On today’s TSX Breakouts report, there are 10 stocks on the positive breakouts list (stocks with positive price momentum), and 36 stocks are on the negative breakouts list (stocks with negative price momentum).
Discussed today is an oversold stock that is on the negative breakouts list.
This growth stock has seen its share price fall nearly 25 per cent over the past month. However, this correction may prove to be a buying opportunity. A low interest rate environment and robust mortgage activity are tailwinds for the company. The average one-year target price is $35.57, implying a potential price return of 44 per cent over the next 12 months.
The security highlighted below is Real Matters Inc. (REAL-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 Real Matters serves the mortgage lending and insurance markets through its four locations, three in the United States (Buffalo, New York; Denver, Colorado; and Middleton, Rhode Island) and its head office in Markham, Ont. The company is a leading independent provider of residential real estate appraisals and title and mortgage closing services.
The company has three main operating segments: U.S. Appraisal (providing estimated market values for residential properties), U.S. Title (required to close mortgages), and Canada. Last quarter, 99 per cent of net revenue (net revenue is defined as adjusted EBITDA -earnings before interest, taxes, depreciation and amortization – plus operating expenses less stock-based compensation) was derived from the U.S. with 40 per cent of net revenue from U.S. Appraisal and 58 per cent from U.S. Title. The remaining 2 per cent of net revenue stemmed from Canada.
One of management’s key objectives is to increase the company’s market penetration. Management targets achieving a market share of between 15 per cent and 20 per cent for U.S. Appraisal by Sept. 30, 2021. For its U.S. Title segment, management’s objective is to have a market share of between 1 per cent and 3 per cent by Sept. 30, 2021.
Before the market opened on July 30, the company reported strong third-quarter fiscal 2020 financial results (the company’s fiscal year end is Sept. 30).
Consolidated net revenue was US$43.9-million, ahead of the consensus estimate of US$39-million and up 53 per cent year-over-year driven by market share gains, new client additions (three new lenders in U.S. Appraisal and four new lenders in U.S. Title), and high mortgage refinancing activity with mortgage rates at historically low levels. U.S. Appraisal net revenue was US$17.7-million, up 21.5 per cent year-over-year. U.S. Title net revenue was US$25.3-million, up 98.8 per cent year-over-year. Lastly, Canada net revenue was US$0.9-million, down 36.5 per cent year-over-year resulting from lower insurance inspection services due to COVID-19 and anticipated to recover by August.
The U.S. Appraisal and U.S. Title segments both reported record adjusted EBITDA. Total adjusted EBITDA came in at US$20.9-million, ahead of the consensus estimate of US$16-million and up from US$10.4-million reported during the same period last year. Looking at the segments, US$10.8-million of adjusted EBITDA was from U.S. Appraisal (EBITDA margin was 61 per cent, up from 58 per cent reported last year), US$13.3-million was from U.S. Title (EBITDA margin of 52.7 per cent, up from 33.4 per cent reported last year), US$0.6-million was from Canada, and there was a corporate loss amounting to US$3.8-million of adjusted EBITDA.
Adjusted earnings per share came in at 15 US cents, above the Street’s forecast of 13 US cents.
The company has a strong balance sheet with US$109.5-million in cash and cash equivalents at quarter-end.
Industry fundamentals
Mortgage activity remains robust supported by low interest rates.
The Mortgage Bankers Association (MBA) provides weekly mortgage applications survey data. On Sept. 9, MBA’s associate vice-president of economic and industry forecasting Joel Kan remarked in the weekly report, “Mortgage rates declined last week with a noteworthy 5-basis-point decrease in the 15-year fixed rate to a new record low of 2.62 per cent. The drop in rates led to a rebound in refinancing activity, driven mainly by borrowers applying for conventional loans. Purchase applications were 40 per cent higher than the same week last year, but the increase is skewed higher by being compared to Labor Day 2019. Nevertheless, there continues to be resiliency in the purchase market. Applications were up almost 3 per cent on a weekly basis and the average loan size continued to increase, hitting a survey high at $368,600.”
Refinancing activity increased to 63.1 per cent of total applications, compared to 62.5 per cent reported the prior week. During the height of the coronavirus pandemic when U.S. Treasury yields tumbled along with mortgage rates, refinancing activity jumped to 76.6 per cent of total applications for the week ending March 6, 2020.
Returning capital to shareholders
The company does not pay its shareholders a dividend. However, management has been actively repurchasing shares as part of its normal course issuer bid (NCIB).
During the nine month period that ended June 30, 2020, 1.6-million shares had been repurchased. However, last quarter only 64,000 shares were repurchased.
In the Management’s Discussion and Analysis (MD&A) issued on July 30, management highlighted its commitment to returning capital to its shareholders, “The strength of our balance sheet allows us to be opportunistic with regards to the purchase of our shares under the NCIB. We believe that we can continue to maintain a strong balance sheet and coupled with our belief that purchase volumes will rebound and demand for refinance activity will continue to be strong for a prolonged period of time, we see continued strength in our financial condition in the near and longer-term time horizons.”
Analysts' recommendations
There are seven analysts that actively cover this company, of which six analysts have buy recommendations and one analyst (Paul Steep from Scotia Capital) has a “sector perform” recommendation.
The firms providing recent research on the company are as follows in alphabetical order: BMO Nesbitt Burns, Canaccord Genuity, Cormark Securities, National Bank Financial, Raymond James, Scotia Capital and TD Securities.
Financial forecasts
The Street is forecasting net revenue of US$159.5-million in fiscal 2020, rising nearly 30 per cent to US$207-million in fiscal 2021. The consensus EBITDA estimates are US$70.3-million in fiscal 2020, increasing 34 per cent to US$94.5-million the following year. The consensus earnings per share estimates are 57 US cents in fiscal 2020 and 78 US cents in fiscal 2021.
Earnings forecasts have been rising. For instance, three months ago, the consensus EBITDA estimates were US$58.6-million for fiscal 2020 and US$79.2-million in fiscal 2021. The consensus earnings per share forecasts were 48 US cents for fiscal 2020 and 67 US cents for fiscal 2021.
Valuation
According to Bloomberg, the stock is trading at an enterprise value-to-EBITDA multiple of 15.4 times the fiscal 2021 consensus estimate, below the three-year historical average of 16.8 times. The stock is trading at an enterprise value-to-sales multiple of 7 times the fiscal 2021 estimate.
The average one-year target price is $35.57, suggesting a potential price return of 44 per cent over the next 12 months. Individual target prices are as follows in numerical order: $30 (the low on the Street is from Mr. Steep), $33, two at $35, $36, two at $40.
Revised recommendations
In July, all seven analysts revised their expectations higher.
- Canaccord’s Robert Young increased his target price to $40 from $25.
- National Bank Financial’s Richard Tse hiked his target price to $40 (before the company released its quarterly earnings results) from $25.
- Cormark’s Gavin Fairweather raised his target price to $35 from $32.
- TD’s Daniel Chan lifted his target price to $36 from $31.
- BMO’s Thanos Moschopoulos bumped his target price to $35 from $23.
- Scotia’s Paul Steep hiked his target price to $30 from $19.
- Raymond James' Steven Li increased his target price by $11 to $33.
Insider transaction activity
Listed below are several recent trades completed by management executives.
Between Aug. 4 and Sept. 4, chief executive officer Jason Smith sold a total of 162,000 shares at an average price per share of approximately $31.24, leaving 3,907,384 shares remaining in this particular account. Proceeds from the sales exceeded $5-million, excluding commission charges.
Between Aug. 10-31, Loren Cooke, executive vice-president and president of Solidifi (a wholly-owned subsidiary of Real Matters), exercised his options, receiving a total of 281,200 shares at an average cost per share of roughly $2.16, and sold 281,200 shares at an average price per share of approximately $28.69. Net proceeds totaled over $7.4-million, not including any associated transaction fees.
On Aug. 26, chief financial officer Bill Herman exercised his options, receiving 36,607 shares at a cost per share of $8, and sold 36,607 shares at a price per share of $29, leaving 19,200 shares in this particular account. Net proceeds exceeded $768,000, excluding any associated transaction charges.
Between Aug. 10-13, chief technology officer Ryan Smith exercised his options, receiving 83,816 shares at a cost per share of $1.84, and sold 83,816 shares at an average price per share of approximately $31.50. Net proceeds totaled over $2.4-million, not including any associated transaction fees.
Between Aug. 10-13, executive vice-president Kim Montgomery exercised her options, receiving 18,258 shares at a cost per share of $6.11, and sold 18,258 shares at an average price per share of roughly $31.50, leaving 26,538 shares in this specific account. Net proceeds totaled over $463,000, not including any associated transaction fees.
Chart watch
The stock has a limited trading history as shares just began trading on the Toronto Stock Exchange in May 2017 (the initial public offering price was $13).
Year-to-date, the share price has doubled in value, making it the top performing stock in its respective sector - the S&P/TSX real estate sector. However, the share price has been under pressure over the past month and is currently in correction territory.
Since climbing to a record closing high of $32.81 on Aug. 6, the share price has dropped over $8, or 24.6 per cent, to $24.73. Given this steep sell-off, the stock is now in oversold territory. The relative strength index (RSI) is at 29. Typically, an RSI reading at or below 30 reflects an oversold condition.
Looking at key technical support and resistance levels, the share price is currently sitting at a technical support level, which lies between $24 and $25. Failing this, the next support level is around $20. Should the share price bounce back, the initial ceiling of resistance is around $30.
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.
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Jennifer Dowty