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Cheapies With a Chance 2022
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A few times a year, we manually review every publicly traded company in Canada. The purpose is to uncover new ideas and hunt for companies that have slipped through the cracks.
The concept is simple. By following a simple formula, searching for value in the most overlooked part of the market, we can find market-beating opportunities. The simple criteria are:
- Growth - Quarterly revenue growth >25%
- Profitability or near profitability - Ideally, two consecutive quarters of positive net income
- Size - Under <$50M market cap and the smaller the better. A tight share structure is also a bonus - Ideally, the best situations are <30M shares outstanding
After we find companies that meet our revenue growth criteria, we then begin to remove companies that are not close to profitability, have too many shares outstanding, have too many red flags, or are simply too discovered.
We've had some unbelievable success with this formula, and boldly claim that even if you didn't read a single thing about these companies, you have a good chance of outperforming the market with a basket of these stocks.
In 2021, we released two Cheapies With a Chance lists, which at today's prices, both lists have provided a positive return (94% & 25.9%). We even uncovered a few multi-baggers and one ten-bagger in the process - POSaBIT Systems (TSX.V: PBIT) which reached a high of $2.4 (1354%) and Inventronics (TSX.V: IVX) which reached a high of $2.98 (861%). Take a look at the two lists below: |
| | | | In previous years we've uncovered some monster gems that have provided our subscribers life altering returns.
As investors, we recognize that not every stock we own is going to be a winner, it’s part of investing. However, by sticking to a simple criterion we have routinely demonstrated we have a proven formula for finding companies that can create huge rewards for those investors.
It’s like putting a quarter into a slot machine that always spits out more cash over time. This is why we love microcaps and try to stick to our formula.
After reviewing all SEDAR filings, this year we had lots of high growth companies with a list of about 150 companies that we've reduced down to 10. And so today, we’re presenting the Top 10 Cheapies with a Chance companies on our watchlist.
Before we share this list, we wish to remind our subscribers that not all of these are Smallcap Discoveries Select Portfolio companies, but instead are part of our Select Watchlist and we wanted to highlight the names that stuck out in our annual SEDAR review. Additionally, for disclosure purposes we've highlighted the names that we own shares of.
For each company, we’ll provide some key facts and a list of pros and cons. Thereafter, we’ll provide the bottom line on if we are buying or passing and what we’d need to see to invest.
(Order according to market cap - smallest to largest)
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| Memex Inc. Ticker: OEE.V
Price: $0.02 Market cap: $2.95M Shares outstanding: 147M Q/Q Revenue growth: 65% EV: $3.2M
EV/EBITDA: 5.9x TTM Net income: $66K TTM P/E: 17x |
| | What it does: Established in 1992, Memex grew to be an industry leader in Industry Internet of Things (IIoT) through the development of MERLIN Tempus, an award-winning platform that delivers real-time, tangible increases in manufacturing productivity. Memex is on the leading edge of industry trends in computing power, machine connectivity, industry standards, advanced software technology, and manufacturing domain expertise.
Our persistent pursuit of innovative IIoT solutions led to a comprehensive understanding of the challenge's manufacturers face. We made it our mission to, "successfully transform factories of today into factories of the future." As the global leader in Machine to Machine (M2M) connectivity solutions, our hardware and software products create unparalleled visibility at all levels, from "Shop-Floor-to-Top-Floor."
The MERLIN Tempus Suite provides effective quantification and management of Overall Equipment Effectiveness (OEE) by revealing hidden capacity using real-time objective data. Further, it offers sustainable benefits that enable world-class OEE such as reducing costs, incorporating strategies for continuous LEAN improvement, and boosting bottom-line financial performance.
Notes:- Profitable two of the last three quarters
- Historically, management overpromised and underdelivered
- Management has known to be more promotional about it's stock
- Bookings are flat in Q4 - totaling: $531K versus $532K
- Turnaround story, and likely not going to attract a high multiple until it can show consistent profitability and growth
- High share count, dilutive history to fund growth operations.
- **We own shares
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| Spectra Products Inc Ticker: SSA.V
Price: $0.045 Market cap: $3.47M Shares outstanding:77M Q/Q Revenue growth: 23% EV: $2.6M
EV/EBITDA: 5.67x TTM Net income: $559K P/E: 6x |
| | What it does: Spectra makes safety and maintenance products for the transportation industry. Their flagship product, Brake Safe, allows truck drivers to visually determine the brake adjustment condition of their brakes. Out of adjustment brakes are the number one service violation in North America.
Spectra’s other key product is Termin-8r. This is an anti-corrosion lubricant that extends truck parts’ life and reliability.
If you recall, this is a company that we’ve profiled in a previous Top 10 at $0.03 and financed at $0.05. It continues to remain as one of our top picks as it’s just too cheap.
Notes: - Profitable four of the last five quarters
- Management has inefficiently allocated a small sum of capital into an investment portfolio
- Net income is skewed on a quarterly basis due to mark-to-market gains/losses from the investment portfolio
- Recently approved share consolidation
- Trucking industry can be cyclical and tied to overall economic conditions
- **We own shares
Divergent Energy Solutions Ticker: DVG.V
Price: $0.10
Market cap: $3.3M
Shares outstanding: 33M
Q/Q Revenue growth: 194%
EV: $5.9M
EV/EBITDA: 10.7x
TTM Net income: $3.39M
P/E: 1x |
| | What it does: Headquartered in Calgary, Alberta, Divergent provides fluids management products and services for the water, gas and oil industries through its wholly owned subsidiary Extreme Pump Solutions LLC. Product lines including Electric Submersible Pumps and the future development of an Electromagnetic Pump technology.
Notes:
- Management has a long history of underperformance
- Capital allocation has been driven towards not yet commercialized products and resulted in losses and debts
- Debts have been restructured at $0.30 and are more manageable from here
- High insider ownership at 33%+
- Recent insider buying
- Should benefit from increased oil and gas industry spending
- Net income was skewed higher by $2,157,000 due to a fair value adjustment on a share issuance. On January 19, 2021, the Company received approval from the TSXV to issue 14,375,000 (post-consolidation) common shares on the conversion of $3,407,000 (CAD $4,313,000) of debentures into common stock of the Company at a price of CAD $0.30 (post consolidation) per share. The shares were issued at the closing market price of CAD $0.11 (post- consolidation) price per share on January 20, 2021 resulting in a fair value adjustment on the share issue of $2,157,000
- **We own shares
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| Bri-Chem Ticker: BRY.TO
Price: $0.205 Market cap: $4.91M Shares outstanding:23.93M Q/Q Revenue growth: 121% EV: $11.8M
EV/EBITDA: 5.67x TTM Net loss: ($1.1M) P/E: N/A |
| | What it does: Bri-Chem has established itself, through a combination of strategic acquisitions and organic growth, as the North American industry leader for wholesale distribution and blending of oilfield drilling, completion, stimulation and production chemical fluids. We sell, blend, package and distribute a full range of drilling fluid products from 25 strategically located warehouses throughout Canada and the United States.
Notes:- Profitable three of the last four quarters
- Turn around potential
- We believe company could benefit from increased oil and gas industry spending
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| Jemtec Ticker: JTC.V
Price: $2.15 Market cap: $6M Shares outstanding:2.79M Q/Q Revenue growth: 26% EV: $4M
EV/EBITDA: 4.9x TTM Net income: $634K P/E: 9.4x |
| | What it does:Jemtec is a full-service provider of electronic monitoring solutions across Canadian communities for over 30 years, used on over 50,000 individuals. These increasingly advanced technologies hold offenders and accused persons accountable and allow them to get back to work, attend treatment programs in the community, meet their family responsibilities, pay taxes, and move forward with their lives.
Notes:- Profitable eight of the last eight quarters
- High insider ownership ~ 49%
- High executive compensation for the business size
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| Fab-Form Industries Ticker: FBF.V
Price: $0.90 Market cap: $8M Shares outstanding: 9M Q/Q Revenue growth: 86% EV: $6M
EV/EBITDA: 6x TTM Net income: $645K P/E: 12x |
| | What it does: Fab-Form designs, develops and commercializes sustainable
foundations for the construction industry. The interface of building components with
the ground has always be costly and inefficient. Fab-Form develops products that
automate this interface.
Notes:
- Profitable eight of the last eight quarters
- Company grown its business from annual revenues of $260K to $2.89M with no dilution
- Company has been profitable every year since 2011
- Most of its recent business growth has come through online sales channels
- Product adoption is slow, but we believe it's nearing a tipping point
- Perfect type of stock for a small retail investor
- Majority of revenues are made from Nudura - a product FBF doesn't own
- **We own shares
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| AirIQ Ticker: IQ.V
Price: $0.285 Market cap: $8.5M Shares outstanding:30M Q/Q Revenue growth: 25% EV: $6.2M
EV/EBITDA: 6.5x TTM Net income: $500K P/E: 17x |
| | What it does: AirIQ (TSXV:IQ) was founded in 1997 and is a pioneer in IoT based asset management solutions. AirIQ's solutions allow commercial businesses to reliably, effectively and efficiently monitor assets in near real time. The Company develops iOS and Android mobile and web-based applications, and cloud-based solutions that stand-alone or that can be readily integrated with existing software. AirIQ solutions are mixed fleet capable and provide fleet reporting, maintenance, compliance, safety and analytics utilizing multiple hardware options including a fully integrated video telematics camera solution and a battery powered solution for non-powered assets.
Notes:- Profitable eight of the last eight quarters
- Conservative management team
- Normal course issuer bid in place
- **We own shares
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| Inventronics Limited Ticker: IVX.V
Price: $1.78
Market cap: $8.55M
Shares outstanding: 4.81M
Q/Q Revenue growth: 63%
EV: $9.86M EV/EBITDA: 5x TTM Net income: $2.2M
P/E: 3.8x
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| | What it does: Inventronics Limited designs and manufactures enclosures and other products for an array of customers in the telecommunications, electric utility, cable television, energy, electronics and computer services industries in North America. The Corporation owns its ISO 9001-registered production facility in Brandon, Manitoba.
Notes:
- Profitable six of the last seven quarters
- This is our fourth year in a row of highlighting this business in our Cheapies with a Chance list. The first year it was profiled was at $0.29 - and it still remains a cheap company.
- It's a "nuts and bolts" type of business, meaning, it's not as scalable as a software company and expenses are likely to increase as the top line continues to grow. We don't expect these type of growth numbers to continue on a year/year basis - but the company was too cheap not to highlight.
- Very low number of shares outstanding, and extremely illiquid - shares can be quite volatile.
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| IBEX Technologies Ticker: IBT.V
Price: $0.385 Market cap: $9.56M Shares outstanding:24.8M Q/Q Revenue growth: 28% EV: $4.3M
EV/EBITDA: 2.3x TTM Net income: $823K P/E: 11.6x |
| | What it does: IBEX manufactures and markets enzymes for biomedical use through its wholly owned subsidiary IBEX Pharmaceuticals Inc. (Montréal, QC). IBEX Pharmaceuticals also manufactures and markets a series of arthritis assays, which are widely used in osteoarthritis research.
Notes:- Profitable five of the last seven quarters
- Higher management compensation
- Lumpy quarterly revenues
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| Biorem Ticker: BRM.V
Price: $0.85 Market cap: $33M Shares outstanding:38.8M Q/Q Revenue growth: 53% EV: $23M
EV/EBITDA: N/A TTM Net income: $846K P/E: 39x |
| | What it does: Biorem is a leading clean technology company that designs, manufactures and distributes a comprehensive line of high-efficiency air emissions control systems used to eliminate odors, volatile organic compounds (VOCs), and hazardous air pollutants (HAPs). With sales and manufacturing offices across the continent, a dedicated research facility, a worldwide sales representative network and more than 1500 installed systems worldwide, BIOREM offers state-of-the-art technology-based products and peace of mind for municipalities, industrial companies and their surrounding communities.
Notes:- Profitable seven of the last seven quarters
- Large $30M backlog of work
- Lumpy results: Biorem is dependent on a few large projects per year. Reduced demand in business periods can have a material impact on revenues in each quarter - review annually
- Contract Work: Biorem’s business is all contract work. Added risk where each contract has its own budgets, and Biorem does not complete it’s work under-budget, it can be unprofitable work.
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| Wrap-up
So, there you have it, ten (10) undiscovered companies that are right around our criteria we think are compelling enough to share. We can’t promise all – or even some of these – will be winners. But our experience shows owning tiny, cash flowing micro-caps is one of the fastest routes to big profits.
To your wealth,
Paul and Trevor
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