This morning, equity markets are likely to be relatively quiet with major U.S. stock markets closing early at 1 p.m. (ET). The price of oil is down slightly this morning ahead of next week's OPEC meeting.
Briefly recapping Thursday's performance. The S&P/TSX composite index lost 6 points, or 0.04 per cent to close at 15,075. There were 115 securities in the TSX Index that advanced, 128 securities declined in value, and four stocks closed the day unchanged.
The S&P/TSX composite index is up 1.95 per cent month-to-date, up 2.37 per cent quarter-to-date, and has a year-to-date gain of 15.87 per cent.
On today's TSX Breakouts report, there are almost double the number of names on the positive breakouts list compared to the negative list. There are 46 stocks on the positive breakouts list (stocks with positive price momentum), and 22 securities on the negative breakouts list (stocks with negative price momentum).
Discussed today is a stock that appears on the negative breakouts list but as its production ramps up, the share price may recover. Analysts are forecasting the stock price to rise between 24 per cent and 49 per cent over the next year. The security highlighted is Stornoway Diamond Corp. (SWY-T).
A brief outline is provided below that may serve as a springboard for further fundamental research.
The company
Montreal-based Stornoway is a diamond exploration and development company with its 100-per-cent owned Renard Diamond Project located in the James Bay area in north-central Quebec. Production is ramping up with commercial production anticipated to be reached by year end. With an expected mine life of 14 years, diamond production is anticipated to average 1.6-million carats annually and the average diamond price is forecast at $155 per carat (U.S.) with operating costs estimated to be $84 per carat (U.S.). Management anticipates the company will become the world's sixth largest diamond producer.
On Nov. 23, the company announced its first diamond sale amounting to $7.6-million (U.S.) or $10.2-million (Canadian). The company sold 38,913 carats at an average price of $195 (U.S.) per carat. In a news release, Matt Manson, the president and chief executive officer commented on the sale, stating, "The diamonds sold in this first sale represent a portion of our production recovered during the initial commissioning and ramp-up of the Renard project during August and September. We saw strong interest in our product assortment…Recent events in India surrounding demonetization has impacted pricing and demand for certain smaller and lower quality items and, as a result, a quantity of these were withdrawn from the sale. These will be sold at a later date. Because of this, and because of a higher than expected proportion of small diamonds recovered during the ramp-up period, the result of this first sale cannot be taken as representative of the longer term pricing profile of the project. This was the first introduction of Quebec diamonds to the market and a price discovery exercise. We look forward to growing our sales profile over the next few months. The project's production ramp-up continues to exceed our expectations and three tender sales have been scheduled for the first quarter of 2017."
According to a diamond industry report issued in June from the Bank of America Merrill Lynch, the value of polished diamonds is anticipated to increase at a compound annual growth rate of 4 per cent between 2016 and 2022.
Dividend policy
The company is focused on achieving production growth, and as a result, currently does not pay its shareholders a dividend.
Valuation
The stock is commonly valued on a price-to-net asset value basis, but can also be valued on a price-to-earnings (P/E) basis. According to Bloomberg, the stock is trading at a P/E multiple of 9.5 times the 2017 consensus estimate.
Analysts' recommendations
This small-cap stock is well covered by the Street with seven analysts following the company. There are six 'buy' recommendations and one 'hold' recommendation. The seven firms providing research coverage are BMO Capital Markets, Desjardins Securities, National Bank Financial, Paradigm Capital, RBC Capital Markets, Scotia Capital, and TD Securities.
The average one-year target price is $1.37, implying the share price may rise 35.6 per cent over the next 12 months. Individual target prices in numerical order are as follows: two at $1.25, $1.35, $1.40, and three at $1.50.
The Street is forecasting substantial growth for the company in the upcoming year. The consensus revenue estimate is $33-million for 2016, jumping to $299-million in 2017. The Street forecasts an earnings before interest, taxes, depreciation and amortization (EBITDA) loss of $10.5-million in 2016, increasing to a gain of $166-million in 2017. The consensus cash flow per share forecast is 13 cents 2016, climbing to 16 cents the following year. The consensus earnings per share forecast is 11 cents in 2017.
Earnings forecasts for the upcoming year have been relatively steady. At the beginning of the year, the Street was forecasting revenue of $247-million for 2017, EBITDA of $150-million, cash flow per share of 19 cents, and earnings per share of 11 cents in 2017.
Insider transaction activity
Robert Chausse, the chief financial officer, joined the firm in April 2016. The following month, on May 12, he purchased 100,000 shares at a price of $1.00 per share. The next month, on June 24, he bought another 100,000 shares at a price of 98 cents per share.
Chart watch
Year to date, the share price is up over 40 per cent.
The share price of this small cap stock, with a market capitalization of over $800-million, can be quite volatile, with dramatic uptrends and downtrends. For instance, over the past five weeks roughly, the stock price has declined 22 per cent to $1.01 from $1.30 on October 24.
The stock has major overhead resistance around $1.20, and after that at approximately $1.30.
There is initial downside support around $1. Failing that there is minor support around 90 cents, and major support around 80 cents.
The two-month average daily trading volume is respectable at approximately 1.8-million shares.
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The Breakouts file is a technical analysis screen intended to identify companies that are technically breaking out. In addition, this report highlights a company's dividend policy, analysts' recommendations, and provides a brief technical analysis for a security to provide readers with more information.
If a stock appears on the positive breakouts list, this indicates positive price momentum, and that a company may be worthwhile for investors to look at the fundamentals in order to determine if the recent price strength is warranted and will continue. If a security appears on the negative breakouts list, this indicates negative price momentum, and may be indicative of either deteriorating fundamentals or perhaps indicates a buying opportunity.
Securities screened are from the S&P/TSX composite index, the S&P/TSX Small Cap index, as well as Canadian small cap stocks outside of these indexes that have a minimum market capitalization of $200-million.
A technical analysis screen does not replace fundamental analysis, but can help identify companies worth having a closer look at.