Photon Control ticks the right boxes, this portfolio manager says

Photon Control’s (Photon Control Stock Quote, Chart, News: TSX:PHO) share price hit a new all-time high last week, just a few days after the Richmond, BC-based company reached a milestone by graduating to the TSX main board. But while PHO definitely has produced a good return on equity, says Jason Del Vicario, portfolio manager at HollisWealth, it’s still a small cap stock and investors should tread carefully.

Optical sensor company for the semiconductor industry, Photon Control moved up from the Venture to the TSX on May 25, with CEO and President Scott Edmonds saying that the listing gives PHO shareholders greater liquidity by making its shares available to much larger pool of capital.

“This new listing reflects not just our consistent revenue growth and profitability but also our improved governance practices and marks a historic milestone for our Company and our shareholders,” Edmonds said in a press release.

Earlier in May, the company reported its Q1 for 2018, boasting revenue of $13.9 million and net income of $2.9 million, both new quarterly records. Management also issued guidance expecting $14 to $16 million in revenue for Q2 and reiterated its commitment to a $3 million share buyback program.

Investors certainly agreed with the news, boosting Photon’s share price over the month of May by 21 per cent, with a further jump occurring in early June. Altogether, the stock is up 32 per cent in 2018.

And while PHO’s upward momentum is appealing, with a market capitalization of $266 million it’s still small enough to be regularly buffeted by market volatility, says Del Vicario.

“I’m a bit of a quant guy and so I’m looking for companies that have a high return on equity and have shown a history of being able to do that. [Photon Control] have done that,” he told BNN Bloomberg. “This is a company that has met our criteria, but for whatever reason I have not been able to pull the trigger in terms of owning them for clients.”

“This is a small company and one should have their eyes wide open when they’re going into these smaller companies,” he says.

To that point, as reported in the Globe and Mail, 78 per cent of Photon’s revenue comes from three large customers, giving the business a concentration risk.

Edmonds has said Photon’s growth potential lies in bringing new products to the semiconductor marketplace.

“Our three-year plan sees us earning on the order of 40 per cent of revenue from highly differentiated products not yet introduced by 2020,” he says. “Past examples of the impact of new product introductions can be seen from our experience in Asia, which has grown from virtually 0 in 2014 to approximately $6.7-million in revenue in the last 12 months, all from expanding the reach of an existing solution to a new customer.”