Profound Medical Corp. (Profound Medical Stock Quote, Chart TSX:PRN), kneat.com (kneat.com Stock Quote, Chart TSXV:KSI) and Photon Control (Photon Control Stock Quote, Chart TSX:PHO) are head of the class for this quarter’s crop of Top Picks from investment firm Echelon Wealth Partners. For Q1, Echelon is going with many of the same names as in the previous quarter, arguing that these picks are now at a significant discount.
Both the fourth quarter and 2018 as a whole may have been all around rough on investors but they were especially so for those favouring small cap stocks. Take a look at the S&P/TSX Small Cap Index, for instance, which dropped 14.3 per cent over Q4.
The rush to relative safety over the latter part of the year was a big culprit, says Echelon Wealth, whose Top Picks Portfolio is habitually weighted towards small caps. All told, their names returned a loss of 17.5 per cent for 2018.
“2018 was a challenging year for our portfolio, and for many investors, but we note that our disappointing 2018 performance follows an impressive 78.6 per cent return in 2017 compared to the Small Cap Index return of 0.3 per cent,” they state.
“We further highlight that our long-term relative outperformance record remains intact, and that our 2-year return for our Top Picks Portfolio was a healthy 47.4 per cent, well above the -15.9 per cent for the S&P/TSX Small Cap Index and the -0.6 per cent for the S&P/TSX Composite Index.”
High on Echelon Wealth’s list is Profound Medical, which analyst Doug Loe rates a “Buy” with a $3.00 target price, representing a projected 12-month return of 280 per cent. (All projected returns are as of publication date.)
Profound is the developer of ultrasound ablation devices including the Tulsa Pro and Sonalleve MR-HIFU, both of which had softer unit sales over the first half of 2018, in part leading to PRN’s drop in share price over the last few months of the year. But Loe sees both devices experiencing more substantial unit sales traction in 2019.
“Our revenue model still assumes that Tulsa Pro can generate top-line growth both from capital sales and from procedure volume-based consumables (disposable ultrasound transducers and thermal cooling probes), though with the latter revenue component unlikely to materially impact gross margin until Tulsa Pro installed base exceeds 30-40 devices in North America and Europe, say by F2020/21,” Loe says.
The analyst is projecting year-over-year revenue growth of 1,289 per cent for Profound Medical in 2019, followed by revenue growth of 66 per cent in 2020. Loe predicts a fully diluted EPS loss of $0.10 per share in 2019 and a loss of $0.03 per share in 2020.
Software company kneat.com also gets the nod, a data validation company whose platform Kneat Gx gives customers real time global visibility and control over their data intensive regulated document processes.
KSI actually finished 2018 up 13 per cent for the year, but analyst Gianluca Tucci believes the company has a lot more room to grow.
“We believe KSI is on the verge of hitting its stride with its SaaS-based Kneat Gx platform,” Tucci says. “In 2018, KSI signed seven new customers and scaled two existing customers. These new customers add to Kneat’s potential install base from its existing customers. This existing potential install base is now 250+ manufacturing sites and translates to an at-scale ARR opportunity of over $20 million. We expect continued news flow in 2019 with two or three go-live events in Q418 which will serve as further validation of KSI’s value proposition.”
Tucci has rated KSI a “Speculative Buy” with a target of $3.00, representing a projected return of 216 per cent.
Optical sensor company Photon Control saw its share price drop over the latter half of 2018 when guidance for the company’s fourth quarter fell short of expectations. But analyst Amr Ezzat says that the selloff has been overdone and that the recent softness in activity in the semiconductor and semi capital equipment industry is merely part of the ebb and flow of the sector rather than a signal of a significant downturn.
Ezzat says that PHO is currently trading at an attractive valuation and thus presents “exceptional” risk/reward characteristics.
“With $0.37 per share in cash on the balance sheet (versus a $1.14 share price), we feel there is limited downside from current levels,” Ezzat says. “We see continued solid FCF generation driving the Company’s cash balance to $0.60/FD shr by 2020. We forecast EBITDA CAGR of 10 per cent though 2020, helping sustain the Company’s best-in-class ROIC of 30 per cent plus. Catalysts include the naming of a new CEO, potential for M&A activity, and a jump in revenues in the second half of the year.”
The analyst rates PHO a “Buy” with a $2.50 target, representing a projected return of 119 per cent.
Filling out the rest of Echelon Wealth’s list of top picks in the innovation sectors are the following:
• IMV Inc (TSX:IMV): SPECULATIVE BUY, PT $12.25, 68 per cent return
• Neptune Wellness Solutions Inc (TSX, NASDAQ:NEPT): BUY, PT $8.00, 69 per cent return
• Acuity Ads Holdings Inc (TSXV:AT): SPECULATIVE BUY, PT $2.30, 90 per cent return
• CannTrust Holdings Inc (TSX:TRST): UNDER REVIEW, Note: Echelon Wealth is leaving TRST in its Top Picks Portfolio “to retain exposure to the cannabis sector, saying that the firm’s rating, price target and forecasts for CannTrust are currently under review following the departure of their coverage analyst.