This Unloved Canadian Stock Is About to See the Light of Day

Badger Daylighting Ltd. (TSX:BAD) isn’t that BAD of a stock. Here’s why short seller Marc Cohodes has this company wrong in spite of its aggressive accounting methods.

| More on:
edit Person using calculator next to charts and graphs

Image source: Getty Images.

Badger Daylighting Ltd. (TSX:BAD) is a Canadian company that’s a great way to play the continued rise in infrastructure spending. The company provides non-destructive hydrovac excavation services to its clients who need holes dug to expose underground infrastructure to the light of day, hence the term “daylighting.”

If underground pipes need to be laid down or maintained, Badger can provide its excavation services, which leave a minimal impact on the surrounding environment versus traditional excavation methods. Badger manufactures and operates its fleet of hydrovac-equipped trucks that mainly serve the utility and municipality and oil and gas industries.

The company was accused of misleading accounting practices by the infamous short seller Marc Cohodes, who has “attacked” many other Canadian companies in the past to profit from a stock’s decline. While Badger may have been “aggressive” with its revenue-recognition methods, there has been no firm evidence of illicit activities that Cohodes alleges in his short reports.

Having a closer look into the financial statements, it’s not hard to see that Badger has a substantial amount of accrued revenues (sales recognized before billing a customer) versus your average firm.

As a result, the company has consistently accumulated a substantial amount of accounts receivables on its balance sheet, accounting for around 22% of assets last year, which should have raised red flags for investors. Such high accounts receivables imply incredibly relaxed credit standards, so Badger may have taken on less-creditworthy clients within the struggling oil and gas industries and thus may have been more susceptible to provide services to less-solvent clients who may not be able to cough up cash down the road.

While Cohodes did shed light on Badger’s aggressive revenue-recognition methods, the company didn’t actually do anything fraudulent, and Cohodes’s allegations were eventually deemed as “baseless” by third-party firms that gave the green light on Badger’s financial statements.

Sure, the company didn’t adopt the most conservative accounting methods, and revenue growth may have been harder to gauge, but in the end, Badger remained compliant with the IFRS and is thus not as uninvestable as it was when Cohodes’s allegations were the talk of the town.

While Badger’s apparent low-credit standards for prospective clients may be seen as a concern, it’s also important to remember that management has factored in estimations for uncollectible accrued revenues, so no sudden drops in operating cash flow should be expected.

As the U.S. economy heats up, more infrastructure spending will be necessary, and that means more work for Badger and other hydrovac excavators. Moreover, rebounding commodity prices is a huge positive for the solvency of Badger’s oil and gas clientele, which account for a big chunk of its customer base.

In addition, insiders have been loading up on shares of Badger with approximately $934,000 worth of insider buying from the company’s officers and directors over the past year.

I think that’s a good indication that Badger is at a turning point and is about to move on and dig itself out of the hole that Cohodes unfairly kicked it in a few years ago.

Stay hungry. Stay Foolish.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Joey Frenette has no position in any of the stocks mentioned. Badger Daylighting is a recommendation of Stock Advisor Canada.

More on Investing

A colourful firework display
Bank Stocks

The Next Canadian Stock I’m Going to Buy

Want to close out the year with a big bang? A Big Bank is highly recommended if you’re looking for…

Read more »

a Couche Tard store
Top TSX Stocks

Why Alimentation Couche-Tard Stock Fell 5% in September

Couche-Tard stock took a hit in September, but the downside pressure could be short-lived considering its commitment to innovation and…

Read more »

Canadian energy stocks are rising with oil prices
Energy Stocks

Why Suncor Energy Stock Fell 10% in September

Energy stocks are top gainers on the TSX in 2022, but still cheap. Suncor Energy stock seems ripe for a…

Read more »

Energy Stocks

Why Canadian Natural Resources Fell 10% in September

With healthy growth prospects and dividend growth, Canadian Natural Resources would be an ideal buy at today's attractive valuation for…

Read more »

A stock price graph showing declines
Tech Stocks

Why Tesla Stock Dived Over 8% Today

Here’s the key reason why TSLA stock is being hammered Monday, despite reporting record Q3 2022 car deliveries and production…

Read more »

Dividend Stocks

3 Expensive TSX Stocks I’d Buy if They Took a Dip

Three relatively expensive large-cap stocks are on my buy list if their prices dip in the next market correction.

Read more »

An airplane on a runway

5 Things to Know About Air Canada Stock

Air Canada stock looks like one of the cheapest on the market. But before you buy the airliner, here are…

Read more »

funds, money, nest egg
Stocks for Beginners

No Time to Invest? The Easiest Way to Create a Million-Dollar TFSA

Here’s how investors can take advantage of a recent market crash to create a million-dollar TFSA with ease.

Read more »