On Wednesday, the final trading day in May, major North American stock markets all finished the month with slight declines.
In the U.S., the Dow Jones Industrial Average declined 0.10 per cent, the S&P 500 index decreased 0.05 per cent, and the Nasdaq composite index lost 0.08 per cent.
Turning to Canada, the S&P/TSX composite index fell 22 points, or 0.15 per cent. There were 116 securities in the TSX Index that advanced, 128 securities declined in value, and six stocks closed the day unchanged.
Year-to-date, the TSX Index is barely in the green, up 0.41 per cent. In the U.S., the Dow Jones Industrial Average is up 6.31 per cent, the S&P 500 index is up 7.73 per cent, and the Nasdaq composite has rallied 15.15 per cent.
On today's TSX Breakouts report, there are 21 stocks on the positive breakouts list (stocks with positive price momentum), and 64 stocks are on the negative breakouts list (stocks with negative price momentum).
Featured today is a company that may appear on the positive breakouts list in the future. There is seasonality in the company's operations and the firm just entered its best two quarters of the year. Historically, the company generates its highest revenues in the second and third quarters. Furthermore, the company recently raised over $40-million, and we could see the money be put to use in the near-term to generate sales growth. The company offers investors a quarterly dividend, currently yielding 8.9 per cent. One cautionary note, the share price can be quite volatile and for that reason this security may be best suited for consideration by investors with a high risk tolerance.
The security I am referred to is CanWel Building Materials Group Ltd. (CWX-T).
A brief outline is provided below that may serve as a springboard for further fundamental research.
The company
Vancouver-based CanWel distributes building materials, lumber, and renovation products to Canadian and U.S. customers. In addition, CanWel operates a forest products company through its Jemi Fibre division.
After the market closed on May 9, the company reported better-than-expected first quarter financial results that sent the share price soaring over 3 per cent on high volume. Over 500,000 shares traded on May 10, well above the three-month historical daily average trading volume of approximately 265,000 shares. During the quarter, revenue came in at $223-million, increasing 12.8 per cent year-over-year and exceeding the Street's forecast of $217-million. CanWel reported earnings before interest, taxes, depreciation and amortization (EBITDA) of $8.17-million, beating the consensus estimate of $7.7-million.
In April, the company completed a bought deal equity financing, raising approximately $40-million through the issuance of over 6.5-million shares at a price of $6.10 per share. Management indicated in a news release that the proceeds were earmarked to fund its growth stating, "The net proceeds of the Offering will be used initially to fund a reduction of the Company's revolving credit facility, which is expected to be drawn in the future to fund potential acquisitions, and for working capital and general corporate purposes. Specifically, the Company is evaluating additional acquisitions of U.S. and Canadian pressure-treated wood operations and expects to announce any acquisitions in due course once definitive agreements are reached."
Dividend policy
The company pays its shareholders a quarterly dividend of 14 cents per share, or 56 cents per share on a yearly basis. This equates to an annualized dividend yield of 8.9 per cent. The company has maintained its dividend at this level since 2012.
In the 2016 annual report, Amar Doman, the chairman and chief executive officer stressed the importance of the dividend stating, "During the year, the Company successfully completed two bought deal equity financings totaling $85-million. The proceeds helped fund the acquisition of Jemi Fibre Corp. and allowed us to facilitate the early retirement of all of our convertible debt. As a result, we now have a stronger balance sheet and have reduced interest expenses. The financings have also significantly improved the liquidity profile of our shares with average daily trading volumes steadily being well above previous levels. We expect the impact of these activities and acquisitions also to positively impact our dividend payout ratio in 2017."
Analysts' recommendations
There are eight firms providing research coverage on this small-cap industrial stock with a market capitalization of $428-million, of which six analysts have buy recommendations and two analysts have hold recommendations.
The eight firms providing research coverage are as follows in alphabetical order: Canaccord Genuity, Cormark Securities, EVA Dimensions, GMP, Haywood Securities, National Bank Financial, Paradigm Capital and Raymond James.
Financial forecasts
The Street is forecasting EBITDA of $60.6-million in 2017, up from adjusted EBITDA of $51.0-million reported in 2016, and anticipated to rise to $66.8-million in 2018. The consensus earnings per share estimates are 42 cents in 2017 and 49 cents in 2018.
Earnings expectations have moderated, declining slightly over the past several months. For instance, three months ago, the consensus EBITDA estimates were $61.3-million for 2017 and $68.0-million for 2018.
Valuation
According to Bloomberg, the stock is trading at an enterprise value-to-EBITDA multiple of 10.3 times the 2018 consensus estimate, above its three-year historical average of 9.0 times but below its peak multiple of approximately 11.5 times during this period.
The average one-year target price is $7.25, suggesting there is nearly 15 per cent upside potential in the share price over the next 12 months. Target prices range from a low of $6.50 (at Cormark Securities) to a high of $8 (at Paradigm Capital), implying a potential price return of between 3 per cent and 27 per cent. Individual target prices provided by seven firms are as follows in numerical order: $6.50, two at $7, $7.25, two at $7.50, and $8.
Revised recommendations
In May, Steven Hansen, the analyst from Raymond James, upgraded his recommendation to a "strong buy" from an "outperform," and lifted his target price to $7.50 from $7.25. Conversely, Timothy Stanish, the analyst at EVA Dimensions, downgraded his recommendation to a "hold" from an "overweight."
Insider transaction activity
The most recent transaction in the public market by an insider occurred in several months ago. On March 10, Sam Fleiser, who sits on the board of directors, accumulated 9,500 shares at an average price per share of $5.81.
Chart watch
The share price can be quite volatile at times, experiencing extreme price moves, both higher and lower.
However, so far in 2017, the share price has been relatively stable, hovering in a trading range predominately between $5.75 and $6.40. Year-to-date, the share price is up 5 per cent.
The share price may be poised to climb higher. From a technical perspective, the stock chart is encouraging, potentially displaying a bullish 'golden cross' pattern in the near future. A "golden cross" occurs when a short-term moving average, in this case, the 50-day moving average, crosses above a longer-term moving average, in this case, the 200-day moving average. When this occurs, it marks a potentially positive signal, suggesting the upward price momentum may have traction. Many traders suggest waiting until the 50-day moving average crosses above the 200-day moving average by a certain percentage, such as 3 per cent, to confirm the bullish signal.
If a 'golden cross' pattern is confirmed, and the share price breaks above the $6.50 level, the stock price could rally to $7.
If the share price retreats, there is strong technical support around $6, which is close to it 50-day moving average (at $6.09) and its 200-day moving average (at $6.10).
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The Breakouts file is a technical analysis screen intended to identify companies that are technically breaking out. In addition, this report highlights a company's dividend policy, analysts' recommendations, financial forecasts, and provides a brief technical analysis for a security to provide readers with more information.
If a stock appears on the positive breakouts list, this indicates positive price momentum, and that a company may be worthwhile for investors to look at the fundamentals in order to determine if the recent price strength is warranted and will continue. If a security appears on the negative breakouts list, this indicates negative price momentum, and may be indicative of either deteriorating fundamentals or perhaps indicates a buying opportunity.
Securities screened are from the S&P/TSX composite index, the S&P/TSX Small Cap index, as well as Canadian small cap stocks outside of these indexes that have a minimum market capitalization of $200-million.
A technical analysis screen does not replace fundamental analysis, but can help identify companies worth having a closer look at.