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There's mega-caps, large-caps, mid-caps, small-caps, and then there's micro-caps, which I classify as publicly traded companies with less than $100 million in market capitalization. Some would argue that up to $100 million is too big for a micro-cap. But that's my definition.
That said, I prefer to play in the small-cap and mid-cap sandbox. Why? Because I can place a greater certainty on those companies' success. They've emerged from their more volatile (and unpredictable) start-up phase, and have entered into their rapid-expansion phase. That's me applying a probabilistic framework. As an investor, you have to stack the odds in your favour. In the book, One Up On Wall Street, Peter Lynch explained "the second phase ["rapid expansion"] is the safest, and also where the most money is made, because the company is growing simply by duplicating its successful formula".
However, this doesn't mean that I completely avoid micro-cap stocks. I own shares in Greenspace Brands (JTR), which has a $80 million market cap, and a couple of others too. Actually, this week I built a new micro-cap watchlist. Check it out at the bottom of this issue. Let me know if we have overlaps. And tell me what I'm missing.
Last week, my newsletter was on Boyd Group Income Fund, which started out as a micro-cap. Now, it's a $1.8 billion mid-cap company and the largest operator of collision repair centres in North America... what an exceptional capital compounder.
This week, I've got a MicroCap DIY Investor Interview for you. When I first started the Capital Compounders Club (sign up!), I promised to post DIY investing stories on our very own members. My philosophy; the more you learn (from others), the more you earn.
So, the first feature is on club member Philippe Bergeron-Bélanger, who’s been a full time investor since August, 2014. Philippe lives in Montreal (I love that city), and also runs a free investment blog called Espace MicroCaps with Mathieu Martin (another club member) where they both share their investment ideas and educational articles about microcap investing.
Philippe’s returns have been great; he says his capital has gone up 8x since 2013. And he’s only 30. Philippe is a compounding machine.
Read on... there’s lots of great info on micro-cap investing, including Philippe’s micro-cap criteria, current holdings, and his favourite non-mainstream book pick (it’s on my reading list now).
MicroCap Investor – Philippe Bergeron-Bélanger
RS: Tell me about yourself and how you got into investing
PB: I have a background in finance and accounting. Out of university, I started to work at Travelers as a surety underwriter. One of my colleague there introduced me to microcaps and my first two investments went up multiple times my invested capital. Needless to say, I was hooked. In August 2014, I decided to quit my job to become a full-time microcap investor. I never looked back.
RS: What is your investing style and who/what influenced you?
PB: Interestingly, I have made some money playing poker while studying at university. It taught me the importance of having sound decision-making processes and the discipline to stick to them. It helped me detach myself emotionally from money, and start thinking in terms of risks, rewards and expected returns. As an investor, our goal should be to maximize potential return “per unit of risk”. Some prefer to minimize downside first, think “margin and safety” and then find the best investment opportunities for that say level of risk. Some prefer to focus on potential return only. I’m more a student of the former than the latter. Influences: Ian Cassel (MicroCapClub) and Paul Andreola (Smallcap Discoveries) had the greatest impact on my investing style.
RS: Tell me about your investing strategy
PB: I run a concentrated portfolio of Canadian microcaps. My goal is to find undervalued and undiscovered equities that have the potential to at least double my money on a 3 years timeframe. In a nutshell, I look for mispriced growth stocks because I can make money in two ways: 1) Expansion of valuation multiple and 2) Growing revenues and EPS.
RS: Walk me through your stock selection process, including criteria
PB: I look for growth businesses that present the following attributes and/or have the potential to show them in a relatively short timeframe: High gross margins and/or high asset turnover, operating leverage (expanding GM% and EBITDAS%), cash flow positive from operations, positive Working Capital, tight capital structure with minimal to no debt, low dilution risk from options and warrants, high insider ownership (ideally a founder-operated business), low institutional ownership, no analyst coverage, low customer concentration risk, some sort of niche competitive advantages and/or intellectual property, etc. I don’t tend to put a lot of weight on past performance as most microcaps are too early stage or have struggled for years before showing glimpses of hope. If they were solid businesses, they wouldn’t be microcaps after all. In other words, I can get comfortable with only a few quarters of sound financial performance if I pay a reasonable-to-cheap price given the growth potential of the company. Note that I don’t invest in resource or financial companies.
RS: How do you control risk?
PB: The best risk-mitigating activity is to do a lot more research than anyone else. You want to get an informational edge on other investors before investing and AFTER. You need to follow your positions closely.
RS: Tell me about your biggest wins and losses
Lite Access Technologies Inc. (LTE.v) – in at 0.25$, still holding
Pioneering Technology Corp (PTE.v) – in at 0.125$, still holding
Biosyent Inc. (RX.v) – in at 1.50$ and sold at 9.50$ in 15 months
Ackroo Inc. (AKR.v) – in at an average cost of 0.085$, still holding
MicrobixBiosystems Inc. – in at 0.40$ and sold at 0.22$
RS: What are the current holdings in your portfolio?
Imaflex Inc. (IFX.v)
Lite Access Technologies Inc. (LTE.v)
Ackroo Inc. (AKR.v)
Pioneering Technology Corp (PTE.v)
Namsys Inc. (CTZ.v)
ImmunoPrecise Antibodies Ltd (IPA.v)
Siyata Mobile Inc. (SIM.v)
Aurora Solar Technologies Inc. (ACU.v)
CovalonTechnologies Ltd. (COV.v)
GatekeeperSystems Inc. (GSI.v)
RenoWorksSoftware Inc. (RW.v)
RS: What's your performance?
PB: My TFSA is a good indicator of my past performance. I’ve been investing for 4 years now and my capital has gone up 8x.
RS: Do you have any final advice for readers?
1) Companies that are dominating a niche tend to do better than those chasing large opportunities. They run a profitable business in their niche and can reinvest profits to expand their TAM.
2) Turn off the noise, stop listening to mainstream media and focus on finding companies that should do well in any macro environment. Remember that the price you pay is your margin of safety.
3) Don’t use leverage. If it’s not good for the companies you invest in, it shouldn’t be good for you either.
RS: What's a great investing book you’ve read that isn’t mainstream?
PB: Insider Buy Superstocks: The Super Laws of How I Turned $46K into $6.8 Million (14,972%) in 28 Months by Jesse Stine
RS: How can readers continue to follow you?
PB: I run a free investment blog called Espace MicroCaps with Mathieu Martin where we share our top investment ideas and educational articles about microcap investing. We also organize networking events at Bier Markt Montreal with speakers and companies in the space. Our message board has over 300 members and is the only French one in North America with a focus on microcaps.
My MicroCap Watchlist (Canadian stocks only, <= $100 million market caps)
DMD Digital Health Connections
Network Media Group
Diamond Estates Wines & Spirits
Vigil Health Solutions
Titanium Transportation Group
Reko International Group
Hammond Power Solutions
Quorum Information Technologies
Hammond Manufacturing Company
GreenPower Motor Company
CVR Medical Corp
Correction Note: in my previous newsletter, it should have read "...37.2% average annual return since inception".
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Happy Investing, Regards,
– Robin Speziale
(If you want to chat, email me at firstname.lastname@example.org)
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Robin Speziale is the National Bestselling Author of Market Masters. He lives in Toronto, Canada. Get a copy of his latest book, Capital Compounders. Click Here.
Disclaimer: Robin Speziale is not a registered advisor. This newsletter does not contain financial advice or stock recommendations. Please conduct your own research and consult a professional.