Underwater robotics, surveillance cameras, cryptocurrencies, military protective wear and addiction counselling. Five interesting looking companies that I have added to my watchlist.
I am off to Las Vegas at the end of the month to attend an investing conference on micro-cap investing, so I thought this would be a good time to introduce a few of the names that I am following in this sector.
The micro-cap segment of the market is a fun and exciting place to invest. Generally defined as companies with market caps of less than $300 million in the US or $100 million in Canada, these small-fry have the potential for outsized gains. Of course, they can also come with some pretty substantial risks, so you have to tread carefully.
Over time, the micro-cap segment of the market has rewarded its investors with superior long-term rates of return. Over the past 50 years, since 1968, according to the Center For Research In Security Prices (the CRSP), micro-cap stocks have risen by 7.5% per year over inflation while large cap stocks have risen by only 5.6%. Investors with the stomach for the increased volatility that comes with the micro-cap sector have been rewarded with an extra 2% or so per year in returns.
The biggest risk that investors face in this sector is getting caught up in the hype. There are a lot of “story” stocks in the micro-cap sector. Companies with great dreams and aspirations, often with a compelling idea behind their story, but with very little in the way of actual substance. These are the marijuana, cryptocurrency and lithium exploration companies of the market. Some of these may pay off for their investors but many won’t.
I much prefer to go hunting amongst the companies with real meat on their bones in the form of actual sales, earnings or book value, that I can analyze and hang my value investing hat on. But I am not completely immune to the allure of a good story. As I do my stock reviews, I always take note of some of the emerging business stories that interest me the most. I am looking for companies with an interesting-sounding business that haven’t yet reached that tipping point of profitability that would then lend itself to a more traditional value-oriented analysis. If I think their idea has merit and they seem close to reaching that crucial profitability threshold then I will put them on a watchlist. There is often a narrow window of opportunity just as a young company first starts to generate a significant profit during which the stock still remains relatively undiscovered and you have the chance to buy in to an exciting future growth play at a still reasonable price. Once they’ve got a few quarters of profits under their belt, the rest of the street usually catches on and the share price moves up. You will have missed your chance. So that I am ready when and if that window of opportunity presents itself, I’ll add some of these potential future players to my watchlist and follow along as their story develops.
Here then are 5 interesting looking micro-caps that are on my radar. None of them has earned a significant profit yet, but all of them I think have an interesting story to tell and I will be watching them to see if any of them graduate to the bigger leagues.
Kraken Robotics – (PNG – $0.165)
This company makes underwater robots (and the sensors that let the robots see what they’re doing down there). How cool is that? Their robots have been used to find old Avro Arrow test models that were fired over Lake Ontario in the 1950’s. They’re also used in “military, commercial and ocean research” activities. The oil and gas industry uses them in their offshore drilling activities. They can be used for environmental monitoring, underwater mapping, marine archeology and whatnot. They recently announced the successful development of a detailed seafloor mapping application which has been integrated and tested aboard a US Navy ship for detecting underwater mines.
The company says that the global autonomous underwater vehicle market (which sounds more sophisticated than “underwater robots”) is growing rapidly and is expected to grow from $310 million in 2016 to $1.2 billion by 2023. I always groan whenever I hear companies report on the projected growth rates of their industry. It often means they don’t have much growth to show themselves. But it adds to the story.
Until now, this industry growth they talk about hasn’t really been evident in their own results. Sales in the last 12 months have been around $2.1 million. This compares to $2.3 million in 2016 and $1.9 million in 2015. Not exactly a blistering rate of growth. However, maybe things are changing. The first half of 2017 started out quite weak but in their recently completed third quarter, they reported a number of new business wins and put up sales of $1.6 million. They say that new products and business development efforts are starting to pay off. They have signed $7 million in new orders this year which is more than 3 times their total revenue in 2016 and they expect this momentum to continue into 2018.
With a current market cap of $16 million, they have a-ways to go to develop enough in the way of sales and actual profits to justify their share price, but if they can build on the momentum they displayed in their most recent quarter and the spate of new products and technologies they are working on, they could conceivably hit the mark.
BLVD Centers Corporation – (CXV – $0.07)
This company operates a number of addiction treatment centers in the US. Their centers involve both a residential component as well as an outpatient clinic. They currently have 7 of these centers operating and have aspirations to roll-up this fragmented industry by offering their head office expertise and practice guidelines and procedures to other local clinics in return for a cut of their revenues. Previously they were handling a lot of the marketing and day to day operation of their clinics from their head office but this was expensive and time consuming. About a year ago they transitioned to a new business model whereby they devolve a lot more of the day to day decision making to local clinic management. They hope to incentivize the clinic managers to operate more as partners instead of employees. So far, this new model seems to have met with some success and overhead costs have come down while losses have been reduced.
On a GAAP basis, they have been close to the break even point over the last 3 quarters. After changing their business model, they are back in cautious growth mode, significantly expanding one of their Los Angeles centers. Their balance sheet looks strong with no net debt and they have annual sales of $35 million. When judged against their current market cap of $18 million, this starts to look intriguing.
Recently they have gotten swept up in the marijuana craze and have plans to extend their operations to include marijuana “lifestyle management”. While I have been heaping disparagement on the marijuana sector in general, this doesn’t sound like a completely bad idea. With the recent regulatory changes, there is sure to be a growing base of regular marijuana users and some of these may experience unpleasant side effects from their regular use of the product. This company’s plan is to offer high quality strains of weed which do not carry the same level of side effects, as well as natural products that seek to alleviate some of these side effects. Whether this new business will be a positive or a money pit remains to be seen.
Overall, this story remains very much unproven. I would like to see growing profitability and new clinics being signed on to their system as evidence that they have a saleable offering. Perhaps the marijuana venture will bear fruit. I am skeptical, but I love to play a hot, new trend by getting in through the backdoor. If I can find a company like this that perhaps might offer good value on the basis of its non-marijuana operations, then I get the potential of the pot business thrown in as a free plus.
Cuba Ventures – (CUV – $0.145)
This company has historically been involved in the travel business in Cuba. They operate a portfolio of 432 websites aimed at the tourist trade, which together generate over 35 million page-views per year. They drive this online traffic to their main booking platform where customers can book hotels, private residences, car rentals and tours. They have benefited as travel restrictions on Americans visiting the country have slowly started to ease and as Europeans, Canadians and others flock to the country in increasing numbers hoping to beat the impending rush of American tourists.
Unfortunately, while this sounds very good on paper, it didn’t seem to translate into much in the way of sales or earnings for the company. In fiscal 2017, they recorded sales of $2.6 million and they lost $1.3 million on that amount of revenue. As a result, the stock price languished, reaching a low of 2.5 cents last summer.
However, the CEO does not appear to be content with sitting back and collecting his somewhat meagre online booking revenue. He has been wheeling and dealing and is trying hard to broaden the scope of this online travel company. In the summer of 2017, he announced a deal with a wealthy investor whereby the investor would front $59 million in seed capital and Cuba Ventures would create a Cuba financing system named CubaFin which would lend this money out to Cuban businesses. The stock price reacted positively to this news, jumping up to the 7 c level. (Subsequently, the company has renamed this initiative RevoluFin and has widened its scope to include worldwide financing of small entrepeneurs, many in the travel industry.)
They followed up this announcement with the announcement in the fall of 2017 that they were jumping on the cryptocurrency bandwagon. They were going to launch a new cryptocoin called Cuba coin that they were hoping could be used for remittances into the country. They have followed through with this plan and have partnered with a European software development company to build and launch their RevoluPay payment app. They have broad ambitions for this platform and plan to roll it out to the Dominican Republic, Cuba and Mexico before pursuing other countries. The app lets you upload your local fiat currency and then converts it into Cuba Ventures’ own cryptocoin. You can then use the app to make remittances, reload cell phones or pay for various travel related services. (At least this is my hazy understanding. I didn’t have the patience to listen to the 2 hour conference call on the subect.)
Caught up in the bitcoin mania, the stock price spiked up to 40 c before slowly settling back down to the 14 c level as the enthusiasm for all things blockchain died down somewhat.
At this level, the company has a market cap of $20 million. Up until recently, the company was inching along with annual revenues of around $2 million and losing money, so this kind of market cap appears unjustified. However, I have been fascinatedly following along with the blizzard of deals and new initiatives that the CEO has been announcing and will be interested to see if anything actually comes of these deals. Will the new financial lending platform be successful? Will anyone actually use the Cuba coins? Will foreign nationals use the new Revolupay app to send money home to relatives or purchase travel services? Will Cuba Ventures be able to grow its legacy online travel business? Stay tuned to find out.
Mission Ready Services – (MRS – $0.225)
With all the sabre rattling going on in the world lately, a company in the defense industry looks potentially attractive. Although, if we all vanish in a puff of nuclear smoke then I suppose it won’t really matter.
Mission Ready is a company that designs and manufactures a line of protective gear for use by the military, first responders and law enforcement. They’ve been limping along with sales of $4 million or so a year but a change in leadership at the top could presage a change in fortune at this company.
In March of 2017, a new CEO took the helm. Apparently, he has previously developed several companies within the tactical armor space and during his 12 year reign at one company, took it from $50 million to $350 million in revenue. Might he be able to perform a similar feat at Mission Ready?
Following close on the heels of this announcement, Major General Peter Fuller was named chairman of the board. General Fuller served over 30 years in the US army, leading organizations with annual budgets exceeding $11 billion. His experience and contacts in the industry could prove very helpful.
A new CFO took over shortly thereafter. Meanwhile, a couple of directors have resigned and the auditor has been changed. What does all of this turmoil at the top represent? Is it a positive sign of change or a sign of hidden trouble? Only time will tell.
In September of 2017, the company inked a large multi-million dollar, 5-year contract to supply their Flex9Armor product to a foreign military (they don’t specify which foreign military that is) and then subsequently announced another deal to supply the Tunisian military with protective gear. Another deal to provide the US military with cold weather gear for evaluation also sounds encouraging.
The CEO has said he expects 2018 to be a year of “unprecedented growth and achievement”. We will see. The big 5 year, multi-million dollar contract has been delayed and the market is anxiously waiting to see how this contract will play out. At a market cap of almost $50 million, this is the most expensive name on this list and that price tag is mostly based on the successful execution of the big multi-million dollar contract. If the contract plays out as expected and with new leadership and a commitment to aggressively growing the business, this could be one worth keeping an eye on.
Gatekeeper Systems – (GSI – $0.11)
Gatekeeper provides high end digital surveillance cameras and monitoring solutions for school buses, transit buses, law enforcement vehicles, wearable applications, transport vehicles, and for the military and coast guard.
Their cameras mount inside a vehicle and record in high definition video and audio everything that goes on inside and outside the vehicle. They currently have 100 000 cameras installed in buses across North America and are actively trying to expand their offerings into the military and law enforcement sectors.
As an example of what they can do, they have developed a system which uses cameras on the side of school buses to record and identify the license plates of drivers that blow past a school bus with its “stop arm” engaged. The system then automatically sends the offending driver a ticket.
They see more opportunities, as cities and counties become aware of the capabilities of this big brother style of video surveillance technology. Creepy as it is, this does seem to be the way our society is headed.
Sales are growing, hitting $10.3 million in the latest 12 month period and the company looks like it could be on the verge of profitability. With a market cap of only $10 million at the current share price, this stock could offer good value if they can boost sales enough to generate a consistent profit.
Full disclosure: I am not currently invested in any of these companies but by the time you read this, I might be.