How We Scored the First 10-Bagger of 2020

By
Keith Schaefer
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0

I had my first 10-bagger at Investing Whisperer this week with Capricor Therapeutics (CAPR – NASDAQ).

I wrote up Capricor for subscribers on March 18th when the stock was trading at $1.
Fast forward to April 29—the stock got up to as high as $11!  

A 10-bagger in a little over a month.  Almost all of that gain came in one day, when it soared from $2.50 – $11 on the back of some positive COVID data for its lead drug, CAP-1002.

But that was only one of the reasons I bought the stock—and actually, it was the least important to me.  I considered its COVID optionality as a bit of a long shot.

I bought the stock because

  1. it was trading at or below cash value,
  2. there was only 6 million shares out
  3. some key technical data is coming out this summer
  4. another company in its space, Sarepta (SRPT-NASD) was a 10 bagger when its data in this same space was positive.

That’s the kind of stock I’m looking for — companies with big upsides that have little of that upside priced in.  

I want a big upside and catalysts.

That is EXACTLY what I found with Capricor.  There was not just one but four potential catalysts for the stock.

One of those catalysts hit and the stock moved significantly. 

While not every stock is going to “work”, those that do can be HUGE winners – just like Capricor.

My next junior biotech pick is coming out in days—and it’s very similar set-up, but better. 
This stock also has

  1. Less than 10 million shares out,
  2. But has the added benefit of $20 million in the treasury, and
  3. It’s most important factor…its technology is already producing revenue!  IT WORKS.  It’s commercial!
  4. It can potentially be used as a platform technology to treat different kinds of cancers

This new biotech has the only effective treatment for a devastating illness that gives patients a very short life span.

It is the best good news story I see in junior biotech—and it’s cashed up, has a tight share float (giving it
explosive share price potential!), and is already commercial. 
 

DON’T MISS OUR NEXT PICK—TO GET IT AS SOON IT COMES OUT, CLICK HERE TO GET A SPECIAL ANNUAL PRICE OF ONLY $900.

 Or you can sign up for our regular quarterly membership of US$249. 

HOW CAPRICOR PLAYED OUT

When I bought Capricor in March the Market had essentially washed its hands of the company.

The market capitalization of the stock was actually less than the cash it held.

Now, microcap biotech stocks can trade at negative enterprise values.  

They do not generate revenue, which means they will eat through their cash over time.  At times the market will anticipate this.

But usually the companies that trade below cash have already seen a failed trial and have poor prospects.

But Capricor is not an early, pre-clinical stage company.  They are proving up another treatment for Duchenne Muscular Dystrophy, or DMD (think Jerry Lewis Telethon!)

Their drug target for this, CAP-1002, has already received orphan drug designation.  Phase 1 results were released in late 2017 showed a good safety profile and efficacy.

Capricor gave us 6-month results on the Phase 2 trial last year.  The stock briefly popped on those results but subsequently gave up those gains, and the Market is now awaiting 12-month results.

The comps on Capricor suggested a big disconnect in valuation.  One larger name that has had some success in the DMD space is Sarepta Therapeutics (SRPT – NASDAQ).

As we pointed out in our alert, there was a big disconnect between how the market valued Capricor and how it had valued Sarepta when it was at a similar stage of development:

Consider that in 2016, when Sarepta Therapeutics was in Phase IIB trials for EXONDYS 51 (also targeting DMD), the stock fluctuated between a capitalization of $600 million to $900 million – and was even well over $1 billion at various times.  After subtracting Sarepta’s cash balance at the time of ~$400 million, that still leaves a valuation in the hundreds of millions.

Capricor, on the other hand, had a ZERO Enterprise Value.  The optionality is HUGE here.  Zero to $400 million or more on a stock with only 6 million shares out then (they now have about 10 or 11 million).

But the story got even better!!  You see, CAP-1002 had received a rare pediatric disease designation (RPDD). 

RPDD is a designation achieved after a company shows positive clinical data in a rare disease.

If CAP-1002 becomes approved for DMD, the RPDD grants vouchers (called a rare pediatric vouchers) to Capricor.
  
These vouchers are unique and valuable.  They can be redeemed to receive a priority review for subsequent products.

What is more – the vouchers can be sold to other companies. 

As we pointed out in our recommendation:

Sarepta sold one of their vouchers for $125 million in 2017, and a second for $111 million a few weeks ago.

The potential for a voucher award was (and is) another huge catalyst for the stock.

Finally, we recognized the COVID-19 angle.  As we wrote in our list of catalysts back in March:

Then just yesterday they announce a COVID19 angle to their pre-clinical product, with a (seemingly) highly qualified person to run it and they say they are going after gov’t grants like crazy to help fund it.

The COVID-19 trials turned out to be the biggest catalyst of all – at least in the short term.

On April 3rd Capricor announced that they had initiated their compassionate use program for severe COVID-19 patients.   This would be using their CAP-1002 cell therapy.

Then on April 29, Capricor reported data on that program, announcing a 100 percent survival rate in 6 patients tested after a 1-month course of treatment.  Four of the six patients had been discharged.

I Follow My Nose

I’m not strictly a biotech investor.  We do not limit ourselves to a single sector.  Instead, I am opportunistic when I see mispricing in whatever sector it may occur.

I follow my nose.

With Capricor I hit the jackpot.  I’ve sold enough stock to be riding for free now, and hopefully the DMD data comes in strong and the stock turns into a 100-bagger for me.

MY NEXT STOCK PICK

I’m excited about my next biotech junior stock pick.  It is already extending the life-spans of patients—giving them high quality years with their loved ones.  As this technology gets more and more approvals by countries around the world, I think the stock has incredible potential.

I expect new sell side research coverage, country approvals and further technical data to be great catalysts for the stock in the future.

Get this new pick delivered to your inbox the day it comes out for A SPECIAL ANNUAL PRICE OF ONLY $900.

But if you want this special annual pricing, you must order by end of day Monday.

This one-time annual price of US$900 ends at 11:59 pm Pacific time Monday!

 Or you can sign up for our regular quarterly membership of US$249. 


Keith 

IS FOSTERVILLE SOUTH (FSX-TSXV) THE NEXT KIRKLAND LAKE GOLD?

By
Keith Schaefer
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0

Fosterville South Exploration Ltd. (FSX:TSXV) is the newly listed junior that owns the ground

  1. Due south
  2. on the same fault
  3. with the same geochemical and geological signatures

as the highest grade, lowest cost mine in the world today – Kirkland Lake Gold’s (KL:NYSE/TSX) Fosterville Gold Mine in south-central Australia.

It’s a huge land package — totalling close to 1,400 km2 — only a couple hours from the big city of Melbourne. The properties have  high-grade historical production.  There is a large amount of historical work, and Fosterville South’s recent work has shown a couple geochemical anomalies 3-5 km long.

In particular, the Lauriston property, due south of Fosterville, is a potential flagship asset for Fosterville South.

The Fosterville Gold Mine was the engine that took Kirkland Lake from $1.62 – $62 in four years — a 40 bagger.  FSX is a long way from $62 of course, and is now trading at… close to $1.62.

I’ll explain below the great geological detective work that local prospector and geologist Rex Motton did to stake this incredible land package — early.  VERY early. He grew up there and spent his teenage years before becoming a geologist, prospecting within the belt 

As the potential of the ultra-high-grade Swan Zone became apparent, he quickly reverse-engineered the geology that led Kirkland Lake to this incredible discovery.

And he then rushed out to stake just under 1,400 km2 of ground – much of it due south of the mine along the same fault structures as Fosterville — before the rest of the geological & investment community knew what the Swan Zone would do for Kirkland Lake’s stock. This was early in 2017.

Now the Aussie geologist has partnered with some of the management team and early investors behind K92 Mining (hottest management group in the business) and some very well-known and uber successful mining titans to bring Fosterville South — FSX-TSXV – to the public markets.

 

How To Catch A Swan
 

When Kirkland Lake acquired the Fosterville Gold Mine, it was not a big deal — with just 244k oz of gold reserves grading 7.0 g/t.

In fact, the geology at Fosterville starts off with low grade (1 g/t) oxide mineralization at surface — perfect for a low-cost heap-leach operation that can generate cash flow quickly.

As you get below 40 metres though, the geology turns to sulphides and gets higher grade — 3-10 g/t. And for most of its modern existence Fosterville was a small mine producing 100-130koz/year at moderate grades of 3-6 g/t.

After Kirkland Lake bought the mine in 2016, they drilled deeper (into what is known as the Phoenix Zone) the results improved, still with disseminated gold in sulfides but at higher grades.  The Phoenix Zone was just a taste of what to come.

Kirkland Lake continued down — 1,200 to 1,400 feet.  That is where they hit the motherlode… where they caught the Swan…quartz veins that had bonanza grades.

Here are the gold grades reported in this press release from Kirkland Lake in 2018:

289 g/t over 6.0 metres Estimated True Width (ETW)
155 g/t over 9.9 metres ETW
423 g/t over 3.2 metres ETW
215 g/t over 5.9 metres ETW
 
Imagine what any of these dream-like holes would do for an exploration stock trading under $2?

But there was no gold rush — perhaps because Fosterville South’s Rex Motton had quickly  staked all of the key land right as this super high-grade news broke, and before North American investors really understood what was about to happen.  All that ground is now in Fosterville South FSX-TSXv

There has always been gold in this region.  Now we know there is even more gold further down.  But with the stock just listed a few days ago, this is ground floor opportunity for Fosterville South shareholders today.

 

Now Fosterville South Is Going Swan Hunting
 

The name says it all, obviously.  Fosterville South’s land package is located directly to the south of Kirkland Lake’s Fosterville Gold Mine.  But it isn’t just the “closeology” to the Fosterville Gold Mine that has the Smart Money so excited. 

It is the geology.

Rex Motton knew how important the edge of Selwyn Block is — it runs directly through the Fosterville Gold Mine in the north and down directly through Fosterville South’s claim further south.

Motton and the Fosterville South team will hunt for more Swans along this edge, called the Selwyn Margin. All of the targets at Lauriston have the same indicator elements (antimony and stibnite) — that led Kirkland Lake to the Swan Zone.

Now look at the map further below. 

Previous drilling on the Selwyn Margin here has already come up with VERY high gold grades near surface, where there Selwyn Margin and Whitelaw Fault intersect.  By the way, the Whitelaw Fault is a key feature of the Bendigo Goldfield (22 M oz!!!) also to the north.

Folks, the clues are hiding in plain sight.

There is actually historical production reported on Lauriston at 20/gt, or half ounce material. This is not a grassroots property, but it has a grassroots valuation!

Historic drilling here shows double digit grades and nobody has ever taken the drilling deeper like Kirkland did to where the Swan Zone is.


Thanks to Kirkland Lake, the geology here is now fully understood. Between location, geology, tight share structure (i.e. low market cap), specialty mining funds rushed to participate in Fosterville South’s financing.  This isn’t Smart Money… it’s THE Smartest Money… institutional funds that are run by geologists, engineers and technical types.

Fosterville South has a big land package and being right beside Kirkland Lake’s Fosterville Gold Mine is appealing….

…But the true excitement from the Smart Money is because FSX has the right type of rock.  The showings here are big regional structures, the gold is disseminated exactly as a geologist wants to see it, and the rocks are the right age. 

As Rex says himself: “The signature’s right, the structural setting’s right, the rocks are right. Without actually getting out there and drilling it, everything else says we’re in the right spot.”

I’ve had two long interviews with Rex, but I don’t want to make this story too long or complicated.  In future stories, I’ll explain Rex’s thinking on his other key assets, and how he hooked up with some of the key guys from the K92 Mining team.

The key point being that you can potentially find a bevy of Swan Zones in the geological structure that Fosterville South has.

For Fosterville South shareholders all it is going to take is one to turn this stock into the next Kirkland Lake. 
 
DISCLOSURE: I am long Fosterville South.

Keith


Although opinions expressed are my own, this article was reviewed, issued on behalf of and sponsored by Fosterville South.  Fosterville South paid for the dissemination of this article.   Further information on the company can be found at SEDAR.com, including the 43-101 report with some important information, risk factors and assumptions. The information in this newsletter does not constitute an offer to sell or a solicitation of an offer to buy any securities of a corporation or entity, including U.S. Traded Securities or U.S. Quoted Securities, in the United States or to U.S. Persons.  Securities may not be offered or sold in the United States except in compliance with the registration requirements of the Securities Act and applicable U.S. state securities laws or pursuant to an exemption therefrom.  Any public offering of securities in the United States may only be made by means of a prospectus containing detailed information about the corporation or entity and its management as well as financial statements.  No securities regulatory authority in the United States has either approved or disapproved of the contents of any newsletter.

Keith Schaefer is not registered with the United States Securities and Exchange Commission (the “SEC”): as a “broker-dealer” under the Exchange Act, as an “investment adviser” under the Investment Advisers Act of 1940, or in any other capacity.  He is also not registered with any state securities commission or authority as a broker-dealer or investment advisor or in any other capacity.

The Story BESIDE the Lowest Cost Gold Producer In The World

By
Keith Schaefer
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0

The Kirkland Lake Gold (KL:NYSE/TSX) success story is exactly why intelligent speculators like you and I love the junior resource sector.

In most sectors a really great stock doubles over a couple of years.  In the mining sector, a great stock is a 10-bagger over a couple years.  Kirkland Lake was a 40-bagger over just four years (with almost no volatily)! This is what overnight wealth creation looks like. 

It’s rare for a large producer to have capital gains like that…what drove it up was when its super high grade Swan Zone at the Fosterville Gold Mine in south central Australia started going into production. 

The Swan Zone became a 2,000,000 ounce deposit at almost one ounce per ton — about 30g/t.  The stock chart kept getting steeper as the Market realized Kirkland Lake was about to become the lowest cost gold play on the planet — bar none.

No exaggeration… with the Swan Zone, Kirkland Lake’s Australian Fosterville Gold Mine ranks as the lowest cost, highest grade mine in the world.

Looking back on this chart and this story, two things surprise me.

  1. that the Market didn’t bid the stock up more quickly as the Swan Zone was discovered. 
  2. No area play developed.  Where were all the juniors staking land all around this incredible deposit? 

Little did I know that one local geologist had already started to scoop much of the best ground!!

A geologist who had spent not just his career — but his entire life — in this area studying rocks, and watching all the mines in the area get built.  You could say he grew up in the shadow of the headframe at Fosterville — and he has close to 1400 km2 of the best ground in the area…

You know where this is going now don’t you?

This geologist has staked close to 1400 km2 near the Fosterville Gold Mine with reported historical high-grade gold production of over 20g/t. 

He knows what the geological controls are — the last 15 years at Fosterville have shown him that.  He knows and talks to key people in the area who know the region well; they’re all his mates.

And he’s packed all that ground, and all his knowledge, and teamed up with the most successful junior mining team of the last 18 months.  Some of the highest profile and most successful investors in the mining business fought to get a piece of the seed stock here (like I did!).

They put all this into a very tight public vehicle with a crazy low market cap — there’s less than 50 million shares out. And it just listed last week!!

This local geologist started staking all this ground way back in early 2017, just as Kirkland Lake themselves were really starting to understand the potential of the bonanza grade Swan Zone. The Kirkland Lake stock moved steadily, but it wasn’t until early 2019 that the stock gained huge attention in the minds of North American investors.

There was no area play because Kirkland Lake had a big land position — and perhaps because this geologist already had so much of  the good geology around it.  This geologist knew where the faults were, how many mineralizing events there were over the eons — where to look and what to look for.

This geologist was born in the area and had spent his early years roaming this gold belt and figuring out its secrets.

And he staked this huge land position just as the Swan Zone was getting developed into the highest grade, lowest cost producer in the world. He was there; he saw it happening long before North American investors got wise.

I think the stock is going to be a HUGE winner.  I’ll be giving you the full story tomorrow — name, symbol, management’s plan that could make its stock chart move like Kirkland Lake’s did.
 

No Sales Pitch Needed – All He Needed Was A Map
 

This story gets better. One thing is — this junior is only recently public.  There is no hangover of old stock or a bad chart to overcome. There are no warrants. The second thing is — it has come public just as the entire world is looking at gold as an investment again.

Third, this junior attracted some of the most successful investors in the history of mining and one of these investors, noted in the company’s go-public press release has a history in the Fosterville area second to none.

At the end of the day, the maps and history of the huge land package brought in $35 million in desired interest for a $6 million raise. Investors who knew the region wanted the opportunity to finally get exposure to the ground that had been so prized, but privately held up until now.  Interest exceeded availability by 700% — none of the institutions were able to get as big of a piece of the deal as they wanted.  $35 million chasing $6 million of paper.

To attract this cash there was not dog and pony show required.  All that was needed was a map to show the institutions where the land was.  Once the location was pointed to on the map the most savvy many gold sector institutions that knew the area said “Give me as many shares as you can!”

This included funds run by geologists and specialists who have studied Kirkland Lake in depth and know what to look for.

You literally can’t get a better indication of the potential here than looking at the go-public news release and the investor presentation to see who was demanding a piece of the action in the property.
 

Under No Circumstances
Should You Miss My Next E-Mail
 

After a decade of not having any interest in the junior mining sector I became very bullish on the prospects for junior gold miners in early 2019.

There was no question in my mind that gold had broken out and that a wave of high quality junior miners would be coming to market.  Companies that had acquired incredible assets while the sector had been starved for capital over the past five years.

I was right.  I’ve had several big winners already with more to come.

There is no junior miner that I have been more excited about than this one… and clearly I am not alone.  The recent financing was oversubscribed many times over and included the savviest investors in the gold mining business.  That’s one reason why it is my single largest position in terms of dollar value.

I can’t wait to watch this story play out.

Tomorrow I’m going to tell you everything you need to know about this junior miner including:

  • How the geology of this property directly to the south of the Fosterville Gold Mine matches up with Kirkland Lake’s high-grade discovery
  • The historical high-grade samples that have already been pulled off this land
  • Introduce you to the Aussie geologist who staked this claim and the top management team that has joined him
  • The name and ticker of this newly public junior miner

Timing will be everything on this one.  You need to be on top of this quickly.

Today, all mining investors know of Kirkland Lake and the Fosterville Gold Mine… but tomorrow… the market will find out who owns what could be the best 1400 km2 around the mine…

Complete with high-grade historical production and kilometres of strike length at surface already. DON’T MISS IT!!


OIL VOLATILITY COST PRODUCERS HUNDREDS OF MILLIONS IN BAD/UNUSUAL HEDGES

By
Keith Schaefer
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0

I’m about to open a small window into the arcane world of oil producers’ hedging.  There are lots of industry terms you’ve never heard of….but the bottom line is this:

Oil producers routinely write WAY out of the money hedges and pocket a small premium on a situation they know will never happen–like oil under $20/b or $10/b.  But in March 2020 it did happen!  And that has cost several producers tens or even hundreds of millions of dollars–being forced to sell their product at very low prices when a different kind of hedge could have saved them.

It’s the epitomy of the saying–picking up pennies in front of a steamroller.  Though to be fair, who saw this steamroller coming?

Until recently I never gave much thought to the type of hedge that an oil producer put on.

Swaps, collars, puts, calls.  Whatever.  There was a fixed price, or a floor – and ceiling.  That is all I needed to know.

But when oil started going way down – way, way, way down –I discovered that all hedges are not created equal.

The problem child is something called a 3-way collar.  This can best be termed as the fair-weather hedge.

A 3-way option is a hedge – as long as things don’t get too bad.  If the bottom falls out, the 3-way option is really no hedge at all.


Trying to Pick Up Pennies In Front of a Steamroller



The first two parts of a 3-way option are the basic elements of any collar. 

The company buys a put – or an option to sell oil – at a price less than the price is on the day of the hedge. 

Then the company sells a call – or an option to buy oil – at a price above that the day of the hedge.

From this put/call spread the company is guaranteed a minimum price – that of the put they bought – and capped at a maximum price – that of the call.

Unfortunately, many oil companies wanted to squeeze some extra pennies out of their hedges – to bring the net premiums down. 

They realized that they were hedging a scenario that was extremely unlikely.  That put they bought protected them again $40 and $50 oil, which made sense, but it also protected them again $30, $20 and $10 oil.

What were the chances oil would get that low?

So they layered on a third put, one that they sold, at a lower price then their spread.  They received the cash for the put (ie. lowered the cost) in return for taking on that tail risk of an unlikely event that brought oil prices down to the $30’s or below.

In the example below, this would leave the company unprotected (ie. exposed to lower oil prices) at anything below $40/bbl.
 


It was a great penny picking strategy – until they found themselves in front of a bulldozer (ie. a price < $30).


Ovintiv – Peeling off the 3-way Collars


Take Ovintiv (OVV – TSX) as an example.  This is not because they are the only company that does this, or because they are the worst perpetrator.  But they have been transparent and their disclosures and they have actually have changed their hedging in the last month – that makes them an interesting case.

Ovintiv at the beginning of March – so right before the Saudi’s waged war on the world and took the price down – had hedges on 165,000 bbl/d of oil for 2020. 
 
Works out to about 70% of their liquids production.  Sounds great right? 
Well… the devil is in the details.


Source: Ovintiv March 12th Press Release

Ironically Ovintiv had been pretty vocal about being 70% hedged.  And before the Saudi’s decided to flood the market, no one really cared about the details.  The stock had likely held up as a relative bastion of safety.

But then came Black Monday and the Saudi flood of oil to the market. 

If there had been expectation that Ovintiv could rely on its hedges to steer through the rough patch, that quickly disappeared.

Of the 165,000 barrels per day hedged, 85,000 were straightforward swaps and put/call collars.  Swaps meant that Ovintiv got a specific price – in this case $57.56.

So not bad.

The problem was that another 80,000 barrels per day were 3-way collars.  Ovintiv had sold that 3rd put at $43.44.  They were fully exposed to downward price movement below that price.

Let’s sketch out how that would impact cash flow if oil averaged $23 for the year – or $20 less than their $43 put. 

All else being equal, those 80,000 barrels a day would have resulted in roughly $584 million less revenue than if those hedges were a straight up costless collar!

Not small potatoes.

Now I did say “would have resulted”.  That’s because Ovintiv realized they were on the wrong side of this trade and did something about it.

From their April presentation:

Source: Ovintiv April Presentation

Some time between March and April Ovintiv realized they were offside on these collars and made some changes.  Their 3-way collars were reduced from 80,000 barrels per day to only 27,000 barrels per day.

Smart move.  Probably not a cheap one, but smart nevertheless.


Canadian E&Ps – Hedged, to a Point


Skimming through the disclosures of public E&Ps in Canada, it is often hard to discern whether a company has a 3-way collar or a more typical costless collar.

At the far (good) end of transparency is Crescent Point (CPG – TSX).  They not only break out 3-way collars, but even give them their own slide:

Source: Crescent Point April Presentation

The presentation this comes from is CPG’s April one, so I must assume these hedges are still held. 

Those 3-way collars are going to hurt CPG’s results in the short run – the puts they sold at $62.75 for Q2 2020 exposes them to the long drop to what is now close to $0.  I don’t doubt that the underperformance of the stock compared to the rest of the sector has something to do with this.

Many companies are vague in their disclosures.  I found lots of references to costless collars without much detail. 

A costless collar means that the amount of premium received for the call sold is offset by the cost of the put premium.  That could mean a single put/call spread, but (with opaque disclosure) also could mean a 3-way collar. 

Often the reason a 3-way option is done is to reduce the cost of the overall hedge.  I am a little wary of companies that reference costless collars and where I don’t see the numbers behind them.

There are a couple names that have clear disclosure and straight up hedges for the first half of this year.   One is Gear Energy (GXE – TSX).  Gear is nicely hedged (~56% of oil production) with simple swaps and collars until the end of June.


Unfortunately beginning in July, Gear replaced those simple hedges with 3-way options, so they are exposed at prices below $55 per barrel beginning in July.

It is a similar story for the second name, Surge Energy (SGY – TSX).  Surge has collars on 4,000 barrels a day in the second quarter, which protects them below $55.  In addition they have 2,835 barrels a day in swaps.

Source: Surge Energy Investor Presentation

But like Gear, Surge has 3-way options beginning the second half. 

The conclusion is that both Gear and Surge, and much of the rest of the Canadian E&P universe, need oil prices to at least begin to recover in the second half of this year.

That may happen.  In which case companies like Gear, and many others, have positioned themselves well. 

But if oil prices continue to stay at these incredibly low levels through the summer, there aren’t too many producers here in Canada that have the hedge book to handle it.
 

EDITORS NOTE: Oil ETFs have been crushed in the volatility this year–and I have been short. USO-NYSE is the most obvious example but there is another GREAT trade coming in ETFs–but timing is everything.  CLICK HERE to get the email on that trade when it’s ready–within 30 days!

CLOUDMD (DOC-CSE DOCRF-OTC) IS MY TELE-HEALTH STOCK

By
Keith Schaefer
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0

An entirely new—and highly profitable—industry is being borne out in 2020—TeleHealth. 

CloudMD (DOC-CSE) is my favourite way to play Tele-Health.  It’s growing quickly with over 100,000 patients registered on its app and over 3000 doctors in 8 provinces in its Electronic Medical Records—EMR system. It has MULTIPLE revenue streams and… it just moved into Canada’s largest market—Ontario—setting up an even faster growth rate.

The recent spread of Coronavirus is only accelerating this.  COVID-19 has forever changed how we all will think about visiting a hospital or seeing our doctor.  We really don’t want to do that at all, if possible.  It will have a very positive and long lasting impact on TeleHealth.

TeleHealth companies in Canada are getting paid more money for services than bricks-and-mortar clinics, and have a fraction of the costs.  Doctors want more of it, patients want more of it, government wants more of it—and the Market REALLY wants more of it.  Everybody wins here; there is no downside.

The rapid scale-up and profitability is key for investors.

The stock market is now recognizing this trend—in spades. You can see it in the stock chart of the US leader in TeleHealth, Teladoc Health (TDOC:NYSE).

While the market plummeted Teladoc’s business and share price soared.



Now that a firm trend is in place—and TeleHealth is one that makes a lot of sense—I’m looking for the junior with the best leverage to this new long term trade.

CloudMD is established, growing quickly and  trading at a fraction of its peers.

The average multiple of competitors in the sector trade at 5-7x revenue, and CloudMD is trading way below that at 2.5x per revenue I’ll have more on those comps in a moment.

But realize that the Canadian use of telemedicine is still just a fraction of where it is in the U.S—so the quick, early upside is even bigger.
 

Literally The Canadian Version of Teladoc Health


The story with this stock is very simple.  CloudMD is literally the Canadian version of Teladoc Health—just at an earlier stage in the growth curve.

The market desperately wants to own TeleHealth right now (see also the stock charts of LVGO-NASD and CATS-NASD).   I see CloudMD as the best way to do that in the junior sector (where the leverage is!).

For this stock to have a major run all that needs to happen is for institutional investors to wake-up to the fact that the company exists.  That’s happening now with the company entering the province of Ontario—which has 14.5 million people—over 1/3rd  of Canada’s population.

CloudMD is a fully integrated health care company—kind of like a hospital-in-the-sky. They do have five bricks-and-mortar clinics, but they also own their own EMR—Electronic Medical Records—system that operates in eight provinces and is used by over 3000 doctors and is supported by an in-house 25 person development team.  They have their own CloudMD app—which has over 100,000 registered patients already.

Folks, we really are in front of the institutions on this one.   I don’t have room in this article to even talk to you about the depth and credibility of CEO Dr. Essam Hamza, but after several conversations with him I can say that shareholders are in very good hands.

The EMR gives CloudMD a recurring monthly revenue stream, which The Street loves. The app gives them high margin fees from doctors, specialists, and groups like massage therapists & counsellors.  These people are revenue, not costs. Like I said, full hospital-in-the-sky. Multiple revenue sources with lower costs.

To schedule a virtual doctor’s appointment all that a patient has to do is download the free CloudMD app and then arrange an appointment with one of the doctors.  There is zero charge for the patient and they can see a doctor very quickly.

CloudMD can scale up the number of patients VERY quickly—and they are. 

Every aspect of healthcare that’s very fractured and disjointed will now be in the one CloudMD ecosystem.

Everyone wins with this system.  Patients, doctors, the medical system, society…even investors. …everyone.
 

TeleHealth is MUCH More Profitable Than Clinics

 
Doctors who have signed up with CloudMD work remotely from home or wherever they are (like their winter home down south).  The rapid scale-up potential excites me. CloudMD can add in unlimited number of doctors and patients–so it has a virtually unlimited ability to scale quickly with little incremental cost.

Profit margins are wide and there is no cap on the number of customers that can be handled.

After a patient has an appointment, CloudMD bills the government directly just like every bricks-and-mortar clinic in Canada does.  CloudMD records 100% of the revenue and gets to keep 30% of the billing for every patient that is seen through telemedicine, which is actually 10% more than what a bricks and mortar clinic receives.  That is because the governments are trying to push TeleHealth.

The doctor gets the other 70% and doesn’t have to deal with any headaches of commuting or running a business.

Without the overhead of a bricks-and-mortar clinic, AND more revenue—CloudMD will be much more profitable than traditional health care stocks.

Faster scale, more cash flow.  And they just entered Canada’s largest market. This is the right stock in the right market at the right time.

When CloudMD goes from one doctor to 10 doctors to 100 doctors working at the same time, they don’t have to build more clinics. They don’t have to create more rooms for them or hire more staff.  They just sign them on. That’s it.

And we are not just talking about family doctors. They are also adding specialists and third party services like counseling and physiotherapists to the platform—and again, all these people are revenue, not costs.

That’s the great thing about this business model. It’s very scalable, very easy, and it grows very quickly.

CloudMD has been growing its recurring SAAS revenue by 30% YoY with its EMR system.  But this year the company is expecting that doctor growth to be much much higher—with a new full time sales team and the Coronavirus pandemic.  SaaS (Software-as-a-Service) revenue is highly lucrative!

Consumer growth (patients) using the CloudMD app is growing even faster.  And the recent COVID-19 situation will only turbocharge that.
 
 

ANOTHER REVENUE STREAM; ANOTHER WIN-WIN

 
There’s another angle here—pharmacies.  CloudMD says they will partner with more than 150 pharmacies in 2020 alone who are afraid of losing prescription business to Amazon (AMZN-NASD). 

Those pharmacies are paying $500 a month for CloudMD kiosks to be in their pharmacies–where customers can get prescription from a doctor on demand. 

This keeps the customer in the pharmacy for their prescription—not out to see a doctor and then off to Costco to get it filled.

Pharmacies that don’t see the writing on the wall will become the Blockbusters of the industry and get left behind.

With the kiosk in the pharmacy can just see a doctor right away, within 10 minutes and walk the prescription back to the pharmacist.
 

BUY-OUTS ARE HAPPENING AT HIGH VALUATIONS


We know that these businesses are worth.

Groceries giant Loblaws purchased QHR—another Canadian based EMR company—for $3.10/share or 7.5 X revenue.  Note that QHR’s former Chairman Mark Kohler recently joined CloudMD’s Board of Directors.  
 
Teladoc bought a company out of Quebec just two months ago called InTouch for about US$600 million, which again is about 7.5 X revenue.  Teladoc itself trades at more than 10 X revenue.

CloudMD trades at 2.5 X revenue… less than a third of recent transactions. Meanwhile the company is poised to grow revenues at a high double digit rate for the foreseeable future.


TeleHealth is the future of how our healthcare is delivered.

Everyone has always expected that the growth would be just like what Netflix experienced with streaming… shaped like a hockey stick.  The hockey stick shape is slow at the start as early adopters move and then straight up as the mainstream catches up with plot.

The demand for TeleHealth from COVID-19 just took the flat part of that hockey stick out of the equation and instead took the industry directly to the exponential growth curve.

The jumping off point for TeleHealth is here and I think CloudMD is the best pure-play TeleHealth stock right now.

TeleHealth is to healthcare what streaming was to video rentals, and what Amazon was to retail.  IT IS THE FUTURE.

Now is the time for investors to get on board especially in Canada where virtual healthcare only accounts for 0.15% of the market and the growth curve will be much steeper.

And for me, that’s CloudMD.  It’s the new normal. I’m long.

Keith

CloudMD has reviewed and sponsored this article.  The information in this newsletter does not constitute an offer to sell or a solicitation of an offer to buy any securities of a corporation or entity, including U.S. Traded Securities or U.S. Quoted Securities, in the United States or to U.S. Persons.  Securities may not be offered or sold in the United States except in compliance with the registration requirements of the Securities Act and applicable U.S. state securities laws or pursuant to an exemption therefrom.  Any public offering of securities in the United States may only be made by means of a prospectus containing detailed information about the corporation or entity and its management as well as financial statements.  No securities regulatory authority in the United States has either approved or disapproved of the contents of any newsletter.

Keith Schaefer is not registered with the United States Securities and Exchange Commission (the “SEC”): as a “broker-dealer” under the Exchange Act, as an “investment adviser” under the Investment Advisers Act of 1940, or in any other capacity.  He is also not registered with any state securities commission or authority as a broker-dealer or investment advisor or in any other capacity.

Tele-Health Is The Next Big Thing

By
Keith Schaefer
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The first realizations I had after studying Tele-Health all of last week were:

  1. This industry was booming BEFORE the Coronavirus pandemic hit.
  2. The low-cost scale up of patients and doctors can happen VERY quickly
  3. It’s much more profitable than bricks-and-mortar health care
  4. EVERYBODY WINS. 
    1. Patients can “see” a doctor same day.
    2. Doctors set their own hours and work from home (or their winter home!)
    3. Lowers cost for many insurers
    4. Investors get to see higher returns

I see Tele-Health as a new Megatrend.  Tele-Health solves many issues — in demographics and geography.  It is more convenient and safer for patients and more profitable for the doctors.

The COVID-19 pandemic has forever changed how people will get health care now.  Fewer people will want to go to doctors’ offices and hospitals.  The last place that a vulnerable senior should ever go is a doctor’s office that is inundated with disease. 

Think of patients in rural or remote areas who have to travel huge distances and at huge expense to see a specialist. Think of young millennials who are so much more at home on their computer screen.

Tele-Health is to healthcare what Netflix and streaming was to video rentals, and what Amazon was to retail. 

IT IS THE FUTURE.

Now is the time for investors to get on board.  Look what US leader Teladoc (TDOC-NYSE) has done.

 
After a deep dive researching the industry and several Tele-Health stocks, I’ll tell you the one I’m choosing to put my money on — TOMORROW!
 
DO NOT MISS MY NEXT EMAIL!
 
Keith

Uncle Sam GUARANTEES You 15%++ on These Stocks

By
Keith Schaefer
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There are some very high yielding US mortgage REITs and mortgage originators that I wonder about…because I think it’s a good chance their mid-teen yields are sustainable with the new US stimulus package helping out.

Mortgage REITs suffered some of the worst losses of any sector in March and the first week of April.  Their book value and dividends took it on the chin.  As did their stock prices.

But over the last couple weeks the mortgage market has stabilized – or at least unthawed – on the backs of unprecedented government intervention in the debt markets. 

Many mREITs now offer double digit yields – even after having reduced their dividends considerably.  All of them trade at a fraction of their current book value. 

March was one of the worst months the sector has ever experienced.  Many mREITs suffered losses of 70-80% from peak to trough.  Even after a strong rally last week, these names are down more than 50% on average.

Three factors led to the collapse:

  1. Liquidity dried up for mortgage securities – even those guaranteed by the government.
  2. Their sources of funding faced margin calls from worried lenders.
  3. The massive 100 bps cut by the Federal Reserve pummeled their hedge books overnight.

But now the dust appears to be clearing.  Where we stand now, mREITs have already taken large hits to their book value.  Dividends have been slashed.  While the full impact of the lockdowns is still not clear through much of the economy – with guidance pulled by many companies – the mREITS have been up front about the extent of the damage.

The news is already out.  The past is in the past. 

Take one of the largest agency-mREITs – Annaly Capital Management (NLY – NYSE).  It pays $1/yr, 25 cents paid each quarter, for a 16.7% yield.



While the details of their business are very complicated, it can be summed up in very simple terms – NLY buys agency mortgage securities, levers them up with repurchase facilities, and tries to hedge out the downside.

Most of the time the strategy works well.  Annaly has been paying dividends for over 20 years. 

But NLY got whacked in March for all the reasons I have already mentioned.  They were squeezed on all ends as their funding costs soared, agency MBS values plummeted, and their hedge book fell as well.

As a result, NLY’s book value took a hit from $9.40 at year end to $7.50 at the end of March.  The stock fell from a high of $10 pre-crisis to below $3.50 at one point.

Today the stock trades at $5.80, where it is valued at 77% of book value.  Is that discount fair?

Well here’s the thing.  While NLY saw all angles of its business squeezed in March, it is now almost entirely backstopped by the Federal Reserve.

Consider that:

  1. The Fed is buying their primary asset – MBS securities – putting a floor on that market.
  2. The Fed is supporting their funding – the repo market – making further margin calls unlikely.
  3. The Fed has already cut rates to zero and the ten-year yield is down to 0.75%.  You will need full-on negative rates to see a further collapse in yields (and their hedge book) from here.  NLY said they have reduced their hedges here because there is simply no way that rates are going up.

A similar but far smaller name name is Orchid Island Capital (ORC – NYSE).  Orchid provides an interesting perspective. They are basically in the same business as NLY (even more straightforward really as NLY has diversified into some other lending) but Orchid has already reported early first quarter results on April 7th.

In that update Orchid announced that they will pay out a monthly dividend of 5.5c for April.  This is down from 8.5c in March.  Nevertheless, even with the cut Orchid yields 18%.



Orchid also reported their book value at the end of March was $4.64 – down from $6.27 at year-end.  But book value is not static – it improves with the market.  ORC said that by April 7th (the day of the release) book value had already risen to $4.83 and $4.93. 

The stock trades at $3.60 – 74% of book.  
 


Monopoly Profits in Mortgage Originations


A third name is PennyMac Financial Services (PFSI – NYSE).   

PFSI is a bit different business that NLY and ORC.  They are a hybrid mREIT, meaning they perform more than one mortgage related business.

PFSI originates and services mortgages.  It is the mortgage origination side that is very interesting right now.

While people aren’t buying houses, record low interest rates make refinancing existing mortgages very attractive for homeowners.  Refinancing volumes have been up as much as 500%+ yoy the last few weeks. 

Source: Wedbush Securities

At the same time gain-on-sale margins (the profit margins of an origination), are going through the roof. 

An indicator of gain-on-sale margin is the primary-secondary spread.  This measures the difference between the interest rate that the borrower pays and the yield on a mortgage security. 

This spread was already widening into the crisis, but it has absolutely blown out in the last couple of weeks.

Spreads are wide because demand for refinancing is high while the mortgage origination market faces constraints.

Smaller originators are being bogged down by liquidity and hedging issues.  Warehouse lines (funding for originations) have been pulled or can’t be counted on.  Banks are taking advantage of the market as best they can, but their capacity is already stretched with CARES Act applications and as they scramble to manage their own loan book.   

The industry is just poorly prepared for the surge in business.  Overall, the mortgage industry has shrunk by one-third over the last 15 years.

A large originator like PFSI is perfectly positioned.  They can capture share and out-sized profits – for a while.

Credit Suisse estimates 2020 EPS for PFSI of $9.45.  Piper-Jaffrey estimated that PFSI could earn $10/share this year. 

The stock is trading at $25. 

The origination market will normalize of course.  Capacity will be added, and margins will shrink back to historical levels.  But even then, PFSI does not appear expensive.  While earnings will come down in 2021, analysts are still expecting $5+ EPS next year.



Mortgage Servicing – Avoiding the next Black Swan


PFSI is also a mortgage servicer.  Mortgage servicing is an ugly duckling right now.  This stems from the CARES Act. 

The CARES Act was signed to support American families and businesses. Part of that intent was to keep recently unemployed workers in their homes. 

The act allows up to 6 months of forbearance for mortgage holders.  Forbearance – a fancy way of saying you don’t have to pay your mortgage for 6 months.

This is great for homeowners but is less so for mortgage servicers.  One of the key roles of a mortgage servicer is the temporary extension of mortgage payments to bond holders (called servicing advances) when the homeowner doesn’t pay. 

Over the long run advancing payments isn’t a problem.  Any payments a servicer makes are the first one’s to be repaid, either when the homeowner becomes current or when the home is liquidated.  They aren’t out the money.

But in the short-run, when a large percentage of homeowners don’t make payments – all at the same time! – well… that could be a problem.

You only have to look as far as the collapse of New Residential (NRZ – NYSE), a large mortgage servicing REIT, to see what’s going on there. 

If the government doesn’t come up with a lending facility to help servicers cope with the advances they face, companies like NRZ are going to have to find very large private pools of private capital that will lend them money to make all these mortgage payments on behalf of homeowners.

But those concerns lie primarily with mortgages that were made through Fannie and Freddie.   PFSI almost exclusively services Ginnie Mae securities.  Ginnie Mae, because they are owned directly by the U.S government, has already put in a backstop for servicing advances.  PFSI can fund their advances from this backstop.

So that de-risks PFSI  – kind of…

I say kind of, because there is one really big risk out there that applies to all the mREITS.  Because the mortgage market is so big – we are talking a $25 TRILLION market – it really applies to the economy as a whole. 

That risk is really what happens if servicers can’t advance the funds. 

It can be summed up simply – this is unchartered territory.

Already we are seeing 3.5% delinquencies on mortgages. 
 

Source: Wedbush Securities

Low estimates are that 5-10% of borrowers are eventually going to take advantage of the CARES act.  But some are predicting that number could be much higher.  Maybe even 25% of borrowers.

If 25% of homeowners don’t pay their mortgage in May or June, it raises the question of whether the plumbing can handle that?

This situation exacerbates if the government doesn’t provide some sort of backstop for servicers.  That risk seems so great, it is almost inevitable that the government will step in.

But even assuming they do, the logistics of making sure all the mortgage servicers have access to funds for servicing advances and that all that money gets into the hands of mortgage holders on time – well, to keep with the plumbing analogy, you are counting on a whole new set of pipes.

That isn’t to say it won’t go smoothly.  It may.  Right now, the market is telling us that with Uncle Sam backstopping many of the payments, there will be no problem.

But like everything else these days, it’s a whole new world, so its hard to say for sure.

I Looked At 106 Gold Stocks For Winners–Here’s The One I Found

By
Keith Schaefer
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Gold hit a 7.5 year high of US$1742.60/oz on June Comex futures on April 7.

Gold has definitely been one of the best performing asset classes during the COVID-19 financial scare.  With QE Infiniti now in place to replenish the world economy, I see a strong future for gold.

Gold stocks, however, have definitely not kept up.  That’s why I’m scouring the “comp” sheets—comparative tables of gold stock valuations—issued by the brokerage firm analysts–looking for high potential stocks thrown out with the bathwater.

I’m looking for companies with

  1. advanced stage, high quality assets with low valuations
  2. in the Americas
  3. with teams that can raise money
  4. have a low cost path to production or to increasing production near term

I started off with a list of 106 gold exploration companies with 191 assets all around the globe, and with deposits ranging from 200,000 oz all the way up to 63 million ounces (Seabridge SEA-TSX)!

Overall, these companies trade at US$34.95/oz in the ground on a “Measured and Indicated” basis.  That means it’s a real deposit.

But that overall number masks many things.  For sure, I wanted to separate out gold deposits in the Americas.  They almost always get a much higher valuation than anywhere else in the world (except Australia).  And if all these great gold stocks have been thrown out with the bathwater, I want to look for high quality that has been unduly punished. 

I also wanted to find deposits with roughly 1 million ounces.  You see, I’m looking for the best leverage at the lowest risk, and here’s my thinking—if the deposit is over 2 million ounces already, the majors and intermediates have been all over it.  It will be MUCH more efficiently priced.  Two million ounces is the threshold that juniors want to attain to get bought out. 

You can sell your company/asset if it’s less, but at 2,000,000 oz it’s close to a no-brainer if it’s in the Americas.

So out of my list of 106 junior developer/explorers, there was only 13 on the list remaining after I applied those criteria—in the Americas, around 1 M oz give or take.

For that group, the average value per M&I oz in the ground was US$112.40—a HUGE difference from the overall valuation of the 106 companies. 

So for me, I want to look at the lowest valuations there, and the one that stood out for me was Prime Mining—PRYM-TSXv, with 880,000 oz in new M&I resource.  It’s oxide, heap-leachable gold at surface in northwest Mexico at a project called Los Reyes—valuation of just US$25.83/oz . 

So I went and did a deeper dive at Prime—because it’s only 22% of the regular valuation.  There’s also a quarter million ounces of inferred resource, taking the deposit to over 1.1 million ounces.

But even not counting that upside, Prime’s stock could go up almost 400%–putting it at $1.60 vs the current 46 cents—and just be at the AVERAGE valuation in that select peer group.  If it wasn’t for COVID-19, I expect it would be a lot closer to that valuation.

The good news, Prime is a fresh story, just listed last fall. The Market doesn’t know much about Los Reyes and can’t yet “game” its potential.  The bad news is, it’s a fresh story and investors don’t really know it.

But, Prime has a new resource calculation just out days ago. And it doesn’t hurt that CEO Andy Bowering—his last deal (Millenial Lithium-ML-TSXv) went from 15 cents to $4.

The art of investing in gold stocks is reading between the numbers—the numbers rarely tell the whole story.  People count for so much.

Prime Board Chairman Dan Kunz is a mine-builder.  He has built over 10 mines all over the world—Korea, Myanmar, the US, Fiji—that counts for a lot.  They don’t need to hire an expensive outside mining contractor.   

The other thing I really like about Prime is—it has optionality that few mine-builders do.  With a simple oxide deposit, one option is to build a very cheap heap leach mine—for roughly US$30 million.  The second option is build a higher end Carbon-In-Leach (CIL) plant for $70 – $100 million—that would recover a lot more gold.

How much more gold? Well, a heap leach mine has 75% recovery. If Los Reyes has  1 million ounces, that’s 750,000 oz recoverable. 

A more expensive CIL plant however has 95% gold recovery—so 950,000 oz—a full 200K more!  So a CIL might cost an extra $70 million, but if they can make $800/ounce profit that’s $160 million in extra potential cash flow—more than 2x the cost. 

If Kunz and Bowering can find the magic 2 million ounces that the majors are looking for, it would mean 400,000 more oz of gold (+ silver!!!) based on a much higher recovery that CIL plants get over heap leach.

That optionality is great to have.  Prime doesn’t need any more ounces to go into production and generate cash flow.  They have said they could do a low cost heap leach mine as fast as they can get permits.

The point is…the numbers work here.  It was a big survey with a lot of data, and I separated out my criteria, grinding the data down to what stocks I thought would give me the greatest upside.  That means a great asset and cheap valuation in the right jurisdiction with a low-cost path to production.  

End Result=Prime Mining PRYM-TSXv. 

Having a good share structure and a team that has both stock market and technical success was just a bonus.

Keith

DISCLOSURE: Keith Schaefer owns shares in Prime Mining. In the past year, Prime has retained Keith Schaefer to help build investor awareness of their company.

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