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On today’s Breakouts report, there are 67 stocks on the positive breakouts list (stocks with positive price momentum), and 12 stocks are on the negative breakouts list (stocks with negative price momentum).

Featured today is a stock that appears on the positive breakouts list. For cautious investors, this security may represent a defensive way to play the energy rally. Year-to-date, the energy sector is the top performing sector in the S&P/TSX composite index.

The stock offers investors a 5.3 per cent dividend yield along with a forecast price return of 16 per cent (potential total return of over 21 per cent). Management has announced dividend increases with the release of its quarterly earnings results for the past three consecutive quarters. The payout ratio was a conservative 24 per cent in the first quarter providing amble room for additional dividend hikes.

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The security discussed today is Freehold Royalties Ltd. (FRU-T).

A brief outline is provided below that may serve as a springboard for further fundamental research when conducting your own due diligence.

The company

Calgary-based Freehold provides investors with a defensive way to invest in the energy sector. The company’s royalty model enables the company to share in production revenue, receiving royalty income; however, given that the company is not an operator, it is not exposed to exploration risk, capital costs or operating costs.

Freehold receives royalties from over 300 operators across five provinces and eight U.S. states. Freehold receives royalties from companies such as ConocoPhillips, Husky Energy, Cenovus Energy, Crescent Point Energy, ExxonMobil, Tourmaline Oil, and Torc Oil and Gas.

For 2021, management anticipates royalty volumes will be 55 per cent weighted to oil and natural gas liquids (80 per cent of revenue) and 45 per cent to natural gas. Consequently, the share price often tracks the price of oil.

Investment thesis

  • Defensive way to invest in the energy sector.
  • Commodity prices are steadily rising along with drilling activity.
  • Attractive and rising dividends with a conservative payout ratio.
  • Strong balance sheet providing financial flexibility to fund future acquisitions.
  • Royalty portfolio diversification and production growth from its recently acquired U.S. royalty assets.

Quarterly earnings

After the market closed on May 11, the company reported solid first-quarter financial results.

Cash flow per share came in at 25 cents, a penny below the consensus estimate. The company reported average daily production of 10,944 barrel of oil equivalent per day, down one per cent year-over-year but up 13 per cent sequentially.

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As noted in the earnings release, “The strong recovery in funds from operations were due to continued upward momentum in crude oil prices, growth in production volumes, and stronger realized pricing on our U.S. assets.”

The company has a healthy balance sheet with a net debt-to-trailing funds from operations ratio of 0.8 times at quarter-end, below management’s target of 1.5 times.

During the quarter, the company completed four U.S. acquisitions adding production of 1,300 boe/d. On the earnings call, management stated that there were 10 rigs currently active on the company’s royalty lands (six in Canada, four in the U.S.).

Management maintained its guidance for 2021 calling for average production of between 10,500 boe/d and 11,000 boe/d.

The following trading day, Freehold’s share price rallied 4 per cent on high volume with over 1.7-million shares traded, well above the three-month daily average trading volume of roughly 840,000 shares.

Dividend policy

The company pay shareholders a monthly dividend of four cents per share or 48 cents per share on a yearly basis. This equates to an annualized dividend yield of 5.3 per cent. In the first quarter, the payout ratio was conservative at 24 per cent.

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On May 11, the company announced a 33per-cent dividend hike, lifting its dividend to its present level of four cents per share from three cents per share. This marks the third consecutive quarter that a dividend hike has been announced.

The increase reflects management’s confidence that funds from operations will strengthen. In the earnings release, management stated, “With an improved outlook for commodity prices and strengthened business model, we are increasing our monthly dividend.”

The company added, “Projected 2021 payouts are below our stated dividend policy levels, which outlines a 60 per cent to 80 per cent payout ratio over the long-term based on forward looking funds from operations. The dividend increase announced today is at a measured pace as, although the commodity price outlook has improved, there is still risk, as the supply - demand balance for oil continues to be tenuous.”

Analysts’ recommendations

There are 14 firms that provide research coverage on this small-cap stock with a market capitalization of just under $1.2-billion, of which 13 analysts have buy recommendations and one analyst (BMO Nesbitt Burns’ Ray Kwan) has a “market perform” recommendation.

The firms providing research coverage on the company are: Acumen Capital, BMO Nesbitt Burns, Canaccord Genuity, CIBC World Markets, Cormark Securities, Desjardins Securities, Eight Capital, Industrial Alliance Securities, National Bank Financial, Peters & Co., Raymond James, RBC Dominion Securities, Scotia Capital, and TD Securities.

Financial forecasts

The Street is forecasting cash flow per share to come in at $1.06 in 2021 and hold steady at $1.06 in 2022.

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Earnings forecasts have been rising. To illustrate, three months ago, the consensus cash flow per share estimates were 86 cents for 2021 and 95 cents for 2022.

Valuation

The stock is commonly valued on an enterprise value-to-debt adjusted cash flow basis.

The average one-year target price is $10.59, suggesting there is 16 per cent upside potential in the share price over the next 12 months. Target prices are quite concentrated, ranging from a low of $9.50 (from Scotia’s Jason Bouvier) to a high of $11 (from seven analysts). Individual target prices are as follows in numerical order: $9.50, three at $10, two at $10.50, $10.75, and seven at $11.

Revised recommendations

After the company released its first-quarter financial results, eight analysts revised their target prices – all higher.

Insider transaction activity

Year-to-date, two insiders have reported trading activity in the public market.

On March 17-18, president and chief executive officer Dave Spyker bought a total of 10,750 shares at an average cost per share of approximately $7.675, increasing this specific account’s position to 43,500 shares. The cost of this investment totaled over $82,000.

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In Jan., 2021, Mr. Spyker became the company’s president and CEO. His prior positions at the company include the chief operating officer as well as vice-president of production.

On March 18, vice-president of corporate services Lisa Farstad invested just over $50,000 in shares of Freehold. She acquired 6,740 shares at an average price per share of roughly $7.43, lifting this particular account’s holdings to 12,990 shares.

Chart watch

The energy sector is the best performing sector in the S&P/TSX composite index year-to-date. Freehold’s share price is up 75 per cent so far this year, well above the S&P/TSX energy sector index, which has rallied 26 per cent.

In terms of key resistance and support levels, the share price has an initial ceiling of resistance around $10. After that, there is resistance around $12 and then around $15. Should the stock price retreat, there is downside support close to the $8 level, which is just above the 50-day moving average (at $7.75).

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.

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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.

POSITIVE BREAKOUTSMay 14 close
AEM-TAgnico Eagle Mines Ltd $84.82
ATD-B-TAlimentation Couche-Tard Inc $43.13
BMO-TBank of Montreal $120.65
BNS-TBank of Nova Scotia $79.76
ABX-TBarrick Gold Corp $29.12
BDT-TBird Construction Inc $9.91
BRE-TBridgemarq Real Estate Services $17.47
BAM-A-TBrookfield Asset Management Inc $58.58
CAR-UN-TCanadian Apartment Properties REIT $57.72
CU-TCanadian Utilities Ltd $35.47
CWB-TCanadian Western Bank $35.88
CJ-TCardinal Energy Ltd $3.22
CSH-UN-TChartwell Retirement Residences $13.10
CHP-UN-TChoice Properties REIT $14.40
CIX-TCI Financial Corp $21.80
CM-TCIBC $132.53
KOR-TCorvus Gold Inc. $3.30
DIR-UN-TDream Industrial REIT $14.28
DRM-TDREAM Unlimited Corp $23.67
EQB-TEquitable Group Inc $153.52
EXE-TExtendicare Inc $8.09
FC-TFirm Capital Mortgage Investment Corp $14.64
FNV-TFranco-Nevada Corp $181.11
FRU-TFreehold Royalties Ltd $9.10
GEI-TGibson Energy Inc $23.71
GWO-TGreat-West Lifeco Inc $36.78
GCG-A-TGuardian Capital Group Ltd $32.25
HCG-THome Capital Group Inc $36.26
HCG-THome Capital Group Inc $36.26
IAG-TiA Financial Corporation Inc. $72.18
IMO-TImperial Oil Ltd $38.91
IPCO-TInternational Petroleum Corp. of Sweden $4.67
KEY-TKeyera Corp $30.64
L-TLoblaw Cos Ltd $72.14
MEQ-TMainstreet Equity Corp $89.40
MDI-TMajor Drilling Group International Inc $9.25
MOZ-TMarathon Gold Corporation $2.92
MRC-TMorguard Corp. $134.27
NA-TNational Bank of Canada $91.56
NGT-TNewmont Corp. $85.75
OGC-TOceanaGold Corp $2.61
ONEX-TOnex Corp $86.78
ORE-XOrezone Gold Corp. $1.22
OCO-XOroco Resource Corp. $3.33
OR-TOsisko Gold Royalties Ltd $16.64
PHX-TPHX Energy Services Corp $3.57
PTS-TPoints International Ltd $20.51
POW-TPower Corp of Canada $37.52
RECP-TRecipe Unlimited Corp. $21.82
RY-TRoyal Bank of Canada $121.86
RUP-XRupert Resources Ltd. $5.68
RUS-TRussel Metals Inc $32.80
SSL-TSandstorm Gold Ltd $10.08
SIA-TSienna Senior Living Inc $15.48
SNC-TSNC-Lavalin Group Inc $32.17
SVI-XStorageVault Canada Inc. $4.76
SMU-UN-TSummit Industrial Income REIT $16.12
TFII-TTFI International Inc. $108.37
TD-TToronto-Dominion Bank $87.73
TMQ-TTrilogy Metals Inc. $3.25
TNT-UN-TTrue North Commercial REIT $7.34
TWC-TTWC Enterprises Ltd. $25.67
UNS-TUni-Select Inc $14.66
U-TUranium Participation Corp. $5.77
WPM-TWheaton Precious Metals Corp. $54.77
WSP-TWSP Global Inc $138.65
Y-TYellow Pages Ltd $13.44
Negative Breakouts
ACB-TAurora Cannabis Inc. $8.29
BIP-UN-TBrookfield Infrastructure Partners LP $63.86
CNE-TCanacol Energy Ltd $3.30
CNR-TCanadian National Railway Co $130.07
CUP-U-TCaribbean Utilities Company Ltd. $14.02
CWEB-TCharlotte's Web Holdings Inc. $3.93
ENGH-TEnghouse Systems Ltd $52.04
PRN-TProfound Medical Corp. $20.41
STC-XSangoma Technologies Corp. $3.54
TCS-TTECSYS Inc. $40.89
WED-XWestaim Corp. $2.59
XBC-TXebec Adsorption Inc. $3.65

Source: Bloomberg

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