Introducing the “Tiny Ten”. Also, a new addition to the portfolio, opportunities in portable toilets, data analytics, solar power and cartoons, and I cross paths with some crafty elks.
The Planet MicroCap Podcast
I’ve been listening to an excellent series of investing podcasts lately called Planet MicroCap. Moderated by Robert Craft, they are an insightful look into the rarefied world of micro-cap investing. Guests include individual investors, newsletter writers, academics and fund managers all of whom offer their own interesting perspectives on the market. Many of them approach investing with the same kind of value-oriented focus that I favour and I would highly recommend taking a listen if you’re interested in learning more about not just micro-caps, but investing in general.
One of the recent guests on his podcast was extolling the virtues of the investor conference circuit. If you spend some time with google, you’ll find a steady stream of these conferences being put on throughout the year and across the country. The interviewee said he had learned a lot from going to these conferences, not just from the companies and the official speakers but also from the other conference attendees. The Planet MicroCap podcast happened to be hosting its very own micro-cap investor conference in Las Vegas and the timing (right between year-end and Q1 earnings seasons) was ideal for me. I had never been to one of these conferences, so with visions of lounging by the poolside between events, replenishing my Vitamin D stores after a long winter, I signed up.
I never actually made it to the pool although I did manage to squeeze in a hot and sweaty day of hiking in the Valley of Fire state park at the end of the trip. More importantly, though, I thoroughly enjoyed the conference. I met a lot of interesting people, heard a lot of interesting presentations, picked up some valuable insights and loved being able to talk about p:e ratios and growth rates for a change without seeing my listener’s eyes glaze over.
The format of the conference was as follows: The first day was a series of lectures and investor panels with presentations by some of the popular investment newsletter writers in the industry as well as by various CEO’s, the heads of the TSX Venture exchange and the Canadian Securities Exchange and various other industry notables. There were panels on blockchain technology, the emerging cannabis industry, micro-cap accounting, mining exploration and various other topics.
The second day was a grueling marathon of company presentations. It was a packed schedule with 4 different companies presenting every half hour from 8 in the morning until 6 o’clock at night. For every time slot, you picked which out of the 4 presenting companies you wanted to see. For a few of the time slots, nothing caught my eye and I slunk back to my room for a quick 20 minute nap.
The final day was an opportunity to set up 1 on 1 meetings with a few of the companies that you were particularly interested in. These being tiny companies, you were usually talking with the CEO, the CFO or at the very least, one of the high-ranking VPs.
During the event, there was ample time to chat with the management of the various companies and the other conference attendees in between presentations and during the hosted breakfast and cocktail hour following the day’s events.
On the whole, it was an extremely well-run operation. I was thoroughly impressed by the organization and effort that had clearly gone into the whole thing and from my perspective, it seemed to go off without a hitch. I thoroughly enjoyed chatting to all the various conference goers and got some interesting perspectives into how others navigate the micro-cap investing landscape.
The attendees were a mix of private investors like myself, newsletter writers, micro-cap fund managers, family office investors (investors who work on behalf of wealthy individuals), people in the business (lawyers and accountants) and company management. There were seasoned pros there as well as newbie investors just getting into the game. Overall, everyone was extremely open and friendly.
For the most part, the companies that were presenting at the conference were in the very early stages of their evolution. Many had market caps of less than $50 million. Some might call these “nano” caps. They were often losing money and were still looking for that elusive first quarter of profitability. They all had very interesting stories to tell, though.
These aren’t the kind of companies I usually invest in. I’ve owned quite a few micro-cap stocks over the years and currently have a number in my portfolio, but they have mostly been larger, more established companies with a history of real profitability behind them. I get a lot more excited by a low p:e ratio than I do by an exciting story.
I’ve followed the micro-cap sector for over 20 years and for the most part, I’d say that the exciting stories often don’t pan out. It’s surprisingly difficult for a company to graduate from doing a few million in annual sales and losing money on what seems like a great idea to a company with $20 million in sales that is actually earning a sustainable profit. There is the potential to shoot the lights out with the right investment in the early stage, “nano-cap” space, but much more often, the company will struggle along for years and never get that big break they are hoping for. An investment in this space in some ways is not so different from spending your money at the craps tables downstairs. (Overall, the odds are better, though.)
Nonetheless, I tried very hard to put away my innate skepticism and actually came across a number of companies that I will be following very closely. As well, a very small company that just made its debut on the markets last November and which I was already in the process of buying up a small position in was a late addition to the conference roster and I got a good chance to grill management one on one after their presentation. I came away from this discussion happy with my investment and will be excited to see how it plays out.
More Micro-Caps To Watch
Here are some of the companies presenting at the conference that caught my attention. Apart from the one I already owned, I wasn’t convinced enough to buy shares in any of the others at the moment, but their stories are compelling and if they can get over that initial hurdle and start earning an actual profit, I will be watching closely for a good entry point.
AnalytixInsight – (ALY.TSXV – $0.40)
One of a number of companies at the conference that is getting in on the burgeoning data analytics space. There is a huge amount of data that is being generated and collected by all this new technology we are installing. Big data is a big trend and there will likely be some big successes in this space for companies that figure out how to extract useful insights from this growing mountain of ones and zeroes.
AnalytixInsight has developed software that scans fundamental company data on over 50,000 companies around the world and turns this data into a narrative. Instead of just displaying a company’s p/e and p/sales ratios (for example), they produce a written report that says, “While revenue growth has been below the peer median in the last few years, the market still gives the stock a p/e ratio that is around peer median and seems to see the company as a long-term strategic bet.” Their reports are also sprinkled with colourful graphs which further help bring the dry numbers to life.
They’ve partnered with some of the big names in the financial world to distribute these reports. Companies like Yahoo Finance, the Wall Street Journal, Thomson Reuters and the Euronext stock exchange. They also offer individual investors access to their reports through their own CapitalCube.com website.
By using intelligent algorithms, they can scan company releases to look for signs of impending dividend raises or cuts or share buybacks and they offer these insights to paid subscribers as well.
Leveraging off of this platform, they are keen to expand into other areas of data analytics with sports scores being one of their first targets. They also offer solutions to individual companies to turn their mountains of data (weekly sales numbers, for instance) into a narrative report that can be presented at weekly meetings.
As if this wasn’t enough to keep them busy, they have also developed a full featured stock trading app (MarketWall) in partnership with one of the biggest banks in Italy. This app is being rolled out to European customers this year and could be quite a success on its own. Still in beta, it has been downloaded over 50,000 times already. AnalytixInsight only owns 49% of this division so it’s sales are not included in the company’s financial results and represent a “hidden asset” of sorts. Analytix is hoping to spin out this division as a separate company sometime in 2019.
At the current share price of 40 c, the company has a market cap of around $28 million. Sales have been growing quickly and if you extrapolate the most recent two quarters, you get annual sales of around $6 million. On top of this, their MarketWall subsidiary, which they own 49% of, is producing sales of around $4 – $5 million a year. So Analytix’s cut would work out to another $2 million or so giving total annual sales of around $8 million. They are losing money on this but were getting close to break even over the last two quarters.
At a market cap of $28 million, the stock does not appear mouth wateringly cheap. I’d start to get more excited at a p:sales ratio of 1 or less. But they have some interesting technology and a number of different avenues they can grow by. They are close to profitability and with continued strong sales growth in 2018, we could see them tip over into sustainable profits sometime in 2018. I’ll be watching for that.
TrackX – (TKX.TSXV – $0.29)
These guys are also part of the data analytics space. In their case, they have developed a full-featured software suite that helps companies track and analyze the data coming from RFID (radio frequency ID) tags embedded in their inventory and assets. These tags generate second by second location and movement data that needs to be stored and interpreted. There are also a growing number of tiny, new sensors coming on to the market that measure things like temperature, humidity, flow rates, etc. and these can be linked in to their systems as well.
Their competitors are mostly small, niche players with more rudimentary solutions. TrackX offers a complete suite of tools. Recent customers include a leading household appliance manufacturer, an online used car retailer and a portable toilet rental company. (I’d love to be able to say I have exposure to the portable toilet rental space!)
Sales grew from $1.5 million in 2016 to over $5 million in 2017 and the expectation is that sales will continue to grow moving forward. With a market cap of $21 million, the stock does not seem particularly cheap but they were close to breaking even in the latest quarter and so I think this could be another company to keep an eye on.
Wow Unlimited – (WOW.A.TSXV – $1.31)
This company produces its own cartoons and sells them to the streaming services like Netflix who are ravenously hungry for content as well as to various cable specialty channels. If you’ve got young kids, you’re likely familiar with some of their shows. Some of their more recent productions include Castlevania and Spy Kids, both of which were taken up by Netflix.
Earlier this year, they bought a very popular network of youtube channels which doubled their quarterly revenue and gave them another venue for their cartoon productions. They are looking at this property as a “cartoon incubator” of sorts. They can use this channel as a proving ground and when they find something that strikes a chord with their online audience they can push it into full production at their production studio and then roll it out to the more mainstream media outlets.
With the youtube acquisition, quarterly revenues jumped to the $10 million mark in Q2 and Q3 and then in Q4 they jumped again to $16 million, giving them revenues for the full year of $44 million. Views on their youtube channels reached 11.2 billion in 2017 and grew by 46% in the fourth quarter from the preceding quarter.
This company could benefit from the heavy spending by all the major streaming services as well as by the increasing adoption of youtube as the primary entertainment provider for a new generation of young children. Revenues seem to be growing quickly and with a market cap of only $29 million, the price to sales ratio is intriguingly low. The fly in the ointment is the company’s profit or lack thereof. They lost $9 million before tax in 2017. Until they can show more of a profit, this will have to remain on my watchlist.
Aurora Solar Technologies – (ACU.TSXV – $0.20)
This company has developed a system which uses infrared light to evaluate the integrity of solar cells as they move along the production line. Surprisingly, there is no adequate competing technology out there that does what Aurora Solar’s does. The alternative way to measure the output of a solar cell manufacturing line is to take a completed cell and physically probe it. This is a time-consuming process that takes 20-30 minutes and can end up cracking or breaking the cell being tested. In practice, most solar plants simply manufacture their cells and accept that as many as ¼ of the cells they produce will be duds. As solar technology advances and cells become more and more complex, the need for Aurora’s real-time measurement systems is growing rapidly.
The company sees its revenues growing from the current $2.8 million mark up to $30+ million by 2020. And they foresee this being highly profitable with over $10 million in projected income by 2020.
If these projections were to actually pan out, this stock would look like a steal at the current market cap of $10 million. A 10 bagger would not be out of the question. However, one always has to take management’s projections with a very large grain of salt. The reality is that the company is currently only selling $2.8 million worth of its measurement systems and is losing money on those sales. But they have no competitors and a technology that could be in high demand as the next generation of two sided solar panels (which harvest light reflected on to their undersides) come on stream. If the reality even partially matches the company’s projections, this will be one to watch very closely.
The Mystery Company
I’ve saved what I think is the best for last. This is the company that I started buying a few weeks ago and was pleasantly surprised to see as a late addition to the conference. I’m still trying to buy up some final shares to round out my position, so I won’t divulge the name just yet, but will post on it as soon as I’ve finished buying in.
The Tiny Ten
Together with the 5 stocks that I profiled in “5 micro-cap stocks to watch”, these 5 additional early-stage companies (including my still to be announced “mystery company”) will be an interesting lot to follow over the coming year. (Collectively, I’m going to call these 10 stocks the “Tiny Ten”.) Apart from the mystery company, I haven’t invested in any of them. The standard line in the venture capital industry is that for every 10 investments you make, 2 of them will be compete duds, 6 of them will be lackluster performers and 2 will shoot the lights out. Averaging out all 10, you hope to come out ahead.
I’ll follow these 10 micro-caps over the next year and let you know how they performed. Will the classic venture cap ratio play out for this group? If so, which ones will be the winners and which will be the losers? Tune in next April to find out!
Crafty Elk Distilling Company
Finally, I’d like to give a shout out to the Crafty Elk Distilling Company. This is a small, private company run by 4 guys out of their metaphorical garage. I had the chance to talk in depth with 3 of them at the conference and was thoroughly impressed by them and the brand they’ve built. The CEO has a background in the pharmaceutical industry and the company is his brainchild. He has come up with a vodka-based beverage that is low in sugar, uses all-natural, organic ingredients and has been given functional, nutraceutical properties by adding things like turmeric, goji berries and prickly pear. They have a number of different flavours including mango honey and kiwi apple.
They have been marketing their beverage by appearing at festivals and supplying individual bars and restaurants. The initial response has been enthusiastic. Their stand at one festival was nearly toppled by the crowds clamouring for a taste of Crafty Elk while the brand name stall next to them sat virtually empty. Another festival which they were supposed to supply for its full 2 week run called them after the third day to say they were sold out. Over the past year they did a pilot run at the LCBO, selling their product online only and the LCBO told them they were one of their hottest first-time sellers.
As of this month, they are launching two flavours of their Crafty Elk “hard juice” on the shelves of LCBO stores in Ontario. Based on strong initial sales they are hoping for revenues of around $2.5 million this year which will hopefully grow as they build brand recognition and expand into other markets. They are hoping to raise $1 million to fund their initial production runs and are giving away 20% equity in their Crafty Elk business which works out to a valuation of $5 million. That certainly seems within the realm of reasonable and if the initial enthusiastic response from consumers is any indication, could represent an excellent entry point into the craft brewing business.
They have been taped for the popular Dragon’s Den TV show, but the episode hasn’t aired yet, so they weren’t able to disclose any details. Keep an eye out for these guys on a future episode!
I haven’t done any sort of serious due diligence on this company apart from chatting to them over a glass of Crafty Elk, but the opportunity seems like it might be interesting to someone experienced in doing private investments. You can find out more and contact them through their website. www.craftyelk.com
Full disclosure: I do not own shares in any of the companies mentioned in this article (apart from that “mystery company” that I keep referring to.)