MDF – Divestor

Looking at the 52-week losers on the TSX

In these strange times where Facebook employees can’t get into their own building because of some technical issue, and half the world has to resort to the indignity of SMS because WhatsApp is down, I bring you some observations on which companies have fared the worst over the past 52 weeks.

In general, the list contains a lot of gold and silver miners that have done the worst, coupled with some biotechnology companies. Marijuana has also not done very well.

I try to avoid gold mining companies like the plague and hence I do not really want to dive into any of them, but notable names which stood out include New Gold (TSX: NGD), Sandstorm (TSX: SSL) and an old friend in Gran Colombia Gold (TSX: GCM).

Outside of this sector, the known and recognizable names on the loser lists is quite sparse. Mediagrif, now mdf (TSX: MDF) is a company that I’ve looked at in the past but have not invested in them. They were a fairly benign SaaS company (probably their most known software offering was MerX) that recently executed on a large-scale acquisition last August with a subsequent equity offering. This acquisition sucked up the cash on their balance sheet and added some leverage to purchase a company that is barely profitable. Large acquisitions very rarely work out and the stock price is certainly reflecting this. People tend to view the entire SaaS sector monotonically when in reality, there are huge valuation rifts between various software offerings – you can’t simply slap on a Constellation Software-sized price to sales ratio on every company that does SaaS!

Another name which caught my attention was MAV Beauty Brands (TSX: MAV). This is a branding reseller company (i.e. take generic products, put a brand label on them, and get them on the shelves of stores). Some of you may guess that I am not the biggest consumer of hair products. You would likely see this company represented in the shelves of Shopper’s Drug Mart. The company is mildly profitable, but they’re not exactly in the best competitive position – just go to the hair-care section at the store and you’ll see why. At a market cap of CAD$90 million they might seem cheap, but they also have a US$140 million term loan to deal with which really guts the valuation proposition.

Moving further down the list of 1-year losers, we have Ballard (TSX: BLDP) which I won’t dissect further – they continue to execute on their very successful business model of raising equity financing every decade when there is hype regarding hydrogen power: “On February 23, 2021, the Corporation completed a bought deal offering with a syndicate of financial institutions for 14,870,000 shares of the Corporation at $37.00 per share, resulting in gross offering proceeds of $550,190,000 and net offering proceeds of $527,291,000” – this will last them another 6 or 7 years!.

The first name which got me legitimately interested was Richards Packaging Income Fund (TSX: RPI.UN), which looked like they were a somewhat-COVID victim, but upon subsequent research I also tossed this one in the discards pile. If they were trading at half of what they were currently, I might have been more interested.

We all remember the toilet paper craze from Covid-19 and KP Tissue (TSX: KPT) was one of the companies that benefited from Covid-19. No longer – you can take a look at them now. They are an extremely leveraged entity.

Finally, something else that caught my attention was Saputo (TSX: SAP), the dairy conglomerate, and they are reaching 52-week lows and are likely candidates for year-end tax-loss selling. Covid-19 has disrupted the business and its profitability. While the stock is still at a healthy price, if it depreciates by another 1/3rd or so, it may get into value territory. Dairy is effectively controlled and protected in Canada by Saputo, Agropur (a co-op) and Parmalat (European-owned), which gives it some monopoly-type characteristics.

Overall, the pickings are very, very slim. The companies that have dropped over the past 52 weeks have really done so for proper reasons. I’m not finding a lot of value out there, and the low P/E names are mostly in the fossil fuel space and they have appreciated extremely.

Impact of BNN (Mediagrif)

Mediagrif (TSX: MDF) is a small Quebec-based software company. It had a lot of turnover on its executive suite, and when it comes to software organizations, if they lose a lot of core intellectual knowledge, it can be very difficult for new offerings to come out. These sorts of changes are impossible to detect looking at financial statements (other than the losses that occur as a result of a loss of product agility), but you could infer this was going on in MDF. Perhaps the most well-known Canadian offering of MDF is Merx, where you can sell the Canadian government defective face masks and any other procurements they are interested in.

Today, MDF stock spiked up 40%:

I tried looking up what could possibly have caused the spike up. No news releases. Nothing on Twitter. Nothing on the usual message forums. But then I found it – some analyst on BNN made it his top pick and equated it to Shopify:

MEDIAGRIF INTERACTIVE TECHNOLOGIES (MDF TSX)
New position.

Mediagrif providea Shopify-like e-commerce solutions, but for much larger companies. They manage the online platform for Sobeys/IGA and also for Carrefour in Italy, the only company enabling online food orders during the peak the crisis. It also owns platforms that enable suppliers to bid on government contracts, allowing corporations to exchange data with their suppliers and customers. This is one of the rare companies doing well in this environment and benefitting from businesses going digital. Whereas Shopify trades at 35 times revenue, Mediagrif trades at just under one time. We have been accumulating shares and now own 5 per cent of the company.

Talk about bidding up his own book! MDF traded 186,000 shares today and typical volume is 10,000 shares. It took about 10,000 shares of trading after 9:00am (pacific) to get the stock up from about $3.80 to $4.80 (presumably after it was mentioned on television).

Who are these people that sit on television and pound the buy button on the words of BNN analysts? How long will be it before they get bored and start hitting the bid and reaching for the exits? (Answer: After 10:12am, 1,200 shares were traded at $6.25, and after that it was just the day-traders that got involved).

I don’t watch BNN, but if you ever have one of your smallcap stocks get mentioned on it in a positive light such as above, I’d pick a good point to dump it (especially as there is liquidity from the active daytraders) and you’ll very likely be able to reload later.

I don’t have much opinion on MDF. There aren’t a lot of software companies on the TSX (other than Shopify, the largest one is Constellation) so as a group they are not difficult to keep an eye on all of them. In general, the sector is more resilient to COVID-19 than others (especially Cineplex!).

Tax loss selling candidates, 2019

Below are 29 companies that are trading lower than 40% year to date on the TSX, that have a market cap of above $75 million. I’ve also restricted the share price to greater than 50 cents.

TSX tax loss candidates

August 30, 2019 closing prices
Last trade > $0.50
Market Cap > $75 million
YTD change -40% or worse

Item	Symbol	Name	Sector	Last	YTD %Chg	MktCap ($M)
1	TH-T	Theratechnologies	Bio	4.98	-40.14	394
2	AVCN-T	Avicanna Inc	Cannibis	3.66	-41.25	88
3	IDG-T	Indigo Books & Music Inc	Retail	6.6	-41.49	180
4	BIR-T	Birchcliff Energy Ltd	Energy	1.77	-41.78	503
5	SOY-T	Sunopta Inc	Food	3.07	-41.86	275
6	SOX-T	Stuart Olson Inc	Engineering	2.89	-41.97	82
7	ATH-T	Athabasca Oil Corp	Energy	0.57	-42.42	303
8	ADVZ-T	Advanz Pharma Corp	Bio	14.7	-42.93	673
9	CFX-T	Canfor Pulp Products Inc	Forestry	9.08	-43.99	574
10	UNS-T	Uni Select Inc	Auto	10.79	-44.41	456
11	MDF-T	Mediagrif Interac	IT	5.23	-45.29	81
12	MPVD-T	Mountain Province Diamonds	Diamonds	1.04	-46.67	223
13	HNL-T	Horizon North Logistics Inc	Energy Service	0.95	-47.22	155
14	IMV-T	Immunovaccine Inc	Bio	3.58	-47.89	186
15	DII-B-T	Dorel Industries Inc Cl.B Sv	Retail Wholesale	9.1	-48.41	292
16	LGO-T	Largo Resources Ltd	Metals	1.37	-51.59	728
17	PONY-T	Painted Pony Energy Ltd	Energy	0.68	-54.36	114
18	PEY-T	Peyto Exploration	Energy	3.2	-54.8	554
19	BNP-T	Bonavista Energy Corp	Energy	0.54	-55	149
20	DR-T	Medical Facilities Corp	Hospitals	6.74	-55.19	211
21	NVA-T	Nuvista Energy Ltd	Energy	1.61	-60.54	370
22	MAV-T	Mav Beauty Brands Inc	Beauty	4.11	-61.52	155
23	SNC-T	Snc-Lavalin Sv	Engineering	16.41	-64.26	2,858
24	OBE-T	Obsidian Energy Ltd	Energy	1.27	-64.43	97
25	TRST-T	Canntrust Holdings Inc	Cannibis	2.3	-64.99	335
26	JE-T	Just Energy Group Inc	Energy Retail	1.46	-67.63	227
27	TRQ-T	Turquoise Hill Resources Ltd	Metals	0.58	-74.22	1,187
28	ZENA-T	Zenabis Global Inc.	Cannibis	1.06	-82.33	214
29	PLI-T	Prometic Life Sciences Inc	Bio	11.6	-95.54	280

Comments:

1: A bio company with an FDA approved small scale HIV medication (used in cases where mainline HIV treatments do not work), and a new product that is used for something called hard belly – which is a symptom in some long-term HIV patients as a side effect of the anti-retroviral drugs that they take to keep viral loads down. Stock is down because sales aren’t exactly going anywhere and those sales and marketing expenses are indeed quite high. Market cap is trading as if the company will get sold off (drug companies don’t capitalize their R&D expenses it takes to get a drug to market, so there is a bunch of hidden balance sheet value in the drugs, despite the relatively little revenues they get from them).

2, 25, 28: Are Marijuana companies, and I have no interest in analyzing them.

3: Indigo is a typical retail story. Their stock chart in the past 18 months is a straight line down. Aside from their lease commitments, their balance sheet isn’t in terrible shape and management has some time to decide what to do, but they are bleeding money at a frightening pace.

4, 7, 13, 17, 18, 19, 21, 24: Canadian oil/gas extraction companies, so I do not need to write further why they are trading down. 13 is an energy service company. My big surprise here is why there aren’t more companies on the down 40% list (doing some quick investigation, it is because most of them already got hammered in 2018 so the losses in 2019 relatively speaking isn’t as big).

5: A low margin food producer with a ton of debt on the balance sheet and bleeding cash. Not looking pretty.

6: Engineering firm impacted somewhat by oil and gas-related spending. Income statement shows they are treading water. They were able to raise financing from Canso at 7% for unsecured debt (rolling over an existing debt issue) and the balance sheet is not in terrible shape. May be a good possibility for a turnaround – given its market cap of $80 million in relation to its overall size (revenues will be roughly a billion in 2019), something to watch. Has a similar feel to IBI Group.

8: The old Concordia Pharma. Classic case of what happens when you over-leverage cash flows too much. They make a ton of cash, but they have a ton of debt and a ton of interest expenses.

9: Lumber has been killed for various reasons. Despite being from British Columbia, I should know more about the industry. Just a year ago it was trading at $27 and today it is nearly $9. The stock graph looks like a normal distribution curve. Despite the fact that their cash flows has been decimated year-to-year, they don’t have any debt and look like they can survive the cycle. Jimmy Pattison trying to take over Canfor Corporation (not the pulp subsidiary) for $16/share seems to be a case of trying to take them on the lows. Canfor owns 55% of Canfor Pulp.

10: I know less about automobile companies than forestry products. Skimming the financial statements, they just appear to be losing profitability and racking up debt.

11: A small IT firm that is undergoing a strategic change and also still looking for a new CEO. Still profitable, and with a relatively blank canvas balance sheet.

12: Owners of a 49% interest in a diamond mine in the N.W.T., and barely making enough to pay off their bank lenders. Will pass.

14: Early clinical stage biotech working on some cancer therapies, P2 studies have samples of less than 20 patients, and skimming the science, looks questionable.

15: Legitimate larger company that has been in a slow straight-line descent for the past three years. Three major product lines (babies, sports and furniture) are sold to major retailers worldwide. Management (Schwartz – family-controlled dual-stock corporation) has been around for a very long time, albeit they seem to be highly overpaid. They resolved an upcoming debt maturity last June with a 7.5% unsecured debt note (not convertible) and this will buy them time to figure out how to improve margins. Cash flows from operations have been diminishing, and they already once cut their dividend, and it is due for another cut. However, given the ~$300 market cap and $2.5 billion in revenues, the potential for a turnaround here is reasonably good, except for this looming worldwide recession coming which would surely impact this company’s fortunes!

16: They mine a commodity I know nothing about (Vanadium), in a country I know very little about (Brazil).

20: This one is interesting. A company that owns majority or near-majority stakes in a few hospitals in the USA and distributes most of its free cash. The only problem being that in the past few quarters, they have really underperformed. If they can figure out what they did wrong and reverse it, then the stock is an easy double from their depressed price. It was bond-like until the bottom fell out of it in the May and August quarterly reports. If there was a candidate for year-end tax loss selling, this one would be it. Another interesting quirk is that their distribution rate on a historical basis is now at a 17% yield. This distribution was below their cash generation in prior years, but not from the first half of this year. It’s likely they’ll cut this dividend unless if they think the past couple quarters was temporary. Knowing about the US healthcare industry, especially in the states that DR operates in, coupled with competitive dynamics of healthcare and competitors will help.

22: Cosmetics company that went public in July 2018 for CAD$14/share (proceeds to pay down debt with IPO). Now it is trading at $4.11/share, which is a fairly good 70% negative return on investment. The company is now barely profitable, but still isn’t at the level which supports the debt on its balance sheet. Still, cosmetics is a pretty high leverage industry to be in if your revenues start to take traction – and their revenues are growing. Might be interesting, considering that beauty products sell in any economic climate! Unfortunately, you won’t see me wearing any…

23: SNC. Enough said. There’s tons of industry analysts out there looking at this one. Their partial sale of the 407 freeway around Toronto will buy them a lot of time to get their act together, but in the meantime, their operations are a total mess. There will probably be a time to buy this one but it will take awhile, and likely more corruption from the federal government is required for a positive outcome (i.e. if Trudeau gets re-elected, it would be a positive for SNC for sure).

26: Balance sheet is a train wreck, company is exploring a recapitalization, and the business model itself is highly broken. Good luck!

27: Another mining company working in a jurisdiction I know hardly anything about (Mongolia), let alone I can’t even pronounce the name of its main flagship mine. Don’t have any more insight than that, sadly.

28: The big loser in the TSX is due to a debt-to-equity recapitalization and a 1:1000 reverse stock split. After the recap they did get rid of a bunch of debt on the balance sheet and raised some cash, which they need in order to bide their time to get FDA approval for their lead product. They burnt about $50 million cash in the first half of the year and have about $80 million left on the balance sheet, so looks like they’ll have to raise more financing…