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On today’s TSX Breakouts report, there are 42 stocks on the positive breakouts list (stocks with positive price momentum), and 11 stocks are on the negative breakouts list (stocks with negative price momentum).

Featured today is a stock that is on the positive breakouts list. This stock is a way for investors to play the U.S. housing market given that approximately 90 per cent of the company’s sales are from the U.S. The share price plunged in 2018; however, industry fundaments are improving. On Dec. 17, solid U.S. housing starts and building permits data were released. The company’s fundamentals are recovering. Last month, the company reported better-than-expected third-quarter earnings results. Meanwhile, the stock is trading at an attractive valuation – at a discount to historical levels. From a technical analysis perspective, the share price appears to have put in a double-bottom with a bullish “Golden Cross” appearing last month. The company is covered by five analysts, and all five analysts have buy recommendations. Furthermore, management has announced a dividend increase every year since 2012. The security discussed today is Hardwoods Distribution Inc. (HDI-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

Langley, B.C.-based HDI is a distributor of hardwood lumber and building products with 66 distribution centers across North America. Management estimates that approximately 50 per cent of its products serves the residential construction market. The other key market that HDI supplies is the commercial construction sector. The company has a diversified customer base with no customer accounting for more than 2 per cent of its sales.

In terms of geographical revenue breakdown, in 2018, approximately 90 per cent of the company's sales came from the U.S. with the balance, 10 per cent, from Canada. As such, U.S. housing starts data is a key statistic to monitor and the company benefits from a rising U.S. dollar. Given that the company’s products are used in the final construction stages, there is a six to nine month delay between strong housing starts data and economic benefits realized by HDI. On Dec. 17, U.S. housing starts data was strong coming in at 1.365-million in Nov., ahead of expectations. In addition, building permits was solid, rising to 1.482-million units in Nov.

The company operates in a highly fragmented market allowing for acquisition growth opportunities. Management estimates that the company’s market share in North America is approximately 10 per cent. Over the past eight years, the company has completed nine acquisitions, of which two purchases occurred this year. Most recently, during the fourth-quarter the company completed a U.S. $34.5-million acquisition of Pacific Mutual Door Company, which is expected to be immediately accretive. After the purchase of Pacific, the company’s net bank debt-to-adjusted EBTIDA ratio increased to the low 2 times level, up from 1.6 times at the end of the third-quarter.

After the market closed on Nov. 11, the company reported better-than-expected third-quarter financial results that sent the share price soaring nearly 8 per cent the following trading day on high volume with over 242,000 shares traded (well above the three-month historical daily average trading volume of approximately 62,000 shares). Revenue came in at $292.5-million. Gross profit margin was 18.2 per cent, the highest level since the third-quarter of 2017, and returned to its typical range of between 18 per cent and 19 per cent. Adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) was $21.3-million, ahead of the consensus estimate of $19.1-million. Adjusted earnings per share came was 43 cents, surpassing the Street’s forecast of 37 cents.

Looking ahead, on the earnings call the president and chief executive officer Rob Brown said, “In the near term, numerous indicators are suggesting the residential construction activity [will] gain momentum as early as 2020. Recent data related to U.S. housing starts and building permits have been positive, and recent reports by a number of major U.S. homebuilders suggest improving construction activity in 2020.” Management is targeting $1.5-billion in sales by the years 2022, 2023. In 2018, sales totaled $1.13-million and for the first nine months of 2019, sales are $1.159-million.

Dividend policy

The company pays shareholders a quarterly dividend of 8.5 cents per share or 34 cents per share on a yearly basis. This equates to a current annualized dividend yield of 2.1 per cent.

Management is committed to returning capital to investors. The company has announced a dividend increase each calendar year since 2012. Last month, the company announced a 6 per cent dividend increase, raising the quarterly dividend to its present level of 8.5 cents per share from 8 cents per share.

Analysts’ recommendations

There are five firms providing recent research coverage on this small-cap industrials stock with a market capitalization of $344-million, and all five analysts have buy recommendations.

The five firms providing recent research coverage on the company are as follows in alphabetical order: Acumen Capital, Canaccord Genuity, CIBC Capital Markets, Cormark Securities, and National Bank Financial.

Revised recommendations

After the company reported better-than-expected earnings last month, five analysts revised their target prices – all higher.

Hamir Patel, the analyst at CIBC Capital Markets, increased his target price to $17 from $15. Nick Corcoran, the analyst at Acumen Capital, lifted his target price by $1 to $18.50. Maggie MacDougall, the analyst at Cormark Securities, tweaked her target price up by 50 cents to $17.50. Canaccord Genuity’s analyst Yuri Lynk hiked his target price to $18 from $15. Zachary Evershed, the analyst at National Bank Financial, raised his target price to $18 from $16.50.

Financial forecasts

The Street is forecasting EBITDA of $77-million in 2019, rising to $87-million in 2020. The consensus earnings per share estimates are $1.44 for 2019, climbing to $1.62 in 2020.

Earnings forecasts have been rising. To illustrate, three months ago, the consensus EBITDA estimates were $73-million for 2019 and $78-million for 2020. The Street was forecasting earnings per share of $1.30 in 2019 and $1.54 the following year.

Valuation

According to Bloomberg, the stock is trading at an enterprise value-to-EBITDA multiple of 6.1 times the 2020 consensus estimate, below its three-year average multiple of 7.3 times. During this time period, the stock has traded a forward EV/EBITDA multiple as low as 5.2 times and as high as 9 times.

The average one-year target price is $17.80, suggesting there is 10 per cent upside in the share price over the next 12 months. Target prices are concentrated, ranging from a low of $17 to a high of $18.50.

Insider transactions

Year-to-date, only one insider has reported trades in the public market. On Nov. 15, Peter Morris Bull, with an ownership position exceeding 10 per cent, acquired 10,000 shares at a price per share of $15.1858 for an account in which he has indirect ownership (Arbutus Distributors Ltd.), raising this account’s holdings to 4,425,670 shares. Prior to that, on Jan. 2, Mr. Bull acquired 42,500 shares at a price per share of $11.0025 for this account.

Chart watch

Between 2009 and late-2017, the share price was in an uptrend. However, in 2018, the stock price collapsed, plunging 46 per cent.

The stock price appears to have put in a double-bottom, before spiking higher in the fourth-quarter of this year. Also positive, last month, the stock exhibited a bullish technical signal – a “Golden Cross” – which occurs when the 50-day moving average crosses above the 200-day moving average. Year-to-date, the share price is up 47 per cent.

In terms of key resistance and support levels, the share price is hovering close to a ceiling of resistance around $16. Should the stock price hold above $16, the next resistance level is around $18. Looking at the downside, there is technical support around $14, close to its 50-day moving average (at $13.83). Failing that, there is support between $12.75 and $13, near its 200-day moving average (at $12.74).

Liquidity for this small-cap stock can be low. The three-month historical daily average trading volume is approximately 62,000 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 indices 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 Breakouts$ Price Dec. 16
AGF-B-TAGF Management Ltd $6.31
ARX-TARC Resources Ltd $7.79
ATA-TATS Automation Tooling Systems Inc $20.90
AUP-TAurinia Pharmaceuticals Inc $24.59
BB-TBlackBerry Ltd $7.53
BLX-TBoralex Inc $25.24
CEU-TCanadian Energy Services & Technology Co $2.09
CPX-TCapital Power Corp $34.42
CS-TCapstone Mining Corp $0.69
CVE-TCenovus Energy Inc $12.79
CGX-TCineplex Inc $33.96
CVG-TClairvest Group Inc. $52.35
MIC-TGenworth MI Canada Inc $58.48
GWO-TGreat-West Lifeco Inc $33.75
HDI-THardwoods Distribution Inc $16.17
HBM-THudBay Minerals Inc $5.29
KEL-TKelt Exploration Ltd $4.54
KEY-TKeyera Corp $33.90
LIF-TLabrador Iron Ore Royalty Corp $26.99
LNF-TLeon's Furniture Ltd. $16.88
MRE-TMartinrea International Inc $13.00
MAXR-TMaxar Technologies Ltd. $17.03
MEG-TMEG Energy Corp $6.87
MRD-TMelcor Developments Ltd $13.25
NVA-TNuVista Energy Ltd $2.90
OSK-TOsisko Mining Inc. $3.64
POU-TParamount Resources Ltd $7.76
PXT-TParex Resources Inc $20.87
PEY-TPeyto Exploration & Development Corp $3.64
PIPE-TPipestone Energy Corp. $1.59
PD-TPrecision Drilling Corp $1.73
SEC-TSenvest Capital Inc. $174.99
SHOP-TShopify Inc $517.42
STN-TStantec Inc $36.63
TCS-TTECSYS Inc. $20.11
TSGI-TThe Stars Group Inc. $32.79
TRI-TThomson Reuters Corp $95.46
TOG-TTORC Oil & Gas Ltd $4.23
TA-TTransAlta Corp $9.14
TCW-TTrican Well Service Ltd $1.06
WCP-TWhitecap Resources Inc $4.89
WSP-TWSP Global Inc $89.10
NEGATIVE BREAKOUTS
CCO-TCameco Corp $11.73
CFX-TCanfor Pulp Products Inc $7.76
CG-TCenterra Gold Inc $9.69
CWEB-TCharlotte's Web Holdings Inc. $11.20
CSH-U-TChartwell Retirement Residences $14.09
ELD-TEldorado Gold Corp $9.47
GMP-TGMP Capital Inc $1.81
JE-TJust Energy Group Inc $2.34
MUX-TMcEwen Mining Inc. $1.38
SYZ-TSylogist Ltd. $9.39
TGO-TTeraGo Inc. $7.43

Source: Bloomberg

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