On today’s Breakouts report, there are 24 stocks on the positive breakouts list (stocks with positive price momentum), and 21 securities are on the negative breakouts list (stocks with negative price momentum).
Discussed today is a stock that has rallied over 40 per cent year-to-date but has not appeared on the breakouts report given its low market capitalization (below the $200-million screening threshold) - VitalHub Corp. (VHI-T).
We last highlighted this company over three years ago. Throughout 2021 and into the first half of 2022, the share price traded largely between $2.80 and $3.50 before falling to the low $2 level in late 2022. However, the stock has staged a comeback, particularly so in recent days.
Over the past 10 trading sessions, the share price has rallied 28 per cent on high volume. As a result, the stock is now in deeply overbought territory (relative strength index is at 87) and from a technical analysis perspective is due for a pullback, or at least a pause, in order to digest these rapid gains.
Given the high volatility in the share price, this stock is best suited for consideration by investors with a high risk tolerance within a well-diversified portfolio.
The stock has a unanimous buy recommendation from six analysts. The average one-year target price is $5.33, implying the share price has 43-per-cent upside potential over the next 12 months.
A brief outline on VitalHub is provided below that may serve as a springboard for further fundamental research when conducting your own due diligence.
Toronto-based VitalHub provides healthcare information systems. Its digital product offerings include patient flow management and electronic health records. The company serves more than 1,000 clients in North America, the United Kingdom, Europe, Australia and the Middle East.
Acquisition growth is one of management’s key objectives. Management seeks to acquire companies that are either breakeven or profitable, have annual revenue of between $1-million and $12-million and recurring revenue exceeding 60 per cent of total revenue. Management targets paying a multiple of between 1 and 2.5 times revenue. The most recent acquisition completed was in January of 2023, when VitalHub acquired Coyote Software Corp. for $2.37-million.
Investment thesis highlights
- Seasoned leadership. VitalHub’s president and chief executive officer Dan Matlow is the former president and chief executive officer of Medworxx Solutions Inc., a Toronto-based patient flow software provider that was sold to Aptean Inc. in 2015. Earlier this month, the company announced the appointment of Francis Shen as the chairman of the board, replacing the outgoing Chris Schnarr, who will be departing on Dec. 31. Mr. Shen was the founder and former co-chief executive officer of Aastra Technologies Ltd., a company that was sold to Mitel Networks Corp. in January of 2014. Also a board member is Tony Shen, the former co-CEO, president and chief operating officer of Aastra Technologies Ltd.
- Growth. Management aims to deliver both organic (internal) and acquisition growth in a fragmented market.
- Higher annual recurring revenue (ARR): A key objective of management is to increase ARR. At quarter-end, the ARR totaled $42.6-million, up 38 per cent year-over-year. On the third-quarter earnings call, the CEO noted that the company adds between $800,000 and $1.5-million to ARR each quarter.
- Rising margins.
- Healthy balance sheet. At quarter-end, the company had $29.8-million of cash (roughly 64 cents per share of cash) and no debt.
Quarterly earnings results
After the market closed on Nov. 9, the company reported better-than-expected third-quarter financial results. Revenue came in at $13.2-million, up 35 per cent year-over-year, and slightly ahead of the consensus estimate of $12.9-million. The gross profit margin climbed to 82 per cent, up from 80 per cent reported during the same period last year. Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) was $3.4-million, up 59 per cent year-over-year, beating the Street’s forecast of $2.95-million.
On the earnings call, Mr. Dan Matlow said, “We think we’ve built a really strong foundation with our business model. And as I said before, we focus on three things every day. One is to make accretive acquisitions. I think a lot of M&A companies do. We’re really focused on that right now to try to get some things over the finish line. Secondly, organic growth, high-margin recurring-based revenue. And as that grows, it comes to the bottom line, and we’re seeing that come to the bottom line quarter-over-quarter. And we have the ability to move resources into our Sri Lankan based resources for both innovation in a cost-effective fashion and that allows us to service this market in an effective way and in a cost-effective way. And all three of them seem to be working really well. We spent a lot of time on it, and we just keep building block by block, and that’s what we’re all about, and we continue to do it.”
The company does not pay its shareholders a dividend.
This healthcare stock with a market capitalization of $163-million has a unanimous buy recommendation from six analysts.
The firms providing analyst coverage on the company: Beacon Securities, Canaccord Genuity, Cormark Securities, Eight Capital, Paradigm Capital and Roth MKM.
Month-to-date, three analysts have revised their expectations and target prices higher.
- Beacon Securities’ Gabriel Leung to $6 (a high on the Street) from $5.50.
- Canaccord Genuity’s Doug Taylor to $4.50 (the low on the Street) from $4.25.
- Cormark Securities’ Gavin Fairweather to $5.50 from $5.
The Street is forecasting revenue of $52.5-million in 2023, up from $39.97-million reported in 2022, and $58.4-million in 2024. The consensus EBITDA estimates are $12.6-million in 2023, up from $9.52-million reported in 2022, and $15.3-million in 2024. The Street is anticipating earnings per share will come in at 11 cents in 2023 and 17 cents the following year.
Financial forecasts have ticked up in recent months. Four months ago, the Street was anticipating revenue of $51.5-million in 2023 and $56.9-million in 2024. The consensus EBITDA estimates were $12.1-million for 2023 and $14.8-million for 2024. The Street was anticipating earnings per share of 9 cents in 2023 and 17 cents in 2024.
According to Bloomberg, the stock is trading at an enterprise value-to-sales multiple of 2.3 times the fiscal 2024 consensus estimate, below the three-year historical average multiple of 2.5 times. On an enterprise value-to-EBITDA basis the stock is trading at 8.7 times the fiscal 2024 consensus estimate, below the three-year historical average multiple of 10.7 times.
The average one-year target price is $5.33, implying the share price has 43 per cent upside potential over the next 12 months. Individual target prices are: $4.50 (from Canaccord’s Doug Taylor), two at $5, $5.50 and two at $6 (from Beacon Securities’ Gabriel Leung and ROTH MKM’s Richard Baldry).
Insider transaction activity
Over the past year, there has not been any buying or selling activity in the public market reported by insiders.
The stock has experienced a parabolic move, rising 28 per cent over the past 10 trading sessions and is now up 40 per cent year-to-date. On Tuesday, the stock closed at a record high, rising more than 3 per cent on unusually high volume with over 452,000 shares traded. The three-month historical daily average trading volume is approximately 82,000 shares.
Given the rapid rise in the share price over the past two weeks, the stock is in overbought territory with an relative strength index (RSI) reading of 87. Generally, an RSI reading at or above 70 reflects an overbought condition. From a technical analysis perspective, the stock is due for a pullback, or at least a pause, in order to digest these gains.
In terms of key technical resistance and support levels, the share price faces a major ceiling of resistance between $3.75 and $4. Looking at the downside, there is initial technical support around $3, near its 50-day moving average at $3.02. Failing that, there is support around $2.75, close to its 200-day moving average at $2.74.
The stock can be thinly traded, which can increase price volatility.
ESG Risk Rating
Looking at three risk providers, Sustainalytics, MSCI and Bloomberg, VitalHub currently does not have an environmental, social and corporate governance (ESG) risk rating.
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.
This report should not be considered an investment recommendation.