Welcome back to the second installment of our 2019 SCD Top 10 list. Today we’ll reveal the Top 5 cheapest companies on our watchlist. As a reminder, these aren’t companies we own – but rather companies we’re watching very closely because of how they score on our criteria: 1) Growth – quarterly revenue growth >25%. 2) Profitability – two consecutive quarters of positive net income. 3) Size – under <$50M market cap. The smaller, the better. A tight share structure is also a bonus – we want to see <30M shares outstanding. So remember these are just ideas. They are not SCD picks. We’ve done early research on them but nowhere near our full due diligence. Invest at your own risk! For each company we’ll give you some key facts and a list of pros and cons. Then we’ll give you the bottom line on if we are buying or passing and what we’d need to see to invest. The stocks are ordered from cheap to even-cheaper. Enjoy! ** The data in the key facts was taken from our screening software (screener.co). We’ve done our best to fact check the data but can’t guarantee all the figures are accurate.
5) Jemtec (JTC) Key Facts: Ticker: JTC.V Price: $1.24 Market cap: $3.1M Shares outstanding: 2.5M Revenue (Trailing Twelve Months - TTM): $2.1M Net Income (TTM): $400,000 Revenue growth last quarter (year-over-year - y/y): 84.4% P/E (annualized): 4.4 What it does: Jemtec provides offender monitoring solutions to Canadian correction agencies. Using Jemtec’s technology, authorities can track and locate offenders and monitor their compliance with correction programs to make communities safer. Pros: - Revenue stability. JTC sells their technology on a project basis to Canada’s provincial governments in agreements ranging from 1 to 5 years. These contracts add visibility and stability to the business.
- Niche domination. Jemtec has been selling since 1987 and owns this small niche. Having landed projects with many of the big agencies, they are in a strong position to build on that success and keep competition out.
Cons: - Insider control. Jemtec is 40% owned by 2 individuals, one being long-time CEO Eric Caton. Eric takes a high-salary (over $300,000 last year), which tells us his interests may not always be as aligned with shareholders.
- Customer concentration. Since Jemtec sells projects to Canada’s provincial governments, their customer base is limited by definition (13 to be exact). The loss of any customer will have a significant impact on JTC’s financials.
Bottom Line: Jemtec is a decent niche business with a valuation so cheap we can’t ignore it. However, management is a big criteria for us, and we can’t get comfortable investing with this team.
4) Good Life Networks (GOOD) Key Facts: Ticker: GOOD.V Price: $0.20 Market cap: $15.5M Shares outstanding: 77.3M Revenue (Trailing Twelve Months - TTM): $10.0M Net Income (TTM): $350,000 Revenue growth last quarter (year-over-year - y/y): 106.9% P/E (annualized): 3.2 What it does: Good Life Networks operates an advertising exchange that connects publishers (websites) with advertisers (brands). Their secret sauce is a big data platform that intelligently connects advertisers with consumers to drive revenue and boost ROI. Pros: - Network effects. Good Life benefits from the same powerful network effects that built companies like Facebook and Twitter. The more advertisers and publishers they get on the platform, the more valuable it becomes, and the more others will want to join it. On and on it goes.
- Valuation. Ad tech is a sexy business for investors. It’s a growing industry, massively scalable and leverages hot technology like big data and machine learning. For that, these companies usually command high multiples – not the 3X earnings we see here.
Cons: - Limited operating industry. Good Life is new to the public markets having just gone public one year ago. Their ad platform was launched just 2 years ago. We have limited history to gauge sustainability of results.
- Competition. To acquire advertisers, Good Life must win ad budget from some of the largest, most powerful companies in the world – companies like Facebook, Google, and Amazon. With these companies ever increasing their dominance, it could be hard for GOOD to continue growing at these rates.
Bottom Line: With stellar growth numbers and a sexy business model, Good Life sits atop our list of new ideas. We want to let it season another quarter or two as a public company, but we’ll be watching this one very closely.
3) Spectra (SSA) Key Facts: Ticker: SSA.V Price: $0.03 Market cap: $1.8M Shares outstanding: 60.5M Revenue (Trailing Twelve Months - TTM): $2.0M Net Income (TTM): $390,000 Revenue growth last quarter (year-over-year - y/y): 29.4% P/E (annualized): 4.7 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. Sigma’s other key product is Termin-8r. This is an anti-corrosion lubricant that extends truck parts’ life and reliability. Pros: - Untapped market. Spectra has a strong franchise in Canada, but has only begun penetrating a lucrative US market that is 10X the opportunity in Canada. Per the MD&A, sales are accelerating in the US.
- Regulatory tailwinds. Out of adjustment brakes are a BIG risk to drivers and as a result, they are the #1 service violation in North America. Spectra’s products have now become mandatory and as regulators crack down, Spectra’s brake business should continue to grow organically.
Cons: - Dependent on new business. Spectra’s flagship BrakeSafe product is made to last – once you buy it, you’re set. This is great for customers – but means Spectra doesn’t have recurring revenues to count on, and must find new customers to grow.
- Cyclical. The trucking industry is cyclical and tied to overall economic conditions. In a downturn, fleet operators will be less likely to invest in the aftermarket accessories Spectra offers.
Bottom Line: Spectra has a proven business model that is now accelerating into the US market. With a clean balance sheet and valuation in the mid-single digits, we like Spectra.
2) SustainCo (SMS) Key Facts: Ticker: SMS.V Price: $0.19 Market cap: $3.0M Shares outstanding: 15.8M Revenue (Trailing Twelve Months - TTM): $15.0M Net Income (TTM): $9,400 Revenue growth last quarter (year-over-year - y/y): 36.1% P/E (annualized): 3.4 What it does: SustainCo is in the energy efficiency business. Through their subsidiary, VCI controls, they sell building automation controls, HVAC services, and real-time monitoring tools that make their customer’s buildings more efficient. They claim 5-15% savings on average for each building they outfit. The company also operates CleanEnergy, which provides heating and cooling services using geothermal energy (energy from the Earth). Pros: - Business Momentum. SMS’s CleanEnergy business has landed marquee public-sector clients like the University Toronto.These wins have opened up opportunities that per management, “are expected to yield some larger booking in the coming months.”
- Cheap. At .2X trailing revenues and just over 3X annualized earnings, SMS is dirt-cheap. Not much has to go right when you’re buying at a valuation like this.
Cons: - Insider control. We like strong insider ownership – but you can have too much. SMS’s CEO owns 66% of the company. By investing in SustainCo, you are completely at his mercy.
- Industry. Clean energy is a tough industry to invest in. Margins are thin, and new business often lives and dies with tax credits.
Bottom Line: SMS is cheap and undiscovered – perfect for what we do at SCD. But before buying, we need to get more comfortable with industry dynamics and the CEO’s plan for the company.
1) Plaintree Systems (NPT) Key Facts: Ticker: NPT.C Price: $0.17 Market cap: $2.2M Shares outstanding: 12.9M Revenue (Trailing Twelve Months - TTM): $23.5M Net Income (TTM): $2.2M Revenue growth last quarter (year-over-year - y/y): 77.0% P/E (annualized): 0.4 What it does: Plaintree is a diversified industrial operating in two primary markets: aerospace and civil construction. The aerospace division manufactures avionic electronics and high-end super-alloys for aircraft construction. The civil construction business, called Specialty Structures, designs and builds structures like commercial domes, barrel vaults, and space frames. Pros: - Diversification. With most microcaps, you invest in a single product line in a single industry. With Plaintree, you get diversification into 2 industries across 4 business lines.
- Cheap. Every stock on this list is cheap. Plaintree – at first glance – is in a league of its own, trading at 0.4X earnings based on annualized Q3 results. No that’s not a typo, but make sure you read the risks before buying...
Cons: - Dilution. Plaintree is not as cheap as it first appears. That’s because of a $247,000 convertible debenture convertible to common at just over a penny(would triple the current share count) and Series A preferred shares that will cost them $18 million to redeem plus $14.6 million accrued and unpaid dividends. Yikes.
- Debt. Plaintree has virtually no cash and nearly $6 million in debt. Nearly all that debt is owed to insiders who have waived interest payments – but you as a shareholder could be at mercy to what the insiders decide.
Bottom Line: Once you get past the eye-popping cheap valuation, there’s too much hair on this stock for us to get comfortable: insider debt, penny-price convertible debentures, and millions of preferred share liabilities to name a few. The business outlook is optimistic but this one’s a pass for us. Wrap-up So there you have it, 10 completely unknown companies that meet our criteria. We can’t promise all – or even some of these – will be winners. But our experience shows tiny, cash flowing smallcaps is the fastest route to big profits. We will be hard at work over the coming months researching these companies – and we invite you to research alongside us. Let us know, what’s your favorite idea on this list? Together, let’s find the next 10-bagger. To your wealth, Paul & Brandon | 
