The 300 Club

Two Interesting Suggestions ......

Robert McWhirter is president and founder of Toronto-based Selective Asset Management Inc.

When he devised a computer model to select dividend-paying stocks, he charged the program with finding companies in growing sectors that already generated strong free cash flow and were likely to generate more over time at increasingly high margins.

Taking dividend yields out of the equation, the model singled out two small firms – a biotechnology stock and a data processing technology stock – that nonetheless boast strong fundamentals.

Mr. McWhirter asserts that both offer the protection from share price losses, or downside, of larger peers while still enjoying solid growth prospects, or upside.

The proof is in the oatmeal

Although Edmonton-based Ceapro Inc. (TSXV—CZO) is hardly a household name, the biotechnology stock’s foremost client is easily recognized around the world, and awareness of its primary product (albeit in less refined form) stretches back to the early stages of human history. The company supplies colloidal oatmeal to cosmetic and healthcare product manufacturers.

Consumer staples stock Johnson & Johnson is Ceapro’s primary customer. It buys colloidal oatmeal and uses it as the main ingredient in Aveeno moisturizer, famously endorsed by actress Jennifer Aniston.

Discussing the first of his two ‘best buys’, Mr. McWhirter readily concedes that Ceapro is not very well-known among investors. Currently, its shares add up to a modest $90-million market capitalization.

However, the analyst says of the company’s aggressive expansion strategy: “They’ve got some nifty stuff in the hopper.”

Ceapro plans to use byproducts from oatmeal extraction (the process for creating colloidal oatmeal) for other health and beauty-related applications.

For example, the company will start a pilot clinical study to develop beta glucan as a cholesterol reducer in the third quarter of this year. A separate clinical program that is slated to begin before the year’s end will examine the use of avenanthramides, another extraction byproduct, as an anti-inflammatory treatment.

Meanwhile, this junior healthcare technology stock is in the midst of building a newer extraction plant that will increase capacity 10 times and reduce costs, says Mr. McWhirter.

That plant is scheduled to start operations before the year’s end as well. The company will run both the new facility and its old plant in parallel so that it will always be able to fulfil its obligations to Johnson & Johnson while taking on new orders for other clients, he explains.

Ceapro’s recent history already demonstrates an impressive capacity for growth. In the first quarter of 2016, Ceapro’s sales grew by 137 per cent on a year-over-year basis, to $4.06 million. Net income after tax for the period came to $1.21 million, translating to a 30 per cent net profit margin. The analyst forecasts overall 2016 revenue of $18 million for Ceapro.

Bill payment processor’s earnings set to quadruple

Mr. McWhirter’s second ‘best buy’, Vancouver-based technology stock TIO Networks Corp. (TSXV—TNC), operates a bill payment processing network that allows people to pay bills from all manner of businesses either remotely or at more than 65,000 physical locations in the U.S.

At present, the company already processes about 80 million bill payments per year, valued at about US$9 billion. Payers can deal with more than 10,000 billers through TIO’s system.

For the company’s 2016 fiscal year, the analyst forecasts earnings will rise fourfold year-over-year, from two cents to eight cents on a per-share basis. The analyst says this technology stock has enjoyed such massive growth because customers are attracted to the convenience TIO offers, especially the ability to pay multiple bills at the same time and place. He adds that TIO describes the U.S. payment-processing market as “quite fragmented”, thereby leading to organic growth and expansion by acquisition.

Thus, Mr. McWhirter says, the company is primed for even greater things in the future. “They’re just saying: ‘We’re happy tilling the soil in the U.S. because there’s plenty of opportunity there.’”

Investor’s Digest of Canada