Corporate insiders have been snatching up shares of Kirkland Lake Gold. Ted Dixon, CEO, INK Research, talks to Sara D’Elia about insider sentiment and why he thinks Kirkland Lake Gold shares are expected to outperform.
Well, thanks for having me, Sara.
So before we get into your analysis today, I want to ask you what is the INK Canadian Insider Index?
Well, the INK Canadian Insider Index is a mid-cap-oriented index that we developed in house here to benchmark opportunity in the Canadian market. And we do that by looking at stocks that have the best value, the best insider commitment-- that means insiders that are buying and holding their stock-- and also price momentum as a proxy for growth. So we call it our VIP approach to benchmarking opportunity in Canada-- Value, Insider commitment, and Price momentum. So we look at the 50 top stocks that ranked very high on that criteria.
Now you mentioned insider, and it's part of the name of it as well. Who qualifies as an insider in a company?
Well, we look at officers and directors primarily. Now there's other types of insiders in the market, including 10% holders such as big funds and the like. But we like to focus on the people who are running and overseeing the company, what are they doing with their own stock?
Very good. So what's interesting about this particular story with Kirkland Lake Gold is you are looking at all of the insiders. But when I read your report, you actually focus on what you just mentioned, some of the big, over 10% holders, in this case, being Sprott. So what are you seeing right now? What's the trend there?
Well, Eric Sprott is a director of the company. He's a non-executive chairperson. What that means is his job is to run the board. He doesn't run the companies. He oversees the overall strategic direction of the company. And of course, many of your viewers will be familiar with Eric Sprott. But if you're not, he is one of the pioneers in gold mining investment management in this country and has built quite a large track record in managing and investing in these types of companies.
So to have a player like Eric Sprott on board is great. But then you want to ask, well, how much stock does Eric Sprott own? How much skin in the game does he have? And he has quite a bit. He owns 10% of the company, over 22 million shares. So he's got a lot riding on the line along with shareholders, and that's what we like to see.
We're going to bring up your chart on the screen for viewers here. But since you started your analysis, the shares are up over 30%. Are insiders still buying? And if they are, is that really a good thing?
Well, Eric Sprott is continuing to buy. Two insiders have been buying since our mid-August report, and most of that has come from Eric Sprott. So he's added another $8 million to his holdings. So that is significant insider commitment.
One of the things I wanted to ask you about is, you also talk a lot about value. How do you determine what's good value in this type of situation?
Well, we treat every stock the same in Canada that we evaluate. So we look at the very basic, plain vanilla valuations-- PE, price to book, price to sales, enterprise value to EBITDA. And we also look at shareholder yield, price to cash flow. Very standard measures. We don't tinker with weightings for different companies. So we apply it across the board. It's like a competition. On everything we look at in our VIP criteria-- Value, Insider commitment, and Price momentum-- we look at every company the same way. And we weight all factors equally, and we want to see which companies come out ahead.
So in terms of Kirkland Lake Gold, it's an expensive stock. It doesn't rank as the cheapest stock in the market, but why is that? Well, you have to be able to see some growth momentum, and you have to look at the insiders, and are they buying into the high valuation story? And in this case, they are.
In this situation, I think what the market is paying for, it's paying for leadership, in a sense. It's paying up for Eric Sprott's participation in this company.
You talk about your index being somewhat of a competition for companies. And what's really interesting is you actually rate companies with an outlook. And in the case of Kirkland Lake, you've given them a sunny outlook. So explain to us what that means. And you even go as far as saying, within the companies you look at, it's in the top 10% of rankings. So what makes you think it's going to outperform?
Well, what we do with our VIP process-- it's Value, Insider commitment, and Price momentum-- we rank every company in the Canadian market and the US market as well that have those types of variables available to us.
So in Canada it's over about 750 companies, 800 companies that we rank. And we rank them on an equal basis on those value criteria like PE, price to book, price to sales, enterprise value to EBITDA, price to cash flow, shareholder yield. And we also look at insider commitment, holdings in the intensity of the buying and selling of insiders, and then the price momentum.
And what we do is we rank every company. And if the company falls in the top 10%, we give it a sunny outlook, just like a weather pattern. And what that means is that company, if it has a sunny outlook, it's in a group of stocks that we expect to outperform.
So it's not a buy or sell rating on that stock. What it is, it's saying that stock is sort of on the sunny side of the beach, and we expect that if you're on the sunny side of the beach, you're going to have a more enjoyable time than if you're on the cloud side of the beach. And we give a cloudy outlook to those stocks that are in the bottom 30%, and a rainy outlook if you're in the bottom 10%.
So Kirkland Lake Gold is in the top 10%. So for a mining company to get up there, it's really notable. And it's actually, at this point, a candidate for possible inclusion in the INK Canadian Insider Index when we do a rebalancing in November. We do it twice a year. We do a rebalancing in November and a rebalancing in May. And Kirkland Lake Gold is one of the highest-ranked stocks in Canada right now based on our criteria.
I hear you. So you're saying no guarantee in terms of this being a buy recommendation. You are going to look at it again in November. But if I'm an investor and I'm thinking the situation, as you mentioned, looks pretty positive. It's like being at the beach, and good spot you have there on the sand. What are some of the things, though, that I should consider, potential risks or things that could go wrong if I were to think about buying it today?
Well, if you're going to go to the beach and you want to have some fun, it's always best to have a group of people. So we would never suggest that anybody just take a look at one stock with a sunny outlook. You want a basket of them. That gets down to your basic--
Diversification approach. So in terms of Kirkland Lake Gold, it is a gold company. So you want to fit that into your overall portfolio and strategy based off of that. Now it's a high grade gold company. They look at deposits that have relatively high grade. It's an underground mining company. So it does have its own risks on the operations side.
And in terms of what you're looking at in gold companies, some investors want lower grade to get maybe more leverage in a raging gold bull market. But a high grade company can tend to weather out a few dips maybe a bit better in the gold market.
So one has to look at the actual specifics of a company and how it fits into your portfolio. And certainly you want a diversified approach. But in terms of gold companies, and in terms of people looking to ensure they have gold mining stock exposure, then Kirkland Lake Gold is one of the ones we see right now.
Thank you very much, Ted. We look forward to having you back to share some insights from your index.
Sara, thanks very much for having me.