And if that wasn’t bad enough… the CSE with its load of cannabis and blockchain stocks closed down 59.1% for the year and 61.0% from it’s highs in early 2018.
No doubt about it… These are ugly charts if you’ve been long.
But... historically these are the times that you can benefit from – if you have the financial and emotional means to do so.
I can try and explain away why I think we are here and what we could have and should have done but let’s face it… it’s pointless. The horse is out of the barn. It’s time to look forward.
As depressing as the markets are right now, investors need to be looking for new opportunities and cutting loose some of their current holdings. It might be painful, but it’s the only way to capitalize on this market turmoil.
You’ll see all of our stocks covered later in this update. And over the next few weeks we’ll be reviewing in-depth every one of our positions. The goal here is to trim poor performers and rotate into better opportunities.
2018 in Review – What happened?
Let’s take a look back at 2018 and review the highs and lows. Hopefully we’ve learned something that will benefit us going forward.
Early in 2018, the Canadian microcap market was skyrocketing on the back of blockchain and cannabis. For a while those sectors felt like the only things working. The mere mention of blockchain would send a stock soaring like the dotcom days.
However, the blockchain excitement proved short-lived. That bubble burst and while cannabis hung on a bit longer, most of the weed stocks finished the year trading at lows. Volatility was the buzz and cash was king again.
The US started off 2018 on a high note. A strong US economy got a boost from tax cuts and early signs of a US-China trade agreement (which still hasn’t materialized). US politics soon became a concern for markets.
Trade wars, political impasses, US midterm election uncertainty and interest rate hikes all weighed on the markets. That combined with a very stretched bull market led to a market reversal into bear territory. December’s market drop was one of the worst on record.
Canadian markets saw their own dose of bearishness. Lower oil prices and a lack of political will to address a growing amount of land-locked oil continued to weigh on the Canadian oil patch. Interest rates bumped higher and the hot housing markets in Vancouver and Toronto, the engines of those local economies, finally began to cool. The Canadian dollar continued it’s multi year slide to finish the year at $0.74 vs the US dollar.
On a positive note, Canada and the US negotiated a new trade pact which calmed some fears of a protracted trade battle over products like autos, dairy products and steel.
The Canadian markets joined the rest of world in entering a bearish trend. Few Canadian assets escaped 2018 with gains and stocks – we can now see – were due for a healthy correction. Hindsight as they say, is 20/20...
In SmallCap Discoveries World…
Most of the stocks we cover started 2018 in good shape. We did not expect the kind of year it turned into.
By mid-year a few of our companies began missing targets. But with few new opportunities that got us excited, we stayed focused on old names like Xpel Technologies and Covalon.
This past October SCD held its second annual investor conference. Keynote speaker Ian Cassel kicked it off with one of the best presentations (Investing is Hard) on microcap investing I’ve ever seen. 12 companies presented to over 110 attendees. We raised almost $6000 for Westcoast Kids Cancer Foundation. It was great to see familiar faces and new ones as well. Thank you all again for your support.
In November I joined the board of ImmunoPrecise Antibodies (IPA.V / IPATF:PINK). As stated in my letter to everyone just before joining, I’m excited about the opportunity and hope everyone views it as a sign of my bullishness on the company and its new management team.
Ok… Let’s get in to some of our positions and most talked about stocks.
Atlas Engineered Products – AEP.V
2018 was a busy year for Atlas. The company went public in late 2017 and has since grown its revenues from $6 million annually to a $50 million run-rate with the recently announced acquisition target, South Central Building Systems Ltd.
Atlas recruited a new high-energy and experienced CEO, Dirk Maritz. The company completed roughly $4 million in equity financing to help pay for recent acquisitions. AEP’s share price ranged from a 2018 opening price of $0.66, reached a high of $0.72, but closed the year down 45% at $0.36.
There is concern higher interest rates and a slowing Canadian housing market will impact AEP. But we think they’re in well supported markets (not Vancouver and Toronto) and areas that will benefit from the aging Canadian demographic. With the recent financing at $0.40 and the strong organic and M&A growth rate, we think shares are a buy below $0.40.
Gatekeeper Systems – GSI.V
We sold GSI at a loss in late 2017 and early 2018. The company failed to get any significant revenue traction and has been burning cash.
While the company had some small wins mid-year, the stock hasn’t done anything. It closed 2017 at $0.13, saw a high of $0.145 and closed the year at $0.095. It trades just above cash value. We have stopped coverage on GSI.V
Hamilton Thorne – HTL.V
HTL was one of our best performers this year. Shares started the year at $0.73 and ended the year at $0.90, up 23%. The stock hit a high this year of $1.28 and drew research coverage from several firms including Bloom Burton and Cormark Securities.
In October the company completed a $1.10 bought deal financing for a total of $10million led by Bloom Burton. The company made one small acquisition, Zandair, which added roughly US$550k in revenue.
HTL reported 42% revenue growth in the latest 9-month period. The bulk of growth came from acquisitions, but they maintained healthy organic growth as well. 9-month profit came in at US$215k after several one-time acquisition costs. We were sellers above $1.00 as we felt shares were a little ahead of a justifiable valuation.
It does look appealing again after the recent pullback below $0.90 but we think there are better opportunities available elsewhere.
ImmunoPrecise Antibodies – IPA.V
As many you know, I recently joined the board of ImmunoPrecise. This means my coverage and opinions on IPA will be somewhat muted going forward. My trading activity in IPA will be reported so I’ll let my trading do the talking.
It was a very busy year for IPA. The biggest event in my opinion was the addition of a new CEO, Dr. Jennifer Bath. Dr. Bath brings with her real industry experience and insight from her previous work at one of IPA’s competitors.
Jennifer has built up her management team with other antibody research industry veterans and I believe the company is now well poised to execute on its business plan.
IPA raised over $10 million in debt and equity and a few months ago settled about $1.33 million of the $4.1 million in debt that company took on to close the Modiquest acquisition. Revenue numbers were recently announced, and IPA grew revenues by 106% mostly on the back of the Modiquest acquisition. Cormark Securities initiated research coverage in November with a $1.00 price target.
Shares started 2018 at $0.60, reached a high of $1.29, and settled the year at $0.71 for a return of 18%.
Lite Access Technologies – LTE.V
Lots of change with LTE. A new CEO, Carlo Shimoon was appointed in March. The board of directors was changed as founders Mike Plotnikoff and Michael Priest resigned. UK general manager Dylan Griffith departed and was replaced by Noel O’Neil.
Most of these changes unsettled shareholders and the stock price began to suffer. There was a reprieve in March when the company announced they were awarded a $29 million contract with telco Gigaclear. Unfortunately that news was not enough – by year’s end the stock had dropped to $0.39 from the $1.45 level it started the year.
I recently returned from a site visit to their project outside of Oxfordshire in the UK. Several issues were discussed including a workflow slowdown from Gigaclear as they makes senior level management changes caused by falling behind their deployment schedule. Gigaclear should have new management in place by the end of January and workflow should be back to normal levels shortly after. It was comforting to learn that LTE’s project is ahead of schedule and on budget.
I don’t believe the current issues LTE is facing warrant the recent low share price. I believe a lot of the recent share price weakness is a combination of shareholder frustration, year-end tax loss selling and general market weakness.
I’m expecting a somewhat stronger Q4 and possible news of additional projects in the UK. It also looks like the Canadian operations are back on track and contributing to the overall business again. The new CEO has made some share purchases which may give shareholders a little comfort that things aren’t as dire as the share price is signalling.
For those brave investors out there it might be worth nibbling at current prices below $0.45.
Namsys Inc. – CTZ.V
Much like Vigil Health, Namsys just continued to deliver. Revenue growth has slowed over the past few quarters – but even with 9% growth – we saw strong leverage in earnings growth.
CTZ rarely puts out news but surprised investors this year when attention shy-CEO Barry Sparks hosted a webcast and conference call. I don’t think we learned anything new.
Shares closed mostly flat on the year. With a trailing pre-tax PE of only 11 times, the stock continues to look underpriced around the current $0.55 level.
We view CTZ.V as another possible takeout target in 2019. We’re buyers at current levels.
Pioneering Technologies – PTE.V
Absolutely terrible year. And we completely missed the boat here. While we did do some selling at higher prices, we unfortunately were not aggressive enough. Pretty much everything that could go wrong did go wrong and the stock was deservedly beaten up.
After 3 years of 50%+ annual revenue growth, Q3 revenues declined by 67%. The company went from generating a profit of over $1 million in Q3 2017 to a loss of $1.1 million. The company’s excuse is that revenues have declined temporarily because of the transition from a direct sale to a distributor selling model.
The stock ended 2017 at $0.85, saw a high of $0.87, and closed 2018 at $0.075 for a drop of 91%. It currently trades below cash value of ~$0.10. We hate buying/holding companies because they are trading at cash if they’re not growing and burning money.
As we still own a significant position, we will be looking for some bullish catalysts or will look to sell and use proceeds for new opportunities.
Renoworks Software – RW.V
We have been patient with this one and it looks like our patience is finally starting to pay off. Revenues have begun to accelerate in recent quarters.
Revenues increased 44% in Q1 to a record $1.08 million and the company returned to profitability in the past 2 quarters. However the highlight of the year was the news that Renoworks has partnered with Geomni, a division of Nasdaq-listed Verisk Analytics (VRSK.Q). We think this deal has tremendous potential to increase revenues. We like the optionality with little downside risk to Renoworks. Share price was a pleasant surprise and RW proved one of our bright lights in 2018. Shares closed 2017 at $0.22, hit an all-time high recently of $0.495, and closed the year at $0.415 for a nice return of 88.6%.
We would consider adding to our positions on any share price weakness below $0.40 and think it is one to watch closely in 2019.
Total Telcom – TTZ.V
Not much to report here.
The company’s share price has suffered due to anticipated revenue growth that has yet to materialize. Revenues have been lumpy and mostly flat on a full year-over-year basis – but at least the company has stayed profitable. TTZ has been able to grow their race tracking division which has offset the drop in their environmental products and heater control products sales.
TTZ’s share price ended 2017 at $0.32, hit a high of $0.36, but finished the year at $0.17, down 47%.
We view TTZ as a hold but will be watching for upside catalysts – especially any uptick in revenues. Insiders have begun buying shares recently at current levels.
Viemed Healthcare – VMD.T
VMD spun out of PHM in late 2017 and the company and its stock performed well in 2018. Viemed was one of the few new stocks we recommended in 2018. Unleashed from the control of its parent, VMD delivered impressive revenue and profit growth. The share price responded well.
Revenues increased 40.1% in the latest 9-month period and profits grew after adjusting for one-time costs, stock-based compensation and new public market expense overhead.
The stock began the year at $2.50, reached a high of $8.75, and closed the year at $5.23 for a return of 109%. There is some concern over Medicaid and Medicare billing changes that may negatively affect VMD’s revenues and that has depressed shares recently.
We sold into the rally early this year and are looking for a good opportunity to re-enter.
Vigil Health – VGL.V
Vigil is a good example of getting no respect from the market for doing the right things.
While revenue growth wasn’t great at only 8% for the last 6 months, the company did deliver record revenue and profits. It generated over $200k in profits in the half, maintained a healthy balance sheet, instituted a share buy-back, had insider buying and yet – the stock closed at 52-week lows.
Shares closed 2017 at $0.70, briefly moved up to the year high of $0.85, and then slid to close at $0.36 for the year, a drop of 48.6%. At current prices we believe VGL is a takeover target or more likely – management will take it private.
High insider ownership, continued growth and profitability, a decent amount of cash and an all-time low valuation make it a no-brainer for a take-out. We think it is a very strong buy below $0.40.
Xpel Technologies – DAP.U.V
Wow, what a year! DAP.u was one of the best performing stocks in Canada in 2018.
They started the year at US$1.40, hit a high of US$7.20 on the back of stellar financial results, and finished the year at US$6.20 – a year-over-year gain of 343%
Revenues in the recent 9-month period jumped 75.4% to US$83.4 million. Net income increased 509% from US$1.1 million to US$6.7 million. The stock did stumble a bit late in the year likely as a result of US/China trade talk impasse. We think the stock still offers good value below US$6.00 with a run-rate PE of around 18
Looking ahead to 2019, what are we watching?
Gold. Let me start by saying we hate the resource sector, especially the junior explorers. I’ve personally learned that I’m not good at picking the winners from the losers in the space.
That said, I can spot relative strength and 2019 looks like it could be good for the gold producers – especially Canadian gold producers who have expenses in a weaker Canadian dollar but get a higher world price for gold. Gold appears to be breaking out in US dollars and even more so in Canadian dollars.
The sector has been so unloved for the last number of years and that alone is reason for it to go higher. Keep an eye on the stocks hitting 52-week highs lately and you’ll find it’s predominantly gold producers.
Small is beautiful. Big was beautiful…. This recent bull market was led mostly by the big names, the FANG stocks and stocks who benefited from massive inflows into index funds and ETFs.
The bigger stocks have been trading at historic highs relative to faster growing yet smaller cap companies. I’m seeing (maybe wishing) early signs that there may be a rotation back to these better priced and less owned smaller companies. I’ve been pointing out some of the recent management takeovers and private equity buyouts of smaller companies.
Valuations matter and cash is moving to where value is most obvious. Watch for more management buyouts as a number of these acquisitions become self financing. Bigger companies will find it’s cheaper to buy these smaller companies than to invest in growing themselves.
Let’s get active. We may also see the small is beautiful trend play out because of the pendulum swing back to active over passive investing. It should become a stock pickers’ market again.
The recent withdrawal from passive equity vehicles has created a self-fulfilling drawdown effect as fund managers are forced to meet liquidations by selling their liquid holdings. This has put more selling pressure on the big stocks.
Last year was one where stocks with higher institutional ownership saw larger drops in share price than those mostly retail-owned. Expect to see that trend continue a bit longer. The question is... where will all that sidelined cash eventually be deployed? Will the unloved smallcaps get any of it? Time will tell.
IPO’s and financings slow. Watch for a lower number of IPO’s and financings. I’ll be staying away from companies that need financing for operations.
The odd financing for a logical acquisition could make sense but companies that need money to finance operating losses are at much greater risk if we see a prolonged bear market. Stick with well financed and preferably profitable companies.
Emerging markets. 2019 could be the year of the emerging markets. They’ve been so beat up that I imagine valuations could get compelling enough to draw investor attention.
Money, like water, loves to flow to low ground, low valuations. Emerging markets and smaller stocks have very similar risk characteristics. They could be the early signal that smaller, “riskier” opportunities are starting to get money flow. Who will lead? Stay away from the leaders of the last bull market.
Historically, the sectors that led the last bull market underperform the next bull market. Think cannabis, blockchain, US stocks and big FANG type stocks. Don’t expect these to be the market darlings of the next bull market. Names you’ve never heard of will likely lead and outperform on the next leg up. That’s where the multi-baggers will be.
Higher interest rates. I think we’ll want to be careful of industries affected by higher interest rates. Economies are now conditioned to record low borrowing costs. A one or two percentage point increase in interest rates can have a dramatic effect on leverage and the cost of debt. Going from a 2% to 4% mortgage payment doubles monthly interest costs. Interest rates won’t have to go up much to have a dramatic slowing effect.
The bottom line
Market directions are impossible to predict. So we won’t waste our time trying. We want to find new ideas and we want to find them early. We want them when they’re dirt-cheap. We have a saying that: “we don’t like to buy when there is blood in the streets, we like to buy when there is no one in the streets”.
So how do we find these new ideas?
Just as we always have – with a bottoms-up approach. We want to let growth and valuation drive our opportunities. We want to find fast growing companies with cheap valuations. This market downturn should make it easier for us to find these. There should be less “investors in the streets”.
We have completed another full look at all Canadian-listed companies and uncovered 49 companies that made it through our first screen. We hope to find several great little companies that meet our investing criteria.
We have already identified one company that we think qualifies as the perfect risk-reward opportunity. We will have a report out on them shortly. In the meantime, I hope you are ready for new opportunities as they present themselves to us in 2019.
On behalf of Brandon, myself and the rest of our team we want to thank you for your support. 2018 was not the best of years for us and our style of investing but we will continue to try and unearth what we believe to be outstanding and unique Canadian microcap investing opportunities.
Please reach out to us if there is anything we can do to help support your investing success. We wish you all a healthy and happy 2019.
To your wealth, Paul and Brandon | 
