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On today’s Breakouts report, there are 71 stocks on the positive breakouts list (stocks with positive price momentum), and just nine securities are on the negative breakouts list (stocks with negative price momentum).

Discussed today is a stock that is on the cusp of appearing on the positive breakouts list. Right now, the stock is locked-in a trading range with the share price moving sideways since the beginning of the year.

However, investors may be rewarded for their patience in the second half of 2021. The stock has a unanimous buy call with an expected potential total return of 35 per cent, which includes the current dividend yield of 7.8 per cent. The security highlighted today is Diversified Royalty Corp. (DIV-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

Vancouver-based Diversified Royalty (DIV) is a corporation with royalty streams from six royalty partners: Mr. Lube, representing 41 per cent of total adjusted revenue in the first quarter; AIR MILES (17 per cent); Nurse Next Door Professional Homecare Services (14 per cent); Sutton Group Realty Services (12 per cent); Oxford Learning Centres (10 per cent) and Mr. Mikes Restaurants (6 per cent).

The coronavirus pandemic significantly affected many of these businesses, including Mr. Lube, an auto service provider with 135 stores included in the royalty pool. Lockdowns have caused individuals to stay at home. As a result, vehicles have been parked in driveways and garages needing little maintenance services.

Oxford Learning Centres, with 146 locations in the royalty pool, were not able to offer in-person tutoring services to students at most locations, while Mr. Mikes, with 38 restaurants in the royalty pool, was forced to close its indoor dining.

Investment thesis

  • Reopening of the economy. Resumption in business activity and lifting of lockdowns will increase royalty revenue.
  • Attractive yield. Potential future dividend increases.
  • Expansion of its royalty streams. On May 11, DIV announced the filing of a final short form base shelf prospectus, which expires in roughly two years. Consequently, the company can raise up to $200-million if it wants to fund an acquisition.
  • Key risk to monitor: Spread of the Delta variant.

Quarterly earnings

On May 13, the company reported its first-quarter financial results.

Adjusted revenue came in at $8.8-million, up from $8.5-million reported during the same period last year but just shy of the consensus estimate of $8.9-million. Normalized earnings before interest, taxes, depreciation and amortization (EBITDA) was $8.3-million, up from $7.9-million reported last year. Earnings per share was 3 cents. Distributable cash flow per share was 4.85 cents.

On April 29, the company released preliminary results so these results did not come as a great surprise to analysts and investors.

Subsequent to the quarter, two positive changes came into effect.

As of May 1, 13 Mr. Lube locations were added to the royalty pool, bringing the number of locations up to 135 locations from 122. The Mr. Lube royalty rate on non-tire sales increased to 7.95 per cent from 7.45 per cent, which is anticipated to generate an additional $1.16-million annually in royalty revenue.

Management provided a cautious outlook for the second quarter as many lockdown orders are still in effect.

President and Chief Executive Officer Sean Morrison said in the earnings release, “The renewed restrictions imposed by various governments to combat the growing number of COVID-19 cases in recent months are expected to result in some softness in the second quarter of 2021. However, as vaccinations are underway across the country, we are optimistic that there will be a meaningful recovery amongst our royalty partners when government restrictions are reasonably relaxed and the economy stabilizes.”

On June 28, management will be holding a virtual annual general meeting with a webcast available to its shareholders and proxyholders.

Dividend policy

DIV pays its shareholders a monthly dividend of 1.667 cents per share, or 20 cents per share yearly, equating to a current annualized yield of 7.8 per cent.

In March 2020, the company announced a 15 per cent dividend cut, trimming its monthly dividend to 1.667 cents per share from 1.958 cents per share due to uncertainties arising from COVID-19.

In the first quarter, the payout ratio on a cash basis was 90 per cent.

Analysts’ recommendations

This small-cap stock with a market capitalization of $306-million is covered by six analysts. The stock has a unanimous buy recommendation.

The firms providing research coverage on the company are: Canaccord Genuity, CIBC Word Markets, Cormark Securities, Paradigm Capital, PI Financial Corp. and Stifel Canada.

Revised recommendations

In May, four analysts revised their target price expectations.

  • Cormark Securities’ Jeff Fenwick raised his target by 40 cents to $3.40.
  • Paradigm Capital’s Corey Hammill trimmed his target to $3.25 from $3.30.
  • PI Financial’s Jazon Zandberg increased his target to a Street-high $4 from $3.
  • Stifel’s Anoop Prihar bumped his target price to $2.85 (the low on the Street) from $2.65.

Financial forecasts

The consensus EBITDA estimates are $37.9-million in 2021, rising to $41.2-million in 2022. The Street is forecasting earnings per share of 15 cents in 2021 and 17 cents in 2022. The consensus distributable cash flow per share is 21 cents in 2021, increasing to 23.5 cents in 2022.

Over the past several months, earnings forecasts have been relatively unchanged. Four months ago, the Street was anticipating EBITDA of $38.8-million in 2021 and $41.6-million in 2022. The consensus earnings per share estimates were 16 cents in 2021 and unchanged at 16 cents in 2022.

Valuation

According to Bloomberg, shares of DIV are trading at an enterprise value-to-EBITDA (EV/EBITDA) multiple of 11 times the consensus 2022 estimate, a slight premium to its three-year historical average forward multiple of 10.6 times but below its peak multiple of approximately 11.9 times during this period.

The average one-year target price is $3.25, implying the stock has a potential price return of nearly 28 per cent, and a potential total return, including the dividend yield, of 35 per cent.

Individual target prices are: $2.85, two at $3, $3.25, $3.40, and $4.

Insider transaction activity

Year-to-date, there has not been any buying or selling activity in the public market reported by insiders.

Chart watch

The share price has yet to recovered to its pre-COVID levels.

Year-to-date, the stock price has climbed 7 per cent. However, the share price has been consolidating, or trading sideways, for most of 2021. The share price has been trading largely between $2.40 and $2.60.

Looking at key technical resistance and support levels, the stock has an initial ceiling of resistance between $2.65 and $2.75. After that, there is overhead resistance around $3, and then around $3.25. Looking at the downside, there is strong technical support around $2.50, close to its 50-day moving average (at $2.51). Failing that there is technical support around $2.25, near its 200-day moving average (at $2.28).

This small-cap consumer discretionary stock has reasonable liquidity. The three-month historical daily average trading volume is approximately 436,000 shares.

POSITIVE BREAKOUTSJune 11 close
ATD-B-TAlimentation Couche-Tard Inc $45.32
ALA-TAltaGas Ltd $25.33
ARX-TARC Resources Ltd $10.10
ATZ-TAritzia Inc. $33.21
ACO-X-TAtco Ltd $45.78
AI-TAtrium Mortgage Investment Corp. $14.56
ATA-TATS Automation Tooling Systems Inc $34.27
BTE-TBaytex Energy Corp $2.18
BCE-TBCE Inc $61.66
BIR-TBirchcliff Energy Ltd $4.21
BLN-TBlackline Safety Corp. $9.17
BPF-UN-TBoston Pizza Royalties Income Fund $14.58
BRE-TBridgemarq Real Estate Services $17.74
CEU-TCES Energy Solutions Corp. $1.97
CPX-TCapital Power Corp $40.32
CHR-TChorus Aviation Inc $5.09
CIGI-TColliers International Group Inc $144.00
CTS-TConverge Technology Solutions Corp. $8.78
CR-TCrew Energy Inc $1.56
CRT-UN-TCT Real Estate Investment Trust $16.85
DSV-TDiscovery Silver Corp. $2.66
DCBO-TDocebo Inc. $67.23
DII-B-TDorel Industries Inc $14.19
DIR-UN-TDream Industrial REIT $14.73
ECN-TECN Capital Corp. $8.76
ECO-TEcoSynthetix Inc $5.89
EFX-TEnerflex Ltd $8.94
ESI-TEnsign Energy Services Inc $2.14
FTS-TFortis Inc $56.47
GBU-XGabriel Resources Ltd $0.34
GH-TGamehost Inc $8.66
GEI-TGibson Energy Inc $26.75
GGD-TGoGold Resources Inc $3.40
HR-UN-TH&R Real Estate Investment Trust $16.60
HCG-THome Capital Group Inc $36.81
ISV-TInformation Services Corp. $30.29
IPCO-TInternational Petroleum Corp. of Sweden $5.48
KEL-TKelt Exploration Ltd $3.45
KEY-TKeyera Corp $35.17
KMP-UN-TKillam Apartment REIT $20.09
LIF-TLabrador Iron Ore Royalty Corp $49.27
MI-UN-TMinto Apartment REIT $22.59
MRG-UN-TMorguard North American Residential REIT $17.13
NOA-TNorth American Construction Group Ltd. $17.93
NTR-TNutrien Ltd. $78.91
NVA-TNuVista Energy Ltd $3.09
PSI-TPason Systems Inc $9.86
PPL-TPembina Pipeline Corp $40.10
PEY-TPeyto Exploration & Development Corp $7.13
PHX-TPHX Energy Services Corp $4.30
PIPE-TPipestone Energy Corp. $2.09
PLZ-UN-TPlaza Retail REIT $4.57
POM-TPolyMet Mining Corp. $4.26
PRMW-TPrimo Water Corp. $21.51
RUS-TRussel Metals Inc $34.61
SIS-TSavaria Corp. $20.56
SW-TSierra Wireless Inc $20.54
SKE-TSkeena Resources Ltd. $15.87
SGR-UN-TSlate Grocery REIT $12.68
SRX-TStorm Resources Ltd. $4.01
TRP-TTC Energy Corp. $64.70
TOU-TTourmaline Oil Corp $33.25
TRZ-TTransat AT Inc $5.93
TCL/A-TTranscontinental Inc $25.75
UEX-TUEX Corp $0.50
URE-TUr-Energy Inc $2.01
VCM-TVecima Networks Inc $15.56
VET-TVermilion Energy Inc $10.67
WJX-TWajax Corp $24.32
WCP-TWhitecap Resources Inc $6.41
WSP-TWSP Global Inc $138.80
NEGATIVE BREAKOUTS
APS-TAptose Biosciences Inc $4.51
BCM-XBear Creek Mining Corp. $1.70
BU-TBurcon NutraScience Corp $3.63
ENGH-TEnghouse Systems Ltd $51.61
GCM-TGran Colombia Gold Corp. $5.01
HDI-THardwoods Distribution Inc $30.68
JWEL-TJamieson Wellness Inc. $34.34
QBR-B-TQuebecor Inc $32.24
ZZZ-TSleep Country Canada $28.97

Source: Bloomberg

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.

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