Broadly speaking, the markets are pricey.

Posted by Ryan Irvine

on Friday, 09 February 2018 15:16

In fact, this past weekend I talked to over one thousand investors and tried to drive home that very point. I do not like valuations on the broader market and would not buy “the market” at current prices. Investors optimism, often a contrarian indicator, had reached a fever pitch and, perhaps most significantly, broader valuations are lofty from a historical perspective.

Many of you have heard of the PE (price/earnings) ratio used to value a stock. Is the ratio for valuing a company that measures its current share price relative to its per-share earnings. If a company were currently trading at a multiple (P/E) of 20, the interpretation is that an investor is willing to pay $20 for $1 of current earnings.

It has its limitations, but can be useful when valuing a stock. We can also use an overall market PE to value a broad index such as the S&P 500 – the largest 500 stocks in the US.

For context of where the market is generally, we like to look at the Shiller PE.  Developed by Yale Professor Robert Shiller, the Schiller P/E is a more reasonable market valuation indicator than the P/E ratio because it eliminates fluctuation of the ratio caused by the variation of profit margins during business cycles.

The Shiller PE is calculated by using the annual earnings of the S&P 500 companies over the past 10 years. There are a few other calculations in the mix, but for the purposes of a quick commentary, we do not want to get too complicated.

Regular PE Distorts


The chart above shows us the “regular trailing 12 month PE” over the last 130+ years. Currently, based on the last 12-months of earnings in the US the PE is 27 – well above the mean of 16, but well below some of its highs.

The highest peak for the regular P/E was 123 in the first quarter of 2009. By then the S&P 500 had crashed more than 50 per cent from its peak in 2007 (financial crisis). The P/E was high because earnings were depressed (not due to high historical valuations). With the P/E at 123 in the first quarter of 2009, much higher than the historical mean of 15 – it looked like a time to SELL. In fact, it was the best time in recent history to buy stocks. On the other hand, the Shiller P/E was at 13.3 (see the chart below), its lowest level in decades, correctly indicating a better time to buy stocks.


Therefore, we look to it today – for a better broader context take on market valuations.

So where are we today?

Currently the Shiller P/E is 32 or 90.5 per cent higher than the historical mean of 16.8. It is currently far closer to its historical high of 44.2 hit in the “Dot Com” boom, than its historical low of 4.8.

We do know that even if stocks stay in their same range the new tax regime will cut PE ratios next year (as would negative the price action on the S&P 500). But US markets are certainly at the high end of valuations.

In what has been is a frothy market, our best advice is to find good unique companies and buy them with patience over a 12 to 18-month period. It is prudent to layer into positions - buy 25% or 50% of your full position to start and add over time.

One of the worse things you can do is buy your full portfolio at once. By spreading out your purchases it prevents you from buying at an annual peak in the markets. Investors should also refrain from jumping on a stock without doing proper due diligence, no matter how “blue-sky” its prospects may appear.

To be frank, I cannot tell you 10 screaming buy right now, but if you give me a year I will find them.

A correction, if that is what we are seeing in the markets is difficult to stomach but likely necessary given the broader valuations and could be healthier long-term. If it continues, we may finally start to see value more reasonable valuations surface and the bonus is our clients would likely see more recommendations moving forward.

New Recommendation

For Inside Edge readers and our long-term clients the next recommendation could appear strange at first glance.

After all, the company has “gold mines” in its name and KeyStone generally steers clear of junior mining stocks (even producers). We view them as great destroyers of capital rather than the capital creators and compounders that we prefer investing in.

Dynacor Gold Mines Inc.  (TSX: DNG)

Current Price: $1.95

Headquartered in Montreal, Canada, with operations based in Peru, the company is engaged in the milling of gold through its government approved ore processing operations.

Dynacor’s activities consist of the production of gold and silver from the processing of purchased ore and the exploration of its mining properties located in Peru, with the potential for commercial extraction of gold and other precious metals.  The company purchases its ore from government registered ore producers from various regions of Peru and then processes it at its wholly-owned milling facility to produce gold and silver which is sold internationally at market prices. Dynacor also owns the rights on three mining properties which are in the exploration stage, including its flagship exploration gold, copper and silver prospect, the Tumipampa property, and does not have any properties in commercial production.


What makes them different?

The company operates a mill, not a mine.

The biggest risk to any junior gold miner is the price of gold. The second is often the deposit/and or mine itself. Most are difficult to mine, produce inconsistent grades, have finite supply among a plethora of other issues. Even for experienced operators they can be a very unpredictable.

Dynacor is different because it does not rely on one deposit. The company receives ore shipments from more than 400 government registered Peruvian artisanal gold miners (small-scale miners). As such, it has limited deposit specific risk from a diversified feedstock of ore.

Once the ore is received, Dynacor weighs, assays and screens ore deliveries for gold content at its new modern Veta Dorada Plant in Chala, Peru. The company then pay the small-scale miners after 24 hours from delivery and process ore through the mill.  In the final step, after 10-14 days of processing, Dynacor receives payment for gold dore bars from recently announced strategic joint venture partner, PX Precinox. Gold produced is sold to some of the world's leading luxury jewelry and watch manufacturers who are very keen to purchase socially responsible traceable gold produced by artisanal miners. The buyers of PX IMPACT GOLD (joint venture) pay a small premium that is then used to fund socio-economic development projects in Peru for artisanal miners and their communities.

How has it been working?

Dynacor recently posted its twenty-six consecutive quarters of profits. This is rare for a gold related-business. On January 9th the company announced final payments, on debt facilities were completed at end of December. Over the last five months of 2017, Dynacor made aggregate debt payments of $6.3-million, all from cash flow, putting the company in a solid net cash position.

On January 18th, the company announced gold ore processing was running at full capacity of 300 tpd. In January 2017, Dynacor processed 185 tonnes per day, ending the year 62% higher at 300 tonnes per day. In December gold production reached all-time record high of 8,908 oz. a 31% increase as compared to December 2016 (6,803 oz).

Suffice it to say, the company is progressing well.


Fair value estimates on commodity related businesses are generally flawed given the unpredictable nature of most underlying commodities. As such, they should be considered to hold a higher degree of risk. If the gold price remains relatively in its same range or higher over the course of 2018, Dynacor trades at a relatively attractive 4.16 times EV/2018 EBITDAe. The company also trades at roughly 6 times our 2018 cash flow estimate. At 10 times our expected 2018 cash flow we reach a fair value in the range of $3.20, or 62%, higher than the current share price. The highest risks to the estimate are execution, weather and the price of gold in 2018.


While Dynacor has been slow to ramp up to its 300tpd target at the Veta Dorada Plant, once it was hit, the company made short work of its outstanding debt and appears on a path towards significant potential growth in 2018. If it does not face the type of headwinds experienced at the hand of Mother Nature in 2018, the company should begin to build cash reserves over the course of the next year positioning management to implement a dividend. This could put the company in front of a wider spectrum of potential investors. While we tread very lightly in commodity based businesses, the stock appears to offer good speculative value at present and provides a unique exposure to gold without the typical significant deposit specific risk seen with traditional junior gold producers.

We maintain our SPEC BUY rating on the stock. We would set limit orders in the $1.90-$2.05 range and be patient.

Quick Update

Sylogist Ltd. (TSX: SYX) was recently re-recommended in September of this past year to our clients and to Inside Edge readers in the $8.60 range. The stock recently closed at $9.75 after increasing its dividend and paying us a special year-end dividend in 2017.

Sylogist is a technology innovation company which, through strategic acquisitions, investments and operations management, provides intellectual property solutions to a wide range of Public Sector customers. The company publishes mission-critical so ware products that satisfy the unique and sophisticated functionality requirements of Public Sector entities, nonprofit organizations, educational institutions, government agencies as well as public compliance driven and funded businesses. Sylogist delivers highly scalable, multi-language, multi-currency so ware solutions, which serve the needs of an international clientele.


On January 16th, 2018, Sylogist reported its Q4 2017 and full fiscal year 2017 financial results.

IMPACT: Positive


2017 Q4 Highlights

×         Earnings per share increased 13% to $0.09 per share, up from $0.08 per share in Q4 2016.

×         Adjusted EBITDA was $3.2 million, an increase of 21%, or $0.14 per fully diluted share, up 27%.

×         Revenues were $8.0 million compared to $8.1 million in the fourth quarter last year.

×         Cash generated from operations totaled $1.6 million, up from $343 thousand in Q4 2016.

×         Cash as at September 30, 2017, totaled $28.8 million - no debt.


We viewed 2017 as a transitional year which was positioning Sylogist, if executed effectively, for future growth. The company continued to build cash and transitioned back to significant EBITDA growth in Q4 as the impact of the reduced licensing rates with Microsoft became stronger. Subsequent to year-end, management completed the acquisition of the assets of K12 Enterprise and Sunpac Systems (detailed in our previous update). K12 Enterprise and Sunpac Systems provide Enterprise Resource Planning solutions to kindergarten to grade 12 education authorities in the United States. The United States’ education market is a large addressable market, saddled with older technology requiring modernization. Armed with the K12 Enterprise so ware, which is a modern SaaS solution based on Sylogists Navigator ERP with Microsoft Dynamics at its core, the company continues to earnestly seek growth opportunities in that market. Management has stated they are encouraged with the potential growth prospects ahead.

In terms of valuations, by applying a below market equivalent multiple of 15 times, the mid-range of management’s 2018 expected adjusted EBITDA, would produce a fair value in the range of $13.50 (comprised of 15*$0.825 + $1.15 in cash) or 35% higher than the current range.  e stock also pays a $0.08 quarterly dividend for a yield of 3.2%, which we see as sustainable.

We are maintaining our rating on Sylogist at SPEC BUY, recently upgraded from HOLD, and maintain the company’s position in our Focus BUY portfolio.  e shares are relatively illiquid and we recommend investors use limit orders in the $9.50-$10.00 range. Be patient and positions should be filled over the next month.

Recommendation: SPEC BUY

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