On today’s TSX Breakouts report, there are 31 stocks on the positive breakouts list (stocks with positive price momentum), and 51 securities are on the negative breakouts list (stocks with negative price momentum).
Discussed today is a stock that would have appeared on the positive breakouts list except its market capitalization is just under the minimum screening threshold of $200-million. It is a micro-cap stock with a market capitalization of $179-million that pays its investors a monthly dividend, currently equating to an attractive 7.1 per cent yield. The share price has been in a multi-year uptrend, rising 14 per cent year-to-date and closing at a record high on Wednesday.
The company offers investors exposure to the Canadian residential real estate market. The security highlighted today is Brookfield Real Estate Services Inc. (BRE-T).
A brief outline is provided below that may serve as a springboard for further fundamental research.
Toronto-based Brookfield Real Estate Services Inc., or BRESI, is a real estate brokerage company operating under well-known brands: Royal LePage, Johnston & Daniel, and Quebec-based Via Capitale. As at March 31, BRESI had a network of 18,708 realtors, representing roughly 20 per cent of the Canadian residential real estate market based on 2017 transactional dollar volume. Transactional dollar volume is calculated by multiplying the number of homes sold by the selling prices of those homes. Franchise agreements are long-term in nature, providing royalty stability. For instance, Royal LePage franchise contracts are for 10 to 20 years, with a standard renewal term of 10 years.
On May 8, the company reported its first-quarter financial results. Cash flow from operations (CFFO) came in at 59 cents per share, up 3 per cent year-over-year. Royalty revenues totaled $10.5-million, up from $10.4-million reported during the same period last year. Management indicated that this growth was largely due to an increase in the number of realtors in the network, which expanded by 573 realtors.
At the Annual General Meeting (AGM) held on May 8, president and chief executive officer Philip Soper highlighted the company’s business model, “We have stability in our structure through long-term franchise agreements with predominantly fixed fees.” He added, “The business is moving to even more of a fixed-fee basis, which should take even more of the variability, the cyclicality, the ups and downs of the actual real estate market out of our operating results.” Currently, the business mix is 73 per cent fixed-fee and 27 per cent is variable, which is impacted by fluctuating home prices. Management expect this mix will shift to 86 per cent fixed-fee and 14 per cent variable in the coming year.
In terms of a softening real estate market impacted by implementation of a mortgage stress test in January and rising mortgage rates among other things, Mr. Soper noted, “If you look at transactional dollar volume specifically in our two largest cities, Vancouver and Toronto, you can see the transactional dollar volume did peak in 2016. It dropped in 2017, stayed essentially flat in Vancouver, and dropped further to the 2015 level in the GTA (Greater Toronto Area). So there has been some peaking and some spiking in transactional dollar volume... So if you look across these markets, you can see they have been peaky, or they have been volatile, but you don’t see that in our results because of the nature of our company”, referring to the company’s fixed-fee structure.
At the AGM, he also noted the knowledgeable backbone of the firm, “We are a Brookfield company. Have very sophisticated advice and council when it comes to structuring our business.”
In the first-quarter Management’s Discussion and Analysis, the company’s longer-term outlook for the housing market was strong stating, “Low inventory in both Greater Vancouver and the GTA are expected to be long-term drivers of national price appreciation.”
The company pays its shareholders a monthly dividend of 11.25 cents per share or $1.35 cents per share yearly. This equates to an annualized dividend yield of 7.1 per cent. The dividend has steadily grown over the past several years.
The payout ratio was 72 per cent in 2017 and 77 per cent for the first quarter of 2018.
This micro-cap stock does not have analyst coverage.
The company has experienced steady growth in recent years. Royalty revenue totalled $39.9-million in 2015, $42.4-million in 2016, and $44.2-million in 2017. Cash flow from operations per share was $2.26 in 2015, $2,42 in 2016, and $2.55 in 2017.
Insider Transaction Activity
Year-to-date, there has not been any buying or selling activity reported by insiders.
Year-to-date, the share price is up 14 per cent, closing at a record high on Wednesday. This micro-cap stock is too small for inclusion in the S&P/TSX composite index; however, if it was in the Index, it would be one of the top performing stocks in the real estate sector. The S&P/TSX real estate sector has delivered a price return of 2.9 per cent so far this year.
The share price has been in a multi-year uptrend. Rising 4.8 per cent in 2017, climbing 7.6 per cent in 2016 and rallying 12.8 per cent in 2015. However, the share price can be quite volatile. For instance, earlier this year, the share price closed at $18.20 on February 28, but dropped 8 per cent to close at $16.75 on April 18.
The relative strength index (RSI) is at 74. Generally, an RSI reading at or above 70 indicates on overbought condition. As such, the share price may need to pause before climbing higher.
Looking at key resistance and support levels, the share price is approaching major resistance between $19 and $20. Looking at the downside, there is initial technical support around $18. Failing that, there is strong support around $17, which is close to its 200-day moving average (at $16.98).
The stock is thinly traded, which can increase its price volatility. The three-month historical daily average trading volume is approximately 13,000 shares.
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.