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On today’s TSX Breakouts report, there are 49 stocks on the positive breakouts list (stocks with positive price momentum), and 14 stocks are on the negative breakouts list (stocks with negative price momentum).

Discussed today is a stock whose market capitalization, currently at $138-million, is just below the screen’s minimum market capitalization threshold of $200-million; otherwise, it would appear on the positive breakouts list.

Year-to-date, this micro-cap stock has seen its share price soar over 80 per cent. Over the past 15 trading sessions, the stock price has jumped 57 per cent. Given the parabolic move in the share price, the positive price momentum may soon pause in order for the stock to digest these rapid gains. The average one-year target price suggests the share price may rally an additional 24 per cent over the next 12 months.

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The company highlighted today is H2O Innovation Inc. (HEO-X), a stock with a unanimous “buy” recommendation from six analysts.

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

The company

Quebec-based H2O Innovation is a water and wastewater infrastructure play.

The company has three main business segments: O&M (operation and maintenance), Specialty Products, and WTS (Water Technologies & Services).

In fiscal 2020 (the company’s fiscal year-end is June 30), 48 per cent of total revenue was from O&M, 30 per cent came from Specialty Products, and 22 per cent of total revenue was from WTS.

In terms of geographic revenue breakdown, most of the company’s revenue is derived from North America. In fiscal 2020, 68 per cent of total revenue came from the United States, 12 per cent stemmed from Canada, and other countries represented 20 per cent of total revenue.

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In July, the company announced a $3.7-million acquisition of Gulf Utility Service Inc., which services approximately 40 municipal and private companies in the State of Texas.

Co-founder, president, and chief executive officer Frédéric Dugré said, “This acquisition consolidates our position as operator of water and wastewater utilities in Texas and will allow us to capture synergies and more efficiency in our operations management, more specifically in the Greater Houston Area. In less than 24 months, we have grown from virtually no revenue coming from Texas to annual revenues of $25-million.”

Mr. Dugré added on a conference call, “We intend to generate cost synergies of approximately $150,000 and additional operational efficiency improvements of $300,000 within the next 18 months.”

Investment thesis highlights

  • Steady growth. Management targets revenue growth of between 7 per cent and 10 per cent in fiscal 2021. The company reported revenue of $133.6-million in fiscal 2020, $118-million in fiscal 2019, and $99.7-million in fiscal 2018. Reported adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) was $12.5-million in fiscal 2020, $7.2-million in fiscal 2019, and $4.1-million in fiscal 2018.
  • High earnings visibility with recurring revenue representing 86 per cent of total revenue in fiscal 2020.
  • Attractive backlog - $125-million as at June 30. A large backlog is desirable as it reflects future revenues (backlog represents awarded contracts that will be converted to revenue).
  • Rising profitability. Management’s objective is to achieve an adjusted EBITDA margin above 9 per cent in fiscal 2021 and above 10 per cent in fiscal 2022. The adjusted EBITDA margin stood at 9.4 per cent in fiscal 2020, 6.1 per cent in fiscal 2019, and 4.1 per cent in fiscal 2018.
  • Acquisition opportunities. On the recent earnings call, Mr. Dugré spoke about future acquisition opportunities, “We do have targets for small tuck-ins that we intend to continue to look at as we just completed one in early July. In a similar fashion, we keep looking for other opportunities still in the O&M and in Specialty Products.”
  • Strong institutional shareholder base. Amongst H2O Innovation’s major shareholders are Investissement Québec (owning over 15 per cent of the shares outstanding), the Business Development Bank of Canada (owning over 12 per cent of the shares outstanding), and the Caisse de dépôt et placement du Québec (owning 11 per cent of the shares outstanding).

Quarterly earnings

Before the market opened on Sept. 24, the company reported better-than-expected fourth-quarter fiscal 2020 financial results (fiscal year-end is June 30).

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Revenue came in at $35.98-million, up 13 per cent year-over-year, exceeding the Street’s forecast of $33.1-million. Recurring revenue represented 87 per cent of total revenue. Reported adjusted EBITDA was $4.8-million, well above the consensus estimate of $2.1-million. The adjusted EBITDA margin was 13.4 per cent compared to 7.4 per cent reported during the same period last year.

The share price rose nearly 9 per cent that day on high volume with over 483,000 shares traded.

Dividend policy

The company does not pay its shareholders a dividend.

Analysts' recommendations

This micro-cap industrials stock with a market capitalization of $138-million is well covered by analysts on the Street. Since reporting its fourth-quarter fiscal 2020 financial results in late-September, six analysts have issued research reports – all with “buy” recommendations.

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The firms providing recent analyst coverage on the company are: Acumen Capital, Beacon Securities, Desjardins Securities, Haywood Securities, Industrial Alliance Securities, and Roth Capital Partners.

Revised recommendations

In September, all six analysts revised their expectations.

  • Desjardins Securities' Frederic Tremblay increased his target to $2.50 (the high on the Street) from $2.
  • Acumen Capital’s Nick Corcoran tweaked his target to $2.20 from $2.
  • · Roth Capital Partners' Gerry Sweeney lifted his target price to $2 from $1.75.
  • Beacon Securities' Gabriel Leung raised his target by 35 cents to $2.25.
  • Haywood Securities' Colin Healey bumped his target to $2.10 from $1.90.
  • Industrial Alliance Securities' Naji Baydoun upgraded his recommendation to a “buy” from a “speculative buy” and raised his target to $2.25 from $2.

Financial forecasts

Again, the company’s fiscal year-end is June 30.

The Street is forecasting revenue of $145-million in fiscal 2021, up from $133.6-million reported in fiscal 2020, and $152-million in fiscal 2022. The consensus EBITDA estimates are $14-million in fiscal 2021, up from $12.5-million reported in fiscal 2020, and $15.2-million in fiscal 2022. The adjusted EBITDA margin stood at 9.4 per cent in fiscal 2020. The net debt-to-adjusted EBITDA ratio was 0.8 as at June 30.

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Earnings expectations have increased in recent months. To illustrate, three months ago, the consensus revenue estimates were $138-million for fiscal 2021 and $146-million for fiscal 2022. The consensus EBITDA estimates were $10.7-million for fiscal 2021 and $11.4-million for fiscal 2022.

Valuation

According to Bloomberg, the stock is trading at an enterprise value-to-sales multiple of 1.1 times the fiscal 2021 consensus estimate and at an enterprise value-to-EBITDA (EV/EBITDA) multiple of 11.3 times the fiscal 2021 consensus estimate, in-line with its three-year historical average (at 11.1 times). The stock is trading at an EV/EBITDA multiple of 9 times the fiscal 2022 consensus estimate.

The average one-year target price is $2.22, implying the share price has 24 per cent upside potential over the next 12 months. Individual target prices are as follows in numerical order: $2 (from Gerry Sweeney at Roth Capital Partners), $2.10, $2.20, two at $2.25, and $2.50 (from Desjardins' Frederic Tremblay).

Insider transaction activities

Year-to-date, only two insiders have reported trading activity in the public market and both transactions were very small.

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On Sept. 29, chief strategic officer Gregory Madden sold 6,032 shares at a price per share of $1.45. Proceeds from the sale exceeded $8,700, excluding trading fees.

Prior to that, on March 18, director Pierre Cộté purchased 14,700 shares at a cost per share of 68 cents for an account in which he has indirect ownership. The cost of this investment totaled approximately $10,000, not including commission charges.

Chart watch

Year-to-date, the share price has rallied nearly 81 per cent. However, most of that gain has occurred in recent days. Over the past 15 trading sessions, the stock price has jumped 57 per cent, closing at $1.79 on Oct. 13, up from a closing price of $1.14 on Sept. 21.

Also positive is that the stock price has rallied on high trading volume. On Mon. Oct. 13, over 500,000 shares traded, which is well above the three-month historical daily average trading volume of approximately 147,000 shares.

In terms of key resistance and support levels, the share price has an initial ceiling of resistance around $2. After that, there is major overhead resistance between $2.40 and $2.50. Looking at the downside, there is technical support between $1.50 and $1.60.

Given the recent parabolic move in the share price, the stock is currently in overbought territory with an RSI reading of 79. Generally, an RSI reading at or above 70 reflects an overbought condition. Consequently, the positive price momentum may soon pause in order for the stock to digest these rapid gains.

Wednesday's TSX breakout stocks

Positive BreakoutsOct. 13 close
ABT-TAbsolute Software Corp $17.64
AT-TAcuityAds Holding Inc. $4.56
CLIQ-TAlcanna Inc. $5.19
ADW-A-TAndrew Peller Ltd $10.80
AI-TAtrium Mortgage Investment Corp. $11.83
AUP-TAurinia Pharmaceuticals Inc $20.57
AYR-A-TAYR Strategies Inc. $19.70
DOO-TBRP Inc $76.56
CP-TCanadian Pacific Railway Ltd $416.81
CJT-TCargojet Inc $224.77
CDAY-TCeridian HCM Holding Inc. $118.37
DII-B-TDorel Industries Inc $14.34
DIR-UN-TDream Industrial REIT $11.64
ELD-TEldorado Gold Corp $17.18
XTC-TExco Technologies Ltd $7.60
EXRO-TExro Technologies Inc. $3.15
FTT-TFinning International Inc $22.30
FSV-TFirstService Corp $180.07
GIL-TGildan Activewear Inc $29.73
FOOD-TGoodfood Market Corp. $9.36
HDI-THardwoods Distribution Inc $26.19
HARV-THarvest Health & Recreation Inc. $2.17
LNR-TLinamar Corp $44.18
MMX-TMaverix Metals Inc. $7.50
MAXR-TMaxar Technologies Ltd. $39.12
MDF-TMDF Commerce Inc. $11.85
DR-TMedical Facilities Corp $4.72
MTY-TMTY Food Group Inc. $45.07
NFG-TNew Found Gold Corp. $3.28
NGD-TNew Gold Inc $2.77
NPI-TNorthland Power Inc $42.58
QTRH-TQuarterhill Inc. $2.12
RICH-TRafflex Financial Group Limited $7.06
RBA-TRitchie Bros Auctioneers Inc $86.15
RSI-TRogers Sugar Inc $4.97
RUP-TRupert Resources Ltd. $6.05
STC-TSangoma Technologies Corp. $2.82
ZZZ-TSleep Country Canada $21.82
SOY-TSunOpta Inc. $10.43
TCS-TTECSYS Inc. $38.54
TER-TTerrAscend Corp. $7.36
TFII-TTFI International Inc. $63.70
TRI-TThomson Reuters Corp $109.03
TIH-TToromont Industries Ltd $82.69
TXP-TTouchstone Exploration Inc. $1.55
RNW-TTransAlta Renewables Inc $18.00
TC-TTucows Inc. $99.81
WELL-TWell Health Technologies Corp. $7.99
XBC-TXebec Adsorption Inc. $5.47
Negative Breakouts
ADN-TAcadian Timber Corp $15.58
ORA-TAura Minerals Inc. $12.93
CCO-TCameco Corp $12.39
CGX-TCineplex Inc $4.61
DML-TDenison Mines Corp $0.45
FD-TFacedrive Inc. $11.29
IMV-TIMV Inc. $4.89
IIP-UN-TInterRent REIT $12.21
LIF-TLabrador Iron Ore Royalty Corp $25.27
LGO-TLargo Resources Ltd. $0.98
MFI-TMaple Leaf Foods Inc $24.76
SJR-B-TShaw Communications Inc $23.31
SYZ-TSylogist Ltd. $10.24
WTE-TWestshore Terminals Investment Corp $14.22

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.

Be smart with your money. Get the latest investing insights delivered right to your inbox three times a week, with the Globe Investor newsletter. Sign up today.

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