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On today’s TSX Breakouts report, there are 50 stocks on the positive breakouts list (stocks with positive price momentum), and nine stocks are on the negative breakouts list (stocks with negative price momentum).

Discussed today is a consumer staples stock that surfaced on the positive breakouts list. The stock recently broke out of a downtrend that had been in place since early 2018. Year-to-date, the share price is up 20 per cent.

The stock has a unanimous buy recommendation from four analysts with an average one-year target price implying the stock price may appreciate 43 per cent over the next 12 months.

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Trading volume can be low, which can increase price volatility. As a result, this stock is best suited for consideration by investors with a high risk tolerance.

The stock highlighted today is Waterloo Brewing Ltd. (WBR-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

Ontario-based Waterloo Brewing is a leading craft brewery. The company manufactures, packages, and distributes its own brands, including value offering Laker and its premium Waterloo product.

In terms of its branded sales volume in fiscal 2020, 75 per cent was from its value brand Laker, 11 per cent was from the LandShark Lager and Margaritaville brands (Canadian rights to these brands), 8 per cent was from its premium Waterloo brand, 5 per cent was from the Seagram brand (Canadian rights to Seagram coolers) with the balance, less than 1 per cent, from other beer brands.

The company is also a co-packer, producing products for other manufacturers.

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For instance, Waterloo Brewing produces and distributes beer products under the President’s Choice and No Name brands. The company is experiencing growth in its co-packer business.

On Feb. 10, the company announced a three-year co-pack contract with Hiram Walker & Sons Limited to produce a line of ABSOLUT vodka products. Last December, the company secured a three-year co-pack contract with Carlsberg Canada to produce its Somersby Cider.

The company operates in an attractive market - producing canned craft beers - where consumer demand is rising. As a result, this regional craft brewery has seen its sales and profitability rise.

According to Beer Canada, in 2019, national bottle beer sales declined by 13 per cent, keg sales fell by 4 per cent, while can sales increased by nearly 2 per cent. In 2019, 65 per cent of national beers sales were from canned beer and 25 per cent of sales stemmed from bottles.

To put this in perspective, five years ago, 40 per cent of national beer sales came from bottled beer. In fiscal 2020, Waterloo Brewing’s branded sales volume increased 21 per cent year-over-year to 279,100 hectoliters.

The company’s products are primarily sold to consumers through three distribution networks: The Beer Store (TBS), the Liquor Control Board of Ontario (LCBO), and licensed grocery stores. Consequently, restrictions placed on bars and restaurants due to COVID-19 have not placed hardship on the company’s financial health and growth.

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On June 3, the company announced plans to expand its production capacity with a $13.4-million investment in its plant. The expansion will increase overall packaging capacity to over 1.4-million hectoliters to fulfil rising demand of its branded as well as co-pack volumes. The company’s canning capacity will double to 900,000 hectoliters.

President and chief executive officer George Croft said, “This new capacity equipment adds a critical component to our upcoming growth plans and set the foundation for the Company to achieve its $25-million EBITDA target over the next three years. We are looking forward to filling it up with Ontario’s favourite beers and beverages.”

Investment thesis highlights

  • Revenue growth is anticipated to continue with additional packaging capacity coming online.
  • Shift in consumer demand to canned craft beer.
  • Growth in its co-packing business.
  • Inexpensive valuation relative to historical levels.

Quarterly earnings

Before the market opened on Sept. 3, the company reported better-than-expected second-quarter fiscal 2021 financial results (the company’s fiscal year-end is Jan. 31).

Revenue came in at $24.6-million, up 44 per cent year-over-year, and ahead of the consensus estimate of $23.3-million. EBITDA (earnings before interest, taxes, depreciation and amortization) increased to $5.8-million, up 61.5 per cent year-over-year and ahead of the Street’s forecast of $4.8-million. The EBITDA margin was 23.5 per cent, up from 20 per cent reported during the same period last year.

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The share price advanced 3 per cent that day and another 3 per cent the following day.

Returning capital to its shareholders

The company pays its shareholders a quarterly dividend of 2.625 cents per share or 10.5 cents per share yearly, equating to a current annualized yield of 2.5 per cent.

Looking back to 2016, the company has announced a dividend increase in December of each calendar year.

In fiscal 2020, the company repurchased 323,200 shares at a volume weighted average price per share of $3.45.

Analysts' recommendations

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This micro-cap stock with a market capitalization of $148-million is actively covered by four analysts, and all four analysts have buy recommendations.

The firms providing recent analyst research on the company are: Acumen Capital, Cormark Securities, ISS-EVA, and Paradigm Capital.

Financial forecasts

The company’s fiscal year-end is Jan. 31.

The Street is forecasting revenue to come in $77.7-million in fiscal 2021, up 29 per cent from $60.3-million reported in fiscal 2020, and rise to $98.9-million in fiscal 2022. The consensus EBITDA estimates are $16.2-million in fiscal 2021, up 40 per cent from $11.6-million reported in fiscal 2020, and $22.8-million in fiscal 2022. The consensus earnings per share estimates are 12 cents in fiscal 2021 and 27 cents in fiscal 2022.

Earnings expectations have been rising. To illustrate, three months ago, the consensus revenue estimates were $71.7-million for fiscal 2021 and $83.6-million for fiscal 2022. The consensus EBITDA estimates were $15.6-million for fiscal 2021 and $21-million for fiscal 2022. The Street was forecasting earnings per share of 10 cents in fiscal 2021 and 22 cents in fiscal 2022.

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Valuation

The stock is not expensive relative to historical levels. According to Bloomberg, the stock is trading at an EV/EBITDA multiple of 7.9 times the fiscal 2022 consensus estimate, below its three-year historical average of 10.4 times.

The average one-year target price is $6, implying the stock price may appreciate 43 per cent over the next 12 months. Individual target prices provided by three analysts are as follows in numerical order: $5.50 (from Corey Hammill, an analyst at Paradigm Capital), $6, and $6.50 (from Acumen Capital’s Nick Corcoran).

Revised recommendations

Last month, three analysts revised their expectations –all higher.

  • Acumen’s Nick Corcoran raised his target to $6.50 from $6.
  • Paradigm’s Corey Hammill increased his target to $5.50 from $5.
  • ISS-EVA’s Anthony Campagna upgraded his recommendation to “overweight” from “underweight.”

Insider transaction activities

Year-to-date, only one insider has reported trading activity in the public market.

In a relatively small transaction, director John Bowey invested approximately $75,000 in shares on Jan. 10. He acquired 20,500 shares at a price per share of $3.65, initiating a position in this particular account.

Chart watch

The stock recently broke out of a downtrend that had been in place since early 2018.

Year-to-date, the share price of this consumer staples stock is up 20 per cent.

In recent days, the stock has had unusually high trading volume. On Monday, over 331,000 shares traded. On Oct. 2, over 542,000 shares were traded, and over 214,000 shares were traded on Oct. 1. This is well above the three-month historical daily average trading volume of approximately 50,000 shares.

Given the stock’s historically low trading volume, the share price can be volatile.

Right now, the share price is consolidating, trading sideways, around the $4 level. In terms of key resistance and support levels, the share price has a major ceiling of resistance between $4.50 and $4.70, near its record closing high of $4.70 reached in March 2018. Looking at the downside, there is initial technical support around $4. Failing that, there is support around $3.50, near its 50-day moving average (at $3.58).

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.

Tuesday's TSX breakouts

Positive BreakoutsOct. 5 close
AGF-B-TAGF Management Ltd $6.11
AQN-TAlgonquin Power & Utilities Corp $20.27
ADW-A-TAndrew Peller Ltd $10.36
AHC-TApollo HealthCare Corp. $3.69
ACQ-TAutoCanada Inc $19.48
BLX-TBoralex Inc $40.13
BPF-UN-TBoston Pizza Royalties Income Fund $8.30
BIP-UN-TBrookfield Infrastructure Partners LP $64.14
BPY-UN-TBrookfield Property Partners LP $17.33
BEPC-TBrookfield Renewable Corporation $84.99
BEP-UN-TBrookfield Renewable Energy Partners LP $73.72
GOOS-TCanada Goose Holdings Inc. $44.72
CNR-TCanadian National Railway Co $143.54
CAS-TCascades Inc $17.61
CCL-B-TCCL Industries Inc $52.66
CDAY-TCeridian HCM Holding Inc. $117.13
CLR-TClearwater Seafoods Inc $6.85
DII-B-TDorel Industries Inc $12.76
ECN-TECN Capital Corp. $5.33
EMP-A-TEmpire Co Ltd $39.38
FTT-TFinning International Inc $21.56
FSV-TFirstService Corp $178.22
FTS-TFortis Inc $55.20
GIL-TGildan Activewear Inc $27.59
FOOD-TGoodfood Market Corp. $9.24
HDI-THardwoods Distribution Inc $25.84
HLF-THigh Liner Foods Inc $9.07
H-THydro One Ltd. $29.05
INE-TInnergex Renewable Energy Inc $24.73
JWEL-TJamieson Wellness Inc. $42.56
LAC-TLithium Americas Corp $21.05
MDI-TMajor Drilling Group International Inc $7.43
MX-TMethanex Corp $33.24
GRA-TNanoXplore Inc. $2.85
NFG-TNew Found Gold Corp. $2.95
NPI-TNorthland Power Inc $41.27
PTG-TPivot Technology Solutions Inc. $2.59
RCH-TRichelieu Hardware Ltd $36.44
STLC-TStelco Holdings Inc. $11.99
SRX-TStorm Resources Ltd. $2.22
TCS-TTECSYS Inc. $32.58
TRI-TThomson Reuters Corp $107.51
TIH-TToromont Industries Ltd $80.02
TXP-TTouchstone Exploration Inc. $1.45
RNW-TTransAlta Renewables Inc $17.25
TC-TTucows Inc. $97.26
WELL-TWell Health Technologies Corp. $7.28
WED-TWestaim Corp. $2.35
WILD-TWildBrain Ltd. $1.59
XBC-TXebec Adsorption Inc. $5.04
Negative Breakouts
CNE-TCanacol Energy Ltd $3.31
CUP-U-TCaribbean Utilities Company Ltd. $14.25
CGX-TCineplex Inc $4.75
EXF-TEXFO Inc $4.11
IVQ-TInvesque Inc. $2.33
GUD-TKnight Therapeutics Inc $5.64
MRC-TMorguard Corp. $100.76
TRZ-TTransat AT Inc $3.75
TRQ-TTurquoise Hill Resources Ltd $1.07

Source: Bloomberg

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