As a student of economics, I believe the stock market at times acts like an old-style ‘beauty contest’. This theory is not new but has been around for 84 years.
A Keynesian beauty contest is a concept developed by John Maynard Keynes and introduced in Chapter 12 of his work, The General Theory of Employment, Interest, and Money (1936), to explain price fluctuations in equity markets.
It describes a beauty contest where judges are rewarded for selecting the most popular faces among all judges, rather than those they may personally find the most attractive.
- S&P 600 (USA Small Caps) up by 0.67% and S&P 500(USA Large Caps) up by 1.05% for the day
- S&P/TSX 20(CAD Small Cap) up by 0.24% and the S&P/TSX 60 (CAD Large Cap) by 1% intraday
- Bitcoin up by 0.76%
- Gold down by 2.62% and oil down by 4.23%
- The movement of capital from bonds to equities pushed the bond yields up for the day in both the USA and Canada, 0.01% and 0.01% respectively.
Today we have a big winner in :
Avricore Health Inc. (TSXV: AVCR)
Business Summary: Avricore is a total health innovator capitalizing on technological advancements and consumer health trends, offering consumers and health providers the ability to take control of spending and health outcomes.
The company focuses on the utilization of point-of-care technologies. They have a wonderful video attached below where they explain this wonderful technology.
Its main asset is HealthTab software. The Company has tested and developed its technology and is in the commercialization stage, expanding into more pharmacies in Canada and around the World, with the intent of becoming the leading provider of point-of-care testing in pharmacy and real-world evidence studies.
How does HealthTab work?
Once the pharmacy has installed the program it is connected to the software. They are granted access to the HealthTab network.
This gives them the opportunity to store and collect data in real-time on patient profiles.
The pharmacy receives up to 21 results on their bio-markers, this data can also be shared with sponsors and researchers on a de-identified basis.
Avricore Health earns revenues from a variety of streams via the HealthTab + RASTR Network including:
• Equipment Leasing
• Screening Tests
• API Integration (Software)
These multiple streams of revenue are all possible because of the network that is created by being in the system.it provides convenience and real-time data to any of its users generating personalized profiles for the patients.
How do the Pharmacies benefit?
This leads us into the recent news release where they are going to supply the equipment and software to a “prominent, publicly-traded healthcare technology company”:
VANCOUVER, British Columbia, Sept. 22, 2020 (GLOBE NEWSWIRE) — Avricore Health Inc. (TSXV: AVCR, OTC: AVCRF) (“Avricore” or the “Company”) is pleased to announce the signing of a Letter of Intent (LOI) with a prominent, publicly-traded healthcare technology company and drugmaker which serves as the foundation to integrate a proprietary point-of-care blood chemistry analyzer into Avricore’s HealthTab™ real-time data reporting system. The companies will work together to license and market this new platform.
Under the terms of the LOI, Avricore will offer the HealthTab™ + RASTR system and technology for the collection, analysis, and reporting of client data in the form of a web-based interface and mobile application both for consumers and sponsors.
“The ever-evolving point-of-care testing environment means integrating a variety of devices into HealthTab,” said Avricore Health CEO Hector Bremner. “By working with a world-leader with a strong commitment to the sector means a collaboration where our clients, many of which are mutual, can benefit from the best devices and our revolutionary data-flow technology.”
By interfacing the new analyzer with the HealthTab™ +RASTR, HealthTab™ will now be able to offer HbA1c blood glucose testing, expanding capabilities with respect to the detection of diabetes risk in patients, as well as supporting healthcare teams in managing treatment programs related to this disease.
The market has reacted by giving the business a new valuation of $CAD 7 million.
But as we know the market does have a tendency to overreact to news developments and this can cause the price of the common stock to trade at unsustainable valuations.
How can the current or potential investor look at the businesses’ published reports to come to their own conclusions?
- Understandable business
The business model is very simple to understand on the front end. They lease their point of care products to the pharmacies and generate operating revenue from the tests they conduct and facilitation of the results and software.
What might be difficult to pick up is the technical side of the medical field, but this is not as important for the investor as the business does not generate any revenues from the healthcare sector directly.
- Competitive Moat
The company currently believes it has no competition in its industry. But due to how quick the point – of- care environment is expanding; they expect profit margins to decrease due to new entrants.
The only way the firm would be able to stay competitive is to get into long term agreements with pharmacies (their clients) and lock them up in a right of use contract or develop some strong patents on their innovative technology that creates an ecosystem similar to Apple(AAPL.NY) or SAP(SAP.NY) that is difficult to leave once you have installed their software.
- Able and competence management
Has all this experience translated into business success?
The business is yet to break even and has not generated a profit for its shareholders.
They have recently put out predictions of where they should be profitable, and this can be seen as optimistic or “too optimistic’.
Simply put the business feels it should break even by early 2021 and should only grow faster from then. The measure they look at to show ‘profitability’ is EBITDA simply because it allows Financial Analysts to value the stock.
EBITDA needs an article to fully appreciate how absurd this is as a measure of business success. But to save the reader from having to read IFRS or GAAP accounting policies I will try to venture on the difficult path of debunking this measure of business success as briefly as I can.
For those who hate accounting, you can skip this and go straight to the Attractive Stock Price section without losing anything.
E – Earnings or Profit
B – Before
I – Interest on Debt and Loans
T – Taxes owed to Federal and State rates
D – Depreciation, the reduction in the value of a tangible asset from being utilized. Like a building.
A – Amortization, the reduction in the value of an intangible asset from being utilized. Like software.
Essentially this measure tries to take out some of the accounting expenses that do not have an economic effect on the cash of the business. They are called non-cash expenses. A good example would be Depreciation, although the asset does lose value over its useful life there is no cash that is actually reduced or taken from the business. This is true, but companies will need to maintain the assets that are wearing down by spending on new equipment or rejuvenating old equipment. Think of it as the true economic cost of doing business. If the company does not invest in new equipment it will become less and less competitive over time, especially in highly innovative industries.
Again, I apologize for this brief accounting lesson.
- Attractive stock price
This is more subjective and due to how imperfect the market can be suggesting an attractive price is an activity that should be seen as art and not science.
The marginal opinion about the price for Avricore Health has fluctuated over the last year from as low as 1 tenth(1/10) of 10 cents to 12 cents. This is an increase of over 1000%.
If we were to speculate, and we shall, this sort of price movement is due for a correction on the downside factoring in the :
- Fundamentals in Accounting looked at in the previous
- And the Current Economic climate due to COVID-19
- Finally, the general weakness of the Canadian Capital Markets as of this writing
But again, this is merely a guess. The reality of the beauty contest is that if every stock is somebody’s favorite, then every price should be viewed with skepticism.