp. (CVE:CXV), Healthcare Special Opportunities Fund(TSE:MDS.UN), and Inspira Financial Inc(CVE:LND).

    Inspira especially demonstrates a case of hubris on steroids with a Fully Diluted share issuance of over 500 million shares, most of which have a $0.15 or less cost basis. Good luck with that.

    PHM’s endless onslaught of selling has nothing to do with the company’s value and everything to do with general market weakness. While some will point to the earlier communications faux pas by management, that merely happened to coincide with the general rout that took over all markets with the revelation that China is landing hard.

    In the last quarter, Healthcare stocks were doubly abused thanks to the unmitigated stupidity of Turing Pharmaceuticals’ Martin Schkreli who bumped the price of daraprim 5,000 percent upon gaining control of it. That prompted a backlash from presidential hopefuls now vying to cap critical drug prices, which will has exuded a chilling effect on the high flying biotech sector. Exactly how much government regulation on pharmaceutical product pricing
    will limit the upside on biotech investing is the main concern.

    At this point, investors should likely be observing the market and waiting to see where a bottom materializes.

    There will be rebounds and routs galore in the months ahead as governments stumble into each other with new stiumuls, ZIRP and currency devaluation tactics. This should be perceived as the gift that keeps on giving. I’m of the opinion that we may yet see PHM at $0.40 or lower before the company’s next milestones, which are uplisting to the TSX and achieving a run rate of $200 million.

    New CEO Casey Hoyt sounds reasonably competent and with a singular focus on driving PHM’s business, will not be distracted by additional projects and companies. The company’s stock buyback program will reduce dilution and at current prices does so at a very reasonable cost of capital. All this means value compression in PHM shares. When the rebound comes, it will be muscular.

***Denotes sponsor of one or more affiliated entities. See http://10.0.1.189:8888/midasletter_old/disclosure/

James West

James West

Editor and Publisher

I employ a Capital Efficiency Model that dictates money should never be exposed for longer than is absolutely necessary to the possibility of being lost. Thus, I routinely sell half my position when a stock doubles from my entry price, and I sell stocks that lose 20%, unless there are...
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Midas Letter is provided as a source of information only, and is in no way to be construed as investment advice. James West, the author and publisher of the Midas Letter, is not authorized to provide investor advice, and provides this information only to readers who are interested in knowing what he is investing in and how he reaches such decisions.

Investing in emerging public companies involves a high degree of risk and investors in such companies could lose all their money. Always consult a duly accredited investment professional in your jurisdiction prior to making any investment decision.

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