Do your homework and know the company. Those are oft-expressed signature rules for investing, and the corollary runs true as well: if you don’t understand it, don’t buy it. By that logic, investors should steer clear of Computer Modelling Group (Computer Modelling Group Stock Quote, Charts, News, Analysts, Financials TSX:CMG), according to portfolio manager Ross Healy who says the software company’s strategy doesn’t make sense. “It’s an interesting company and they’re very, very profitable,” said Healy, chairman of the Strategic Analysis Corporation, who spoke on BNN Bloomberg on Thursday. “The return on equity of that company is something like about 37 per cent and it's been very high for a long period of time.” “As a consequence, the valuation of the company measured in price to book terms has also been been very high. That's the good news,” he said. “The unfortunate news is that the company has never used its potential to expand their business at a faster rate.” Calgary-based Computer Modelling Group has reservoir simulation software and markets to the oil and gas industry internationally. The company had total revenue of $67.4 million in the latest fiscal year, ended March 31, 2021, with the breakdown of $59.6 million in software licensing revenue and $7.8 million in professional services. EBITDA for the year was $34.8 million and free cash flow was $24.5 million with EPS coming in at $0.25 per share. But those numbers were down from the previous fiscal year, with the current 2022 fiscal year’s quarters showing either slow or negligible growth. Last week, for example, CMG released its fiscal third quarter 2022 financials, where revenue was $17.0 compared to last year’s $16.0, a nice bump, but EBITDA was down from $9.5 million a year ago to $8.8 million and EPS was flat at $0.07 per share. Management appeared moderately optimistic in its outlook, pointing in the Q3 press release to a recovery in oil and gas demand and commodity prices as good signs for the business. “As market sentiment improves and our customers adapt to operating in volatile market conditions, we are encouraged by the renewals that we have seen in our customers’ calendar 2022 budget cycle. As the market focuses on energy transition, capital discipline, operational efficiencies and debt reduction, CMG will be responsive and proactive to our customers’ needs and will support them in improving the value of their assets by optimizing production and realizing operational cost efficiencies. We are hopeful for a more positive 2022,” CMG said. But the market certainly hasn’t taken to the stock in recent years. CMG hit a high of around $15 in 2014 and has been shifting downwards ever since, dropping below $10 per share in 2018 and then hanging around the $5 mark for the past two years. The $446-million market cap CMG does come with an attractive dividend currently at a 3.6 per cent yield, but Healy says investors should be wary when a company seems less than interested in expanding its horizons as seems to be the case with CMG. “During their growth phase the valuation got quite high. It got up to about 16x its book value. And so where did it go from there? Well, if they can't expand or they won't expand and they won’t use their tremendously high valuation to raise new equity money and expand their business, well, what happens is you get a nicely profitable but not growing company,” Healy said. “As a consequence the price to book on the stock has fallen from 16 down a long way and the stock has fallen.” “And they're actually using the cash that they've got — about $48 million, according to their last balance sheet — they're using it to buy back their stock at a very, very high valuation level. Well, what are they thinking about?” he said. “I would have thought that they would have known more about how to utilize the capital markets but apparently not,” Healy said. “I frankly would go elsewhere because I don't see where this stock is going to go.” For its part, Computer Modelling Group has said there’s a growth area for the company in the field of energy transition modelling, as the world starts turning in earnest away from fossil fuels and towards more renewable sources of energy. “Energy transition-related modelling, such as carbon capture and sequestration and geothermal processes, continues to be an area of opportunity for CMG, as CMG’s existing software has the technical capabilities to support energy transition-related modelling,” said CMG in the February 10 press release. “As producers and governments become increasingly interested in these processes, we believe that CMG is the experienced go-to partner for energy transition modelling solutions. During the current quarter, we continued to add new software and consulting contracts for energy transition and CO2-related work,” CMG said.