Finding Multi-Baggers In Micro-Cap Stocks | The Acquirer's Multiple®

During his recent interview with Tobias, Paul Andreola, Founder and Editor at Small Cap Discoveries discussed Finding Multi-Baggers In Micro-Cap Stocks. Here’s an excerpt from the interview:

Tobias: It happened like more than a decade ago now, but it’s been a long time between drinks with deep value guys. Tell me a little bit about Small Cap Discoveries.

Paul: What we have is, it’s a hybrid between a newsletter and a bit of an investor’s club. What we do is, we’re trying to find those anomalies in the micro-cap, I’d even say nano-cap market. What we probably do is really find these odd little companies based solely in Canada. Right now, all we do is we look for, sort of scrounge around the Canadian public markets and try to find companies that fit the criteria that I started to use over the last 25, 30 years. And finding these, they call them 10-baggers, 100-baggers, whatever you want to call them. Companies that typically go undiscovered for years, and then for whatever reason, something starts to happen, they become discovered and with a little bit of luck, they turn into pretty good investment wins.

Tobias: So, what do you look for?

Paul: A number of things. We use a bit of GARP principle where we’re trying to find growth companies, but really at early, early stages, right at some form of inflection point. One of the key things we look for is companies that are growing at least 25% per year or greater from a revenue basis, on a per share basis, which is important. We’re trying to find these hyper-growth companies that actually have some real fundamentals behind them, profitability, or at least some real visibility to profitability. And we’re trying to find them before the industry or the market finds them.

We’ve got this checklist that we use that we– ideally a company will check off most of the boxes and if it does, we’re fortunate enough to hold on to some of these, then they turn out to be pretty significant winners.

Tobias: What’s on your checklist?

Paul: Well, like I said, revenue growth is the first thing we screen for. [crosstalk]

Tobias: What period of time just before you– over what kind of– [crosstalk]

Paul: The more the better. We’re measuring year over year. If we see a company come out with a quarterly statement that shows that revenues have grown 50% over the same period last year, that starts to get us interested. Over and above that, it’s been doing that for several years, and all the other criteria still fits our list, then that gets us even more excited. A good example, and one that has really worked out for us was a company called Xpel Technologies, which had actually had probably eight or nine quarters of just fantastic growth, and yet the stock had never really gone anywhere. So, we were fortunate enough to capture that early enough and had these back-to-back quarters, and literally turned out to be 100-bagger from where we started buying it.

Tobias: That’s amazing. I think I’ve had a few smaller micro-cap guys. I think Connor Haley also had a position in Xpel. When did you discover that and how did that play out?

Paul: I discovered it when it was roughly about 17 to 20 cents. I think now, the last I looked at it– I’ve since sold it, but– I think it’s trading about $15 or $16. That would have been five years ago. I can’t remember exactly when, but it was early on for sure.

Tobias: Is that a Canadian company? You’re exclusively Canadian?

Paul: Well, exclusively Canadian listed. Xpel actually used to be listed in Canada. There’s a number of companies down the States that’ll come up here in the list because of the structure of the IPO market here. Yeah, so that was one that headquartered in San Antonio, Texas but listed here, had toiled in obscurity up here for years. And it just kept growing its business, and then eventually left the Canadian market and now it’s exclusively trading down in the States.

Tobias: So, they can be US companies and they’re taking advantage of that lower listing standards. Are they’re going on to the Toronto Venture or something like that, or they’re on the main board?

Paul: Yeah, so TSX Venture, yes, the Toronto Stock Exchange venture is a component. I would argue actually that the listing requirements themselves are about as onerous as any in the world. The way the industry is set up here, I think it’s more conducive to funding like very, very early stage companies. And I think that was the big draw for a while. But, yeah, they’re scrutinized the same as any other company. But, yeah, the TSX Venture is, I think, what you’re asking, that’s right.

Tobias: So, the idea is rather than raising venture capital say, you go and you can get [unintelligible [00:06:46] distributed shareholder base by listing in Canada. I’m familiar with that a little bit because it’s a similar process in Australia. I think they can get listed [crosstalk] listed or no, it’s just there’s a less mature maybe venture capital market there, so they tend to list at an earlier stage.

Paul: You’re dead right. That’s exactly it. I’ve actually worked with the TSX Venture Exchange and doing a lot of roadshows to try to entice companies to come up here and list. And that’s just it. An early-stage company has got a couple options, and one is venture capital. I think what’s happening now more with venture capitalists is they are looking for the next unicorn, so it’s less likely to get funding from one of these big VCs. If you don’t meet that benchmark, you’re left to struggle and try to find angel investors. The TSX Venture Exchange is sort of that secondary option. But that being said as well, the venture capital market in Canada up until a few years ago, I would have said is extremely immature, not really able to properly fund a lot of these companies. So, the TSX Venture was really the only option, especially for a Canadian-listed company to get any kind of capital that they really needed.

Tobias: That venture capital money, there’s a lot of fishhooks in it. You’ve got to grow at a really rapid rate to hold on to your equity in those when you take that home.

Paul: Well, that’s true. And the other issue too is, if you have any sort of stumble, that’s when it gets really dangerous where, if you’re publicly listed, you’ve got some capital and it’s typically distributed capital, so there’s not one person or one group that says, “Okay, because you didn’t hit your benchmarks this quarter, you’re ratcheting back.” Exactly. There’s some real viable reasons why it makes a lot of sense for some of these startup companies.

You can find out more about Tobias’ podcast here – The Acquirers Podcast. You can also listen to the podcast on your favorite podcast platforms here:

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