Portfolio manager Robert McWhirter names two ‘best buy’ Canadian industrial penny stocks that are on the cusp of breakthroughs. Both companies enjoy the stability of onshore production combined with the leverage of offshore sales.
Since the global financial crisis began late last decade, more and more customers and clients have made supporting the domestic economy and shopping locally a priority. North American businesses responded accordingly by emphasizing the local provenance of their raw materials, labour, products and services.
More recently, politicians have touted the merits of economic isolationism and self-sufficiency, in some cases building successful platforms based on these values. This has resulted in businesses fearing that not only will they be rewarded for their local bona fides, they will also be punished for whatever dirty secrets they harbour abroad (for example, through higher taxes on companies that use foreign labour).
Selective Asset Management president and founder Robert McWhirter says that in the current economic and political climate: “Industrials, generally speaking, are a favoured section in part because a lot of companies are looking at onshore production as opposed to offshore.”
However, he adds that his ‘best buy’ picks, both industrial stocks, have more than promising sector trends in their favour. Mr. McWhirter is a longtime financial professional and Chartered Financial Analyst who has worked in the securities industry for more than 30 years. Before he founded Toronto-based Selective, he served as a vice-president and portfolio manager at RBC Global Management, managing technology stock holdings in Royal Bank’s Canadian equity mutual funds.
Aside from the general potential for more domestic manufacturing activity, both of his ‘best buys’, Cymat Technologies Ltd. (TSXV—CYM) and Robix Environmental Technologies Inc. (CNSX—RZX), have put years of time and energy into major paths to growth that are on the cusp of breakthroughs, the analyst says.
Aluminum foam for autos, construction and military
To help visualize structural metal manufacturing stock Cymat Technologies’ flagship product line, Mr. McWhirter suggests imagining an Aero chocolate bar, made of milk chocolate injected with air bubbles. “Imagine that chocolate bar is now made of aluminum,” he says. Cymat is a materials technology stock that manufactures “stabilized aluminum foam” by adding a specific silica component that allows air bubbles in the metal to hold their shape. It can manufacture foam across a wide range of thicknesses and densities.
“The bubbles themselves provide qualities of impact absorption,” the analyst explains, resulting in a lightweight and durable product. The company’s three main intended markets are automobile manufacturers (who would use foam to protect vehicles from crashes), construction firms (using foam as a building material), and the military (using foam as armour against explosives).
At present, about 80 per cent of its business is architectural and the remainder is military. In the trailing 12 months to late May 2017, the company racked up sales of about $2.5 million while its net income over the same period amounted to a loss of about -$750,000.
However, Mr. McWhirter points out that the company effectively trades at a tenth of a typical TSX company based on its high growth prospects. Cymat had previously raised $2.5 million in three financing rounds. Large blocks of convertible debentures and warrants, 13 million of each, connected to that financing will mature at the end of June. The analyst says there are about 19.5 million shares outstanding at the moment. If all of the debentures are converted to stock and all of the warrants are exercised, the number of outstanding shares would more than double to 45.5 million shares, which is likely to boost liquidity.
In addition, the company has spent about three years working with an original equipment manufacturer (OEM) to one of the Big Three U.S. automakers to use foam for crash protection. Cymat has also spent five years trying to secure an additional military contract, to include foam in beach landing vehicles. Mr. McWhirter says it should find out whether that project will ramp up by September.
The dual catalysts of a visible order backlog and higher liquidity without having to pay much more in operating costs could combine to lift Cymat upward like a balloon (perhaps even one made of aluminum), the analyst predicts.
The analyst’s second ‘best buy’, Robix Environmental Technologies, provides oil recovery equipment and oil and gas waste water treatment products. It has developed a simple method for removing oil from water in wells by using two large-diametre, slow-moving steel drums.
The company has made a deal with Petróleos Mexicanos (PEMEX, Mexico’s state-owned oil-and-gas company) to supply massive machines, which it hopes to deliver by September. In the meantime, it is exploring opportunities to provide smaller versions of its machines to the Armada de México (Mexican Navy) to rapidly respond to oil spills. Mr. McWhirter praises Robix for its high-margin, recurring revenue business model.
(Disclosure: Mr. McWhirter and his clients own or intend to own shares of both Robix and Cymat.)
This is an edited version of an article that was originally published for subscribers in the June 9, 2017, issue of Investor’s Digest of Canada. You can profit from the award-winning advice subscribers receive regularly in Investor’s Digest of Canada.
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