Photon Control is too risky right now, Aventine’s Telfser says

Photon Control (Photon Control Stock Quote, Chart, News: TSX:PHO) is a risky investment, cautions James Telfser, partner and portfolio manager with Aventine Asset Management, who says that even with its strong performance in 2017, underlying issues with the company still raise too many red flags.

By the numbers, Richmond, BC-based Photon Control is looking pretty sweet, with significant revenue growth over the past year, during which the company’s stock price almost doubled. Photon’s Q3 results for 2017 showed revenue of $12.0 million, an increase of 38 per cent over the prior year quarter and a year-to-date revenue of $32.8 million, representing a 42 per cent bump on the previous year.

The positive trend was buoyed by strong industry growth and bigger customer demand, said CEO Scott Edmonds in Photon’s November quarterly report. “These record results drove strong cash flow in the quarter. As we look to the fourth quarter, our operations are running efficiently and we believe we are well positioned to meet the demand from our backlog which is also at an all-time high,” he said.

But the optical sensor company still comes across as a dubious investment for Aventine, says Telfser, as restructuring and management issues over the past year may point to problems going forward.

“They were suing each other, they needed to do some big settlements, guys who founded the company were no longer working at the company,” says Telfser, in conversation with BNN. “Generally, that sets off a whole bunch of red flags for us and so we were surprised to see the stock continue to bounce higher.”

“With TSXV companies, you have to understand all the moving parts of the business,” says Telfser. “They have a decent underlying business, but it looks like there was too much infighting going on … [and] when it’s one of 20 companies in your portfolio, you just can’t have that kind of risk in your fund.”

Coming from a strong cash position, last week, Photon announced an extension of its normal course issuer bid to buy back 5.5 million shares, amounting to about five per cent of the total shares issued. Edmonds states that the move is in keeping with the company’s strategic plan.

“The Company’s priorities for capital deployment are first funding product development for growth, followed by M&A activity, and thirdly ongoing share repurchases,” says Edmonds. “The Company has renewed its NCIB to ensure the ability to pursue such opportunities as authorized by its Board of Directors.”

Photon, with a market cap of 212.8 million at the time of publication, has seen its stock price edge towards the $2.00 mark in recent months, hitting a 52-week and all-time high of $1.97 in November.

Telfser says that the upward push could be enough to gain attention but investors should tread lightly, nonetheless. “If it’s just a small weight in your portfolio, sure, the momentum trend is there so let it ride and see what happens,” says Telfser. “But I wouldn’t recommend it being anything more than that.”