Two noteworthy things happened this week, one of them impactful to our portfolio, the other a testament to the times we live in. On March 1st, Pioneering issued Q1 financials after hours, and the results were unfortunately weaker than we might have hoped. Before the full digestion of these results could happen, we became aware that March 2nd was the birthday of Theodor Geisel, better known as Dr. Seuss. While this news usually doesn’t make major headlines, what did make headlines is the fact that cancel culture had finally found Dr. Seuss, and he too was made to pay the price. While this post won’t dwell on this fact, we thought that in honor of the Doc, we would go through the Pioneering results in “Seussian” fashion. It will be a shorter read, but we have no doubt it will be clear to even the youngest investor out there. Using our format of green, amber and red, we will reveal whether Pioneering is still living….or dead.
The chart may yet go lower still!
Which would seem to be a bitter pill.
If one is long on shares already,
Then perhaps it’s time that one holds steady.
For those who seek to join the fray,
Cheaper prices may be on the way.
While all of that may sound intense,
We don’t believe we’ll see 3 cents.
The balance sheet is somewhat worse.
As lingering COVID exerts its curse.
Without strong sales, cash has burned,
As the economy slowly turns.
We see that inventory has been growing,
The seeds of future sales it’s sowing.
So while the balance sheet is not a total fright,
It is a somewhat “uglier” sight.
The key here is that without debt,
Remaining cash will sustain them yet.
The income statement is plain ugly.
Or as the kids say, “that is fugly“.
With sales in a precipitous drop,
The bleeding has of yet to stop.
Not only tariffs have caused some pain,
But increased marketing, not spent in vain.
While this quarter looks like hell,
We still believe that safety sells.
While rental rates won’t go higher,
Those landlords still hate kitchen fires.
Cash flow has a similar fate.
As without earnings, it must deflate.
Within this statement, there’s only one good read,
The fact that cash is bleeding….at a slightly lesser speed.
If sales don’t take a higher turn,
There’s precious little cash to burn.
Be that said, if sales grind higher,
Then the future won’t look quite so dire.
But, rather than prognosticate,
We will all just have to wait.
Since Q4, there’s been little change.
But nonetheless, some things are strange.
One day last month, I fell off my chair:
Pioneering traded 7 MiIlion shares!
Such volume was beyond the norm,
And suggested some sort of earnings storm.
Alas, it seems, it was not to be,
And the shares have settled down, quite evenly.
Aside from that, there’s not much to say,
Insiders still hold, and have not gone away.
Tariffs are still a nagging hurdle,
And sales that move like an unhurried turtle.
We hold still, as we think,
This ship is not on course to sink.
With that in mind, we should impart
This ride is not for the faint of heart.
With all small caps, there is the chance
You could lose your shirt,
And perhaps your pants.
As always, as we like to say, if you have comments, fire away!
We hope this read has struck a spark, and if so – just email Mark.
On January 28th, 2021, Armada released their Q2 financials. While earnings and cash flow were positive, the numbers definitely weren’t as strong as Q1. That being said, while Q2 results didn’t replicate Q1, Armada is still a micro-cap with potential. We still hold a fairly large position in Armada, and with that in mind, we walk through their Q2 number using our usual bullish, neutral, andbearish format.
The chart is still showing strength. On an overall basis, Armada shares continue to exhibit strength. Volume in and around the Q2 release was particularly strong, with Armada trading approximately 785,000 shares from January 28th to the end of February 1st, 2021. To put this into context, for the entire 2020 fiscal year (June 01 2019 – May 31 2020), Armada traded approximately 2.5 MM shares. In essence, about 30% of the total volume of fiscal 2020 changed hands in the three days around the Q2 release. While most of the market is still relatively unaware of Armada, someone was interested, and voted with their wallet(s) leading up to the Q2 release.
The balance sheet remains solid.The beauty of small companies is that the financial statements usually aren’t trying to throw any curveballs, which is true for Armada. The balance sheet has hardly changed when comparing Q2 vs Q1. Cash is up on a quarterly basis, and current assets are down by an immaterial amount. When adjusted for intangibles, total assets are up by ~ $140K when compared to Q1, and on the liability side, total liabilities are up on a quarterly basis by ~ $126K, all of which is a function of changes in lease liabilities. Other than that, the balance sheet has hardly moved, and on a YoY basis, there are no concerns. The company still has a very strong current ratio, and total liabilities are small when one considers they could almost be fully paid out by cash on hand.
Revenues and earnings are flat.While we were hoping for a repeat of Q1, it was not to be. Revenues and earnings were down on a quarterly basis, but both EBITDA and net earnings are improved when viewed on a YoY basis. It should be noted that these numbers are still reflective of a Canadian economy that is still in the midst of dealing with COVID induced lockdowns, so one might argue that these numbers are surprisingly strong. In any case, while the income statement doesn’t present any red flags, it is arguably neutral at this point. Given the very strong Q1 showing, Armada still has the remainder of the year left, and if even one of those quarters comes close to a repeat of Q1, it will significantly impact the full year results of Armada.
Cash flow is still solid, although not as strong as Q1.For whatever reason, it seems that the Armada cash flow statement requires a bit more detective work, as the value labelled as “Cash provided (used in) by operating activities” is actually the total change in cash flows due to working capital changes. The correct (after working capital changes) cash flow is shown below, and for both the 3 month and 6 month period, cash flow is solid at $0.01/share for 3 months and $0.02/share for 6 months. This suggests that full year cash flow could be somewhere between $0.02/share (if the remainder of the year is horrible) and $0.04/share, if Armada can produce similar 6 month results. Either way, this works out to a current cash flow yield of somewhere between 13% and 27%, using the current price of $0.15. Given that the Armada business model isn’t particularly capital intensive, this means the cash balance just keeps growing, which is fine by us.
Insiders continue to hold, and some have purchased.Insider holdings are essentially unchanged since our December 2020 post, with the three largest insiders (Matthews, Timoteo, and Oszlak) holding approximately 11.7 MM shares in aggregate. Additionally, as of early February, one insider (Rob Montemarano) made a relatively small purchase of ~ 30,000 shares at $0.135.
While insider holdings don’t occupy the same amount of “page space” in our discussions, they are key, in that significant insider ownership means that management has skin in the game. In turn, if they have skin in the game, they are less likely to engage in poor decision making – which is an excellent segue to perhaps the most pressing question: what is the deal with the dividend ?
Armada has instituted an annual dividend.The skeptics who are reading this are saying “that heading should be amber, or perhaps even red“, and the optimists are saying “that heading is just right”. As with all things, it’s always good to have an independent opinion. We think that the dividend policy is a positive development for Armada, and will walk through the reasons why.
First off, let’s unpack the language of the press release as it relates to the dividend:
An investor reading this hears two messages, specifically that “…Armada plans on upholding this annual dividend…”, and then “…..investors are cautioned that the declaration and payment of dividends is at the discretion of the board of directors of the company and any future declaration of dividends will depend on the company’s financial results…”
These two messages seem to run counter to one another, but the truth is that this language isn’t contradicting itself. The first part is very positive, as the explicit mention of “upholding this annual dividend” is there with purpose. If the intent was to pay a one time special dividend, the company would have stated that – very clearly. Additionally, the last part of the message (which seems to cast doubt) also sounds more ominous than it is. This language is typical, and the financial world is full of it. If you need confirmation thereof, just look at any quarterly press release by a dividend stalwart such as BCE. On any quarterly press release, a company such as BCE will likely have a full page of “Material risks”, the point of which is to communicate that (a) the future is uncertain, and (b) if the future is uncertain, dividends might also be uncertain. This is not to say that BCE is a “bad” company, but simply to demonstrate that statements such as this are everywhere. If an investor were to take each one of these as a statement of “material risk”, nobody would invest – ever.
The second thing about the dividend announcement is the fact that Armada has both been creating cash flow and is sitting on cash. With $669K in cash, the company could pay the dividend ($176K), pay off all current liabilities ($477K) and still have $16K of cash left over – even if not another dime of cash flowed in during the next 6 months. Folks, there isn’t a liquidity crisis here.
The last thing that gives us comfort is the fact that insiders own so much of the company, and not options, actual common shares. With 17.67 MM shares outstanding, insiders own 11.7 MM shares, or about 66%. Put yourself in their shoes and pretend that you and your partners own the majority stake in a company, which appears to be doing better. Would you suddenly embark on a wild decision making spree without sitting down and discussing business prospects at length ? While this isn’t impossible, most companies are not in the practice of shooting themselves in the foot, particularly if the insiders own so much and have been working with the company for so long.
Despite the dividend announcement, Armada remains relatively unknown.While there was a flurry of trading in the few days preceding the Q2 press release, recent volumes suggest that the broader market is still oblivious of the Armada story. We would be very surprised if any analyst types are following Armada, and we would suggest that the company remains too small for institutions, as they would regard it as “too risky” due to its size. What this means is that the price may yet flirt with prices at the lower bounds ($0.12 – $0.13), which may yet provide a “cheaper” entry for interested small investors.
While the price has moved up considerably from former lows, we believe Armada still has room to move upwards.It’s true that the “cheap prices” may be gone, but financial metrics still point to opportunity. Using Q2 numbers as a proxy for “go forward” results, the numbers suggest the following:
Book value: The average book value multiple for Armada (2010 – 2020) has been 3x, and this should be viewed in the context of a company that may not have been as focused as it is today. Currently, at todays price ($0.15), Armada is trading at ~ 2.9x book value, so it’s no longer trading below historic lows. With that in mind, given that Armada is not a “hard asset ” company, we would defer to other valuation metrics rather than using book value in isolation.
PE multiple:Armada has already earned $233K up to Q2. If it can get another $120K under its belt over the next two quarters, it will earn a total of (approximately) $353K for the full year, or $0.02/share. A goal of $120K over the next 6 months isn’t really that lofty, so we are suggesting this should be attainable. If Armada does indeed manage to achieve this target, it would be trading at 7.5x earnings, well under the 10x-11x market average.
EV/EBITDA multiple:If one uses the same assumption that Armada can earn another $120K in the next 6 months, it suggests that total EBITDA for the year could land around $425K, given that Armada has already earned $270K of EBITDA up to Q2. Since Armada is sitting on a relatively large pile of cash ($669K), their EV today is just under $2.0 MM, suggesting an EV/EBITDA multiple of 4.7x. Traditionally, the typical EV/EBITDA multiple for Armada has ranged from a low of 1.95x to a high of 9.6x, with the average falling around 6x, meaning that Armada still falls under its historical EV/EBITDA multiple.
Cash flow yield:As mentioned previously, we expect that Armada should be able to create between $0.02/share and $0.04/share of cash flow for the full year. Based on the current price of $0.15, this implies a still healthy cash flow yield between 13% and 26%.
The price of Armada is higher, but is well off it’s 52 week high. In early January, Armada got as high as $0.20, so there is still upside. For any investors contemplating a purchase of Armada, we would keep the following in mind:
Trading has still been choppy: While there was a flurry of activity around the Q2 press release, recent trading has been at lower volumes. We would not make large purchases (or sales) “at market”, as these have the potential to significantly move the price.
The price will likely weaken after the dividend record date: We would not be surprised to see selling after April 30th 2021, as some investors will seek to crystallize any gains, and will already have qualified for the dividend.
The dividend does not pose a risk to solvency: As mentioned previously, unless an unforeseen catastrophe occurs, the implementation of the dividend does not imply solvency risk.
The book launch may yet result in increased revenues: We addressed the impact of the Armada e-book in our prior post, and given the very small amount of shares outstanding, incremental revenues from the book could provide a significant boost.
The dividend is a vote of confidence by management: Generally, companies initiate dividends when they are confident about the future. As stated previously, given the very large insider holdings, we find it unlikely that Armada would make a decision like this unless they have put significant thought into it.
We are long on Armada, with an average purchase price of ~ $0.115 CAD, and will continue to purchase at opportunistic prices. Readers with questions or comments can direct them to mark@grey-swan.com.
Pioneering issued full year financials after hours on January 28th 2021, and the results were entirely dependent on one’s frame of reference. If one were to compare full year results to fiscal 2019, they were astronomically better. If one were to compare them to Q1 or Q2 of this year, they were much worse. As the saying goes – is the glass half full or half empty ? Or in the case of Pioneering, is the share price, like an unattended stove, going to ignite or not ? Whatever the case, we are still attending to the proverbial “Pioneering stove”, as we are still long on the company, and with that being the case, we dissect the latest results using our usual green, amber, and red format for those areas we consider bullish,neutral, and bearish.
Still scraping the bottom… Again, the chart is a questions of one’s perspective. If you have been looking to acquire Pioneering – cheaply – then this is the time. Unless there is more catastrophic news waiting in the wings, it is unlikely the shares will get much cheaper. Based on trading (post earnings), it would seem that the overall market expected “so-so” results, as no wave of sales (or purchases) have overwhelmed the price. So, for those looking for some “GameStop” action, it’s not to be found here. On the other hand, for those that are already long, the share price is a bit disappointing, as “long folks” were probably hoping for some post earnings uplift. In any case, if you are looking to accumulate cheaply, now is probably the time. If you have already done so, repeat the mantra, “patience is a virtue”…
The balance sheet remains a place of refuge.The good news is that the balance sheet remains a relatively safe haven. While it’s slightly worse than it was at Q3, the balance sheet remains solid with $0.16/share in total assets, of which $0.12 are current assets. These values are virtually unchanged when compared to Q3, and the only significant movement in the balance sheet (from Q3) is on the liability side, as short term liabilities (primarily payables) rose by approximately $500K, effectively reducing tangible book value by about $0.01/share, from $0.105/share to $0.093/share. Viewed over the span of the entire year, the most significant balance sheet changes are in payables (up ~ $700K) and the inclusion of lease liabilities ($1.6 MM) due to the lease accounting changes related to IFRS16.
Perhaps the key takeaway from the balance sheet is that the cash balance, while lower, still provides flexibility in the event that sales do not pick up as anticipated. Over the course of fiscal 2020, Pioneering managed their expenses to such a degree that they only burned $422K of cash (before changes in working capital) over the entire year, and if one includes changes in working capital, they were cash flow positive. With $2.1 MM in the bank as of year end, this suggests that even in this very challenging environment, Pioneering can still manage for the foreseeable future. Conceivably, if the company continued to burn through cash at the same rate, they could theoretically continue operating “on a shoestring” for almost 5 years.
The income statement – a story of relative improvement.The way in which one views the income statement is likely a function of expectation. Without a doubt, performance has improved YoY, but it is a roller coaster – revenues are up $2.59 MM, up a solid +66%, but COGS (partly due to tariffs) are up $2.16 MM, +126%…but then other cash expenses (excluding amortization & FX) are down $1.39 MM, or -30%. Overall, total controllable expenses are down, and the overall operating loss is considerably smaller than that of 2019. Perhaps the single biggest takeaway from the income statement is the following statement, which is made on page 8 of the MD&A:
If one adjusts for this impact, then Pioneering would actually have performed reasonably well, given the uncontrollable impact of COVID on sales. Adjusted for tariffs, GM% improves from 41% to a much more robust (and historically consistent) 49%, and EBITDA would have improved from -$535K to a much smaller -$18K. Clearly, if Pioneering can make any headway on the tariff issue, it has the potential to significantly improve future results. In the meantime, 2020 results are all a function of perspective – they are significantly better YoY, but are unfortunately still underwater.
Cash flow is similar –both better and worse. Like the income statement, cash flow is better when viewed YoY. In fiscal 2019, Pioneering was hemorrhaging cash, and there were no safe havens – if one looked at cash flow before or after changes in working capital, cash from investing, or cash from financing – everything was either negative, or at best, flat. In fiscal 2020, in an environment when Pioneering had to deal with the double whammy of COVID and tariffs, they managed to be cash flow positive over the course of a very difficult year. Some cynics might say that these numbers are better because of a significant CEWS (Canada Emergency Wage Subsidy) offset, and while there was some of this in fiscal 2020 (approximately $175K), this amount does not change the overall story. So, the bad news is that cash flow is much lower than it was when compared to Q3, but on an overall basis, $226K of positive cash flow for the entire year is still an achievement. The fact that the company managed to have positive cash flow at all cannot be ignored, and is proof of the fact that they have managed reasonably well during a very difficult time.
There has been no insider selling. Share purchases and sales by insiders are thought to be a hint of what’s to come. In this case, the statement seems to be “we haven’t left yet, and we aren’t leaving now”. The company enjoys significant insider ownership, with over 25% of the total shares owned by Sr. management or Directors. As identified by those appearing on Pioneering’s website, the three largest internal shareholders are:
David Dueck (Director) – owns 8.74 MM shares (16%).
Kevin Callahan (CEO & Director) – owns 2.59 MM shares (4.6%)
Richard Adair (Director) – Owns 1.57 MM shares (2.8%).
So, despite some very challenging years, insiders have continued to stubbornly hold, despite the headwinds of staff issues (termination of Laird Comber), tariffs, and COVID.
Analysts have long since left this party.For someone looking to exit their position in Pioneering, this is a negative, and for those who believe there are better days ahead, this is a weak positive. To be sure, the price of Pioneering isn’t enjoying any “talking up”, so a buyer today knows they aren’t buying into an inflated price. Since we are long on Pioneering, we obviously have an interest in the shares moving higher – someday. In the meantime, we take comfort in the fact that unless there is some more truly ugly news out there, the shares won’t fall from their ” precipitous highs” any time soon.
There’s been a change in Senior Management.Included in the January 28th press release was news that Pioneering’s President, Dan MacDonald, had left the company. On the surface, this sounds negative. However, the truth is, announcements like this are almost always ambiguous, and are hard to ultimately decipher unless there are other obvious issues at hand. At the end of the day, any member of a company has a life outside of their “company duties”, and likely a family and everything else that goes on with that. It is quite possible that Mr. Macdonald may have an offer on the table from a totally different company that is hard to pass up – or he may be leaving because he simply wants to slow down a bit, and is tired of the “grind”. Given that he has ownership of approximately 405K shares, it would have been much more negative if he would have dumped these shares and then resigned. So, while it is true that there is a management gap for the foreseeable future, this news can ultimately go either way. Without better information in hand, we believe it is neutral at this point.
At the end of the day, Pioneering still has potential – but is has been a long road. At this point, we would argue that only the hardiest of retail investors are still holding Pioneering, or are contemplating a purchase. Since its peak in both share price and financial results in 2017, the company has endured three brutal years that have caused any holders to question their resolve. However, if you are still reading this, you likely have some sort of interest in Pioneering, so here’s what we would say to a holder of PTE shares at this point:
Despite their ugliness, these numbers are an improvement: As dismal as these full year numbers look, they are an improvement over 2018 and 2019. As hard as it is to believe, despite a significant increase in COGS, Pioneering had better net income and cash flow for fiscal 2020 than it did in fiscal 2018 and 2019.
Their cash balance should tide them over: Given how Pioneering has reigned in costs, even their reduced cash balance of $2.1 MM is enough to keep them going for the next few years – bankruptcy isn’t lurking around the corner.
They have hit $10 MM in revenue before: In 2017, Pioneering had revenues of over $10 MM, and up to Q2 of fiscal 2020, it appeared that Pioneering could replicate that number, with quarterly revenue growth of 13% (Q2 vs Q1) and YTD sales of $4.7 MM. The point is that if Pioneering can keep their “non-COGS” costs in line, they can be profitable even with the impact of tariffs. To be sure, they will not be as profitable, but they won’t be bleeding cash.
Any tariff change will be huge: If Pioneering makes any headway on the tariff issue, it will be a huge tailwind for the company.
At the current price, PTE is a value play: What was once a growth story has now been loitering in the waiting room of small cap value for some time. At the current price, Pioneering is a debt free small cap with almost $.04 of cash on the balance sheet that is trading at less than tangible book value.
Dilution risk is unlikely: Given their low cash burn, it is probably unlikely that the company would risk dilution at such a low price.
A backlog of orders would not be a total surprise: Companies in both the US and Canada have been on “pause” for some time now, but slowly, business will have to come back to something resembling normal. If lockdowns continue, this simply means….more people cooking at home, and more fires will happen. If lockdowns are lifted, it means that companies who previously parked their orders will probably move ahead with them. The first scenario raises awareness and potentially future sales, the 2nd scenario brings back sales that were already contemplated earlier.
We are still long on Pioneering, and may add at these levels. Questions or comments can be sent to mark@grey-swan.com.
With the recent frenzied trading in Gamestop (and a few other names), it’s hard not to be sucked into the endless vortex of discussion – will the Reddit mob prevail, will Gamestop continue its dizzying climb, and will yet another Wall Street firm endure heavy losses ? While we don’t have a crystal ball, we do know that at some point, the short sellers will have closed their positions, and after that, the only buyers left will be the Reddit mob. Eventually, someone who bought at $100, or $200, or whatever the price, will decide that they actually don’t want to lose that money, or that they actually want to make some money – and the selling will begin. As the saying goes, “this isn’t my first rodeo”, and we have seen this play out before in different forms, such as Bre-x, the Tech bubble, Enron, and the housing bubble. They are all different, but they are all the same in the end, and we lived through them all to fight (and invest) another day.
While we can’t offer up the entertainment of the Gamestop story, we can offer up something that has lottery like appeal, but whose payoff is much more…reasonable.
We are always looking to broaden our reader base, and in doing so, we offer up our own version of a “lottery”. The rules are simple:
Step 1 – Sit down and think of all of those folks that you know. Some of them may like doing their own investing, or may like reading about it. For those that you think might be interested, compile a list of at least 5 email addresses.
Step 2 – Send out an email to them, either as a group or singularly – it’s totally up to you. Explain to them that you have started following Grey-swan.com, and that you think they might like the content. Send them a link to the website, and tell them that if they are interested, they too can sign up.
Step 3 – Once you have sent your email(s) to your friends & associates, send one email to mark@grey-swan.com that lists the entire group of email addresses (at least 5, but as many as you like) that you have sent your message(s) to. The subject line should say “contest”, and in the body of the email, include a list of those folks that you sent your email to. It should look like this:
By sending the email in this format, it is easy to compile a list of “who referred who”. If you wish to include further correspondence, such as a comment about an article, please do so under the email addresses.
Step 4 – If you decide that you have more people that might be interested (a minimum of 5), feel free to repeat with a new list.
Step 5 – If you are not a follower already, make sure you are. In order to send out your prize, we need to be able contact you.
Step 6 – At the end of the month of February 2021 (11:59 PM on February 28th, MST), the person whose efforts have resulted in the greatest number of new followers wins the following prize:
You will notice that this prize, while it won’t move the heavens and the earth, is actually two prizes – the book, and the bookmark. It may not look like much, but that bookmark does have value, and those with a keen eye will recognize it for what it is. Also, unlike the one shown, it will come in its own new, shiny unopened packaging. However, the book is probably more valuable than the bookmark, as it will provide you with some of the tools to (hopefully) make much more money in the future.
That’s it. Hopefully, this will lighten up these dreary winter days, and at the end of the month, Gamestop will probably be worth a lot less – but you might have won something that will provide “dividends” for the long run!
As always, questions or comments can be sent to mark@grey-swan.com.
It should be noted that because this update is occurring “off cycle”, we will not be delving into the typical analysis of the balance sheet, income statement, or cash flow statement. This article deals specifically with the Armada press release of January 20th, 2021. Armada should be issuing Q2 financials later this week or in early February, so we will engage in a more fulsome analysis of results at that time. For those that are interested, our initial review of Armada can be found here.
On January 20th, 2021, Armada issued a press release, in which the company announced that Armada had just released an e-book, aptly entitled “The Road to the Deal”. The intent of the book, as per the press release is to “….take away the fear and anxiety associated with buying a new car or truck. Along the way, we (Armada) discovered that removing the ‘mystery’ from the process benefits both buyers AND sellers, in that more vehicles are sold and long-term relationships are established.”
When I read this press release, I initially thought this was just another self-congratulatory press release that is typical in the small cap market. As I have mentioned in other articles, press releases are sometimes used in lieu of “real results”, and much of the time, they simply stoke investor imagination – and share price. But later that same day, I thought about it a bit more, and decided I was wrong. The share price was actually lower (after the press release) than it was earlier this month, and the more I thought about it, the more I came to the conclusion that this press release is worth talking about. Bear with me as I walk through the reasons why….
Armada is actually engaged with their shareholders. In one of our recent posts, I highlighted one of the reasons why I continue to invest in the volatile small and microcap sector. In “10 reasons why I bother…”, number 3 on the list was the fact that small and microcap CEOs will actually return your calls and emails. Keep in mind, not every company is the same, and some smaller companies could care less, but generally speaking, they are more likely to do so. When I read the Armada press release, it raised some questions – so I asked. The fact that I got a response wasn’t what was interesting, it was the speed at which it occurred. I received a full response to all my questions in less than 24 hours, and a clear indication that if there were more questions, the door was open. A willingness to clearly (and quickly) share information with shareholders in an “unfiltered” channel like a direct call or an email is a big deal. It is much easier for a company to issue a press release (or a promotional shareholder piece) and never take direct questions – it is much harder to be there at the behest of a shareholder and answer questions quickly and directly.
Armada is already in business – they aren’t talking about “having one”. This might sound painfully obvious, but it is relevant. So many of the press releases that come from small cap companies talk about the future – what they plan to do, and how much money they will make, if everything goes as planned. Or, even more breathlessly, the fact that the company has signed a non-binding expression of interest about one of the products that is in development. You may notice that paragraph has a lot of italics in it, because we are trying to highlight the ethereal quality of these statements. I think that last one is my favorite, as a non-binding expression of interest is analogous to someone looking at your car parked outside. When you go and talk to him or her, they say “Hey, I like your car, and I’d like to sign a document that says that maybe I’d like to buy your car – but just maybe”. If that happened, you might tell your neighbor, but you certainly wouldn’t get too excited. So, what we are trying to highlight here is the fact that Armada is talking about their core business, which is already generating real revenue and real cash flow. This press release is talking about something “real”, and is not contingent on a slew of variables turning out “just right”.
Armada has created a new, low cost revenue stream out of thin air. There have always been print books on this topic, and there are many websites which address new car buying, so Armada hasn’t exactly created something brand new. That being said, the point is not to dominate e-book sales in this category, but to inject oneself into that space. Tim Hortons sells coffee, Starbucks sells coffee, and Second Cup sells coffee – they all sell the same thing. However, all of these companies also realized that some people want a latte or small espresso. Armada was already in the “regular coffee” business with their CarCostCanada member service – but some people didn’t want a “regular coffee” for the price of the membership. With the e-book, they are also selling their version of an “espresso”, an area in which previously they were getting zero revenue from.
People will always find the purchase of a new car stressful. Next to buying a house, buying a new car is perhaps the 2nd most expensive purchase a person can make. For most people, this is stressful, which is validated by 3rd party articles that say the same. The e-book addresses this, and will make it more probable that someone will take the “new car plunge”. You have to remember, Armada doesn’t care who you buy the car from, they are simply interested in the fact that you want to buy a new car. This is similar to the “picks and shovels concept” that was so prevalent in gold rush towns. The miners were all looking for the motherlode, but the shopkeepers were in the middle, selling the supplies to help the miners in their quest. Consumers are looking for the “best deal”, and Armada is like those shopkeepers, extracting a slice of value in the process.
A small amount of e-book sales is material. So, you are probably agreeing that the purchase of a new car is stressful, but not everyone is going to run out to buy this book – and I totally agree. But here’s the rub – not everybody has to buy the book. According to StatsCan, about 1.44 MM new cars were purchased in Canada last year – and that was a slow year, due to COVID. Let us assume that a very small fraction of people, just 1%, decide that an e-book would help them in their purchase of a new vehicle. Additionally, let’s assume that 30% of the $29.95 cost of the book is lost to the online channel, such as Amazon or Apple books. The simple math says this:
1,440,000 new car purchases x 1% x $29.95 book price x 70% = $301,896
That last number looks small, but the thing is, Armada is a small company, with a small number of shares outstanding (17.67 MM), which also hasn’t diluted the shareholder base to death. This means that this “small” $301,896 equates to incremental EBITDA of $0.017/share – not bad, given that 99% of the potential buyers have passed on the book in this example. In addition to this, Armada (as per their most recent audited statements) has significant tax pools that remain unutilized, which could be used to reduce taxes in the future. This means that any additional earnings could be sheltered from tax, and if one were to apply a “market average” 10x multiple, this incremental $0.017/share could be worth $0.17 in isolation. The moral here – small companies with a small numbers of shares outstanding don’t need enormous earnings bumps to make a difference in the share price.
Most importantly, the book creates awareness – and probably new customers. Not only will the e-book create another revenue stream, but it’s going to drive incremental business for Armada. When you think about it, there are currently two classes of people out there when it comes to new car purchases – the relatively small population that is already using the Armada product offerings, and the very large population that is not. For that group that is already dealing with Armada, it will simply provide them with another possible product offering. For that other, very large population, it creates a pathway to potentially engage Armada when they decide to buy a new car, when previously, they might not even have known about Armada, CarCostCanada, or the other Armada product offerings.
Even prior to the e-book, Armada looked attractive. Readers of our initial Armada article will recall that we suggested the valuation was very attractive at that time (early December 2020), and even at the higher price of $0.175/share, the valuation continues to be attractive. In our “Recognizing small cap opportunities” article, we indicated that small cap companies can provide cues well in advance, before the price runs away. In our original Armada article, we suggested that Armada was undervalued even if it executed at “underwhelming” levels for the next three quarters. Given that Armada has just created a brand new revenue stream, we would suggest the following for consideration: In their fiscal Q1, Armada created $0.0135/share of EBITDA and $0.0128/share of earnings. It stands to reason that with a new revenue stream, the probability that Armada continues to meet (or possibly exceed) this level increases. If Armada were simply to perform at the same level, with no uptick from the sale of the e-book or related business lines, this would suggest full year EBITDA and EPS of $0.054 and $0.0512 respectively. These results in turn imply a current valuation (today) of:
A PE multiple of 3.4
An EV/EBITDA multiple of 2.72, which is reflective of Armada’s high cash balance.
An operating cash flow yield of 29%, if one uses EBITDA as a proxy for operating cash flow.
All of these valuation parameters, in conjunction with the fact that the float is small, and the company has no debt, skew Armada into the realm of “very interesting”. If the e-book increases revenues beyond these levels, then the upside is much greater – which is why I continue to hold Armada, and purchase at opportunistic prices.
For those that have questions or comments, I can be reached at mark@grey-swan.com.
Titan released Q1 financials on January 20th, 2021, and despite being fairly unremarkable, the shares hit a 52 week high of $0.54 on the same day. Titan now appears to have exited “the basement”, and even though the energy markets aren’t exactly strong, Titan shares have seen an increase in trading volume over the last month. While Titan is definitely not as inexpensive as it was a month ago, we believe it should still trade beyond these levels, and with that in mind, we take a look at the Q1 results using our usual green, amber, and red format to highlight Titansbullish,neutral, and bearish points.
We have liftoff…. In our December update, we indicated that the chart was improving, and it has continued to do so. From the time of writing our December update, Titan has managed to rally another 25%, some of which can likely be attributed to general market optimism. When we summarized our December update, we also suggested that the “low hanging fruit” was in the $0.55 range, and recently (January 20th), Titan hit a 52 week high of $0.54. So, from a technical perspective, with the shorter term MAVGs having crossed over on reasonable volume, we are no longer plumbing the depths. Folks that favor the technical over the fundamental will now be looking more closely at Titan, as it will have provided the necessary validation for them to move money off the sidelines.
The quarter was bad. The balance sheet hardly changed.Make no mistake, the quarter was still ugly, as any improvements in the energy sector have not yet translated through to companies like Titan. However, if one looks at the balance sheet, you have to squint hard to see how this quarter impacted it. The short story is that there is virtually no change in the balance sheet. Cash holding are actually up, total assets have decreased by $286K, total liabilities have also decreased by $143K, and net tangible equity (excluding the value of intangibles) decreased by about $72K, which suggests an actual per share reduction in book value of less than $0.01/share. Tangible book value was $0.516/share, and as of November 30th it’s $0.513/share – not exactly the stuff of materiality. There isn’t much more to say, as the balance sheet continues to provide a solid foundation for Titan, and buyers of Titan today are still able to purchase the company at a discount to tangible book value, and the company is still sitting on $0.33/share in cash.
The income statement is much worse on a YoY basis. As mentioned previously, the quarter was ugly, and the numbers bear this out. Whereas a “normal” top line (in an already depressed market) would be about $1.4 MM, Q1 2021 was down about 40% from these levels, at $850K. These results, while clearly “bad”, are not surprising given that the energy sector is only recently seeing slow improvement. These results were also buffered due Titans participation in the CEWS program, which provided approximately $90K of relief. In any case, the income statement does not raise any eyebrows, and at a net loss of $142K ($0.005/share), the results, while poor, are well within expectations.
Cash flow from operations is still negative. Cash flow is negative both before (-182K) and after changes in working capital (-34K), but again, this is within expectations, given the current business environment. Overall, cash flow is actually positive, as Titan finance income totally offsets negative cash flows from operations. Perhaps of more interest is the fact that if Titan did not receive the ~ $90K CEWS benefit, finance income would still have offset the negative cash flows from operations, and Titan would still have increased its cash balance. Overall, the cash flow statement is solid, given the poor operating environment, and the fact that the company managed to be cash flow positive is a testament to their planning earlier in this commodity cycle.
Insider ownership is unchanged. As of January 21, 2021, the “Article 6 Marital Trust created under the First Amended and Restated Jerry Zucker Revocable Trust dated 4-2-07” is still the largest shareholder, with 10.5 MM shares, or about 37%. Additionally, a review of SEDI information indicates that there has been no insider selling.
News continues to be sparse. As indicated in prior posts, the company has by no means “inflated” the share price via press releases, as given the thin following of the company, it’s likely a misplaced priority. While the shares have rallied (along with the rest of the market), we would hardly say the shares have been “talked up”. This means the shares, although more expensive today, are still on the cheaper side of things – for now.
We continue to hold Titan, and increased our position. In our fiscal year up update, we suggested that the price could see more weakness at the end of December due to tax loss selling, and while the shares got as low as $0.36, the overall trend was “onward and upward”. We managed to increase our position, but not quite as cheaply as we had hoped. In any case, we continue to hold a larger Titan position, as we believe that while the energy sector slowly improves, Titan is one of the best capitalized companies within the sector. Realistically, not much has changed since our December update, and for investors holding (or looking at purchasing) Titan, we would say this:
The chart is definitely looking better: From a technical perspective, the market is suggesting that better days are ahead. Investors who tend to allocate capital based on technical factors will likely look at Titan more favorably, which may explain the increase in volume and liquidity over the last month.
The commodity price is improving: The overall consensus is that demand (and prices) are slowly improving. Any improvement in the overall global economy will translate into increased activity levels in the energy sector, which will filter down to companies like Titan.
The number of active rigs continues to increase…slowly. Related to the above, the Canadian rig count continues to slowly increase, which also suggests business should improve for Titan.
Titans balance sheet continues to be solid: As stated before, where other companies are folding up or scrambling to stay afloat, Titan remains comfortably above water.
Titan continues the work to diversify their revenue stream: At this time, the bulk of Titans revenues are still driven by energy – but they realize this dependence can hurt, and continue to investigate other sectors where fluid hauling is commonplace.
The low hanging fruit may be gone soon: In our December update, we suggested that a simple reversion to more a more normalized price to book ratio would bring the shares up around the $0.55 range, which occurred on January 20th. Based on the solid balance sheet and technical strength, we expect the shares to continue their ascent.
Questions or comments ? Feel free to send them to mark@grey-swan.com.
The Caldwell Partners issued their Q1 financials on January 14th, and despite COVID, fractured politics (in the US), and a generally questionable business landscape, their numbers gave an investor something to feel good about. If you were fortunate enough to have picked up some Caldwell shares in the latter part of 2020, you have probably done quite well. That being said, Caldwell was also busy expanding, and their acquisition of IQTalent partners means that the Q1 financials, while good, must really be viewed through a “post acquisition” lens. This is what we will be aiming to do, using our usual green, amber and red format to indicate areas which are thought to be bullish, neutral, or bearish. When titles display mixed colors, this indicates that a situation may be improving (or getting worse) as compared to our assessment from a prior post.
What a difference a quarter makes.Readers who checked in for our year end update on Caldwell (here) will recall that we viewed the chart at that time (late November of 2020) with cautious optimism, as it was just showing signs of recovery, with recent price action suggesting strength. Well, where we once indicated that the MAVGs seem to be converging, today it is a foregone conclusion. The Caldwell chart that was once “showing signs of recovery” is now in full recovery mode. The long and short term MAVGs have crossed over, which suggests that we are (hopefully) at the beginning of a longer rally. With that in mind, we should clarify that while we regard this chart as bullish, the strength of the shares is cold comfort for someone who has been waiting on the sidelines, as the “cover charge” to join has increased substantially.
Caldwell layered on an acquisition – but the balance sheet is still solid.With the acquisition of IQTalent Partners, we felt that it would make little sense to view Q1 results through the lens of the “old” balance sheet, so we have taken the liberty of representing the acquisition impacts on a “new” balance sheet. As per the MD&A, details of the acquisition are as follows:
What the acquisition does is increase the total share count by ~ 25%, reduce the cash balance, increase goodwill (or intangible assets) and layer on some short and long term liabilities. The “post-acquisition” balance sheet (with impacted areas highlighted in yellow) could look something like this (see below). Readers are cautioned that this is a representation of what we believe the balance sheet could look like, not the actual balance sheet as released by Caldwell on January 14th. For the sake of simplicity, US dollar amounts have been expressed at the average 2020 US-CAD FX rate of $1.34 CAD to $1.00 USD. Additionally, the entire purchase price is assumed to be captured as Goodwill or Intangible asset.
What is clear is that while Caldwell has traditionally had little or no “soft assets” and no debt, it now will have a larger intangible asset base and will also have some “longer” term liabilities due to the acquisition. However, unlike bank debt, these liabilities are not interest bearing, nor is there an ability for anyone to “call the debt”. In fact, unlike the share issuance and cash payment of $3.0 MM US, the remaining liabilities are all contingent on various factors, such as employees remaining with IQTalent and profitability. This suggests that some of these liabilities may actually be less, although how much less is unknown. Additionally, we are showing these liabilities at an FX rate of $1.34 CAD to $1.00 USD, which is on the higher side of the 10 year FX history. At such time that the liabilities are discharged, the FX rate may actually be lower.
So, while the Caldwell balance sheet isn’t quite as pristine as it once was, it now must contend with a larger “soft” asset base, whose value will only prove out over time. Overall, Caldwell is still sitting on a significant cash balance ($0.60/share), and the liability impacts are likely less onerous than bank debt. While we never like to see large Goodwill balances, we recognize that these must be viewed in the context of income and cash generating ability. Which brings us to the Q1 Income Statement….
The balance sheet might be a bit worse off – but earnings aren’t.After adjusting for the increased share count, Caldwell quarterly EPS would be up by 43% at $0.033/share vs $0.023 a year ago – pretty good for a year when companies are still dealing with a global pandemic. While the topline was essentially flat, the difference was primarily a combination of reductions in reimbursed expenses, G&A, and the offsetting impact of $110K of residual Government COVID grants. With that in mind, the previously quoted EPS amount of $0.033/share takes this stimulus into account, and the $0.033/share value reflects the removal of this.
What these numbers obviously do not reflect are any impacts of the IQTalent acquisition, the inclusion of which should theoretically boost topline revenues, but would also increase costs as well. At this point, we cannot make any useful projections, as to do so would simply be conjecture. What we can say is that Caldwell is starting out 2021 on the right foot. If it continues to execute at a similar level, it would be on track for full year EPS of roughly $0.13 – $0.14/share for the full year, suggesting a 10x earnings multiple as of today – not dirt cheap anymore, but not a stratospheric valuation either.
Like earnings, cash flow is solid.Any way you decide to look at it, cash flow is better on a YoY basis, both before and after changes in working capital. If one uses the post acquisition share count of 25.5 MM shares, Caldwell generated $0.065/share in cash before WC changes, or $0.216/share after WC changes. It is too early to tell whether or not Caldwell can continue to generate cash flow like this for the next three quarters, but if they can, the company is seriously undervalued at the current price of ~ $1.25 – $1.30. If one extrapolates both quarterly cash flow values over the course of a year, it suggests a cash flow yield of somewhere between 20% (($0.065 x 4) / $1.30) and 66% (($0.216 x 4) / $1.30). Both of those values are respectable, and one of them raises eyebrows. For all intents & purposes, the cash flow statement validates what the income statement was already saying – that Caldwell seems to be going in the right direction, and at a good clip.
The Insider story has changed, but is still supportive. There has been no selling activity by insiders, but the post acquisition insider picture is slightly different. With the issuance of new shares, there is now a new group of insiders (the former IQTalent management & directors) who hold shares that are subject to a three year hold period. While there is never a guarantee that an acquisition will go well, a three year hold period is strong incentive to make it work.
The price has strengthened, and the valuation has now left the “easy money” stage.Since our November post, Caldwell shares have gained approximately 60%, so anyone that bought in during Q4 of 2020 has done well. However, the easy money is now gone, and the valuation is now contingent upon execution. If the IQTalent acquisition proves to be accretive, and Caldwell can continue to execute at the same level, then the shares remain attractively priced. On the other hand, if Caldwell has “bitten off more than it can chew”, the shares may stumble. That being said, while past results do not necessarily predict future results, they do provide validation that the company has at least managed to navigate through a very challenging 2020 with solid results. Readers should note that the valuation parameters discussed below are all viewed in a “post acquisition” context, using the new number of shares outstanding and taking into account balance sheet impacts.
Book value: With the increase in total shares and the (likely) layering on of soft assets, Caldwell is trading well beyond its traditional price/book multiple. However, it should also be noted that the price/book multiple for a company such as Caldwell should be used to identify when the shares are mispriced at the low end, and not necessarily as determination when to sell.
PE multiple:The PE multiple currently sits on the edge of “still cheap”. If Caldwell continues to execute at similar levels, then today’s multiple is a reasonable 9x – 10x, depending on whether one includes or excludes the Government stimulus. However, as stated previously, this is contingent on the company continuing to execute at the same level. One could also argue that if Caldwell comes out with similar results for Q2, then it is quite possible that the market assigns the company a higher multiple, which would suggest today’s prices is still “cheap”.
EV/EBITDA multiple:At a current EV/EBITDA multiple of approximately 2.1, Caldwell is no longer in bargain basement territory (as it was in Q4 of 2020), but it is well below its historical average of around 4x.
Cash flow yield:As previously noted, if Caldwell continue to execute at around the same levels, it will be generating somewhere between a 20% and 66% cash flow yield for the year. Even at the lower level of 20%, this is well below the long term average for Caldwell, which is closer to 9%.
The dividend may not come back – or it might. In our November post, we suggested that Caldwell had the financial wherewithal to reinstate the dividend. However, with the IQTalent acquisition now in the rear view mirror, it has demonstrated that Caldwell has expansion plans beyond the traditional executive search function. Regardless, investors are ultimately rewarded when a company performs well. If Caldwell continues to execute well (without a dividend), the market should eventually award it higher valuation metrics. If the company executes well and reinstates the dividend, that would be the proverbial icing on the cake. Assuming Caldwell continues to execute well, we will continue to hold Caldwell, with or without a dividend.
In closing, we believe current shareholders (and potential new investors) should keep the following in mind:
The share price is much improved: Yes, the “ticket to entry” is much more expensive, but the argument is that the results speak for themselves. This is always the classic conundrum – buy early and suffer “dead money risk” or buy later and take on more price risk.
The new shares are locked up: If one does buy at today’s price, there is security in knowing that the newly issued shares aren’t being sold anytime soon, and insiders continue to hold.
Bankruptcy is still a non-issue: It might sound repetitive, but acquisitions sometimes come with lots of debt. Caldwell has managed to avoid this trap.
If it happens, reinstatement of the dividend will move the price even more: As mentioned, there is no guarantee of this, but if it happens, it will further juice the share price.
Insider sentiment is likely to remain positive: With Q1 results like these, it is highly unlikely that there will be any insider selling (by pre-acquisition shareholders) that could sink the price.
Caldwell may be reinventing how it is perceived: An analyst once stated that Caldwell “paid a good dividend, but the small size implies risk, and we don’t see the upside.” All of that may be changing – which could mean that Caldwell may command a higher valuation in the future.
We purchased more Caldwell in Q4 of last year, and continue to hold. Questions or comments can be sent to mark@grey-swan.com.
Every now & then, I receive a comment or an email, the gist of which is usually the same. To paraphrase, the message is usually something like “Hi there, I like your writing, but I wonder why you take the time to look at these companies. It seems like a lot of effort, when you could just invest in Tesla, Bitcoin, or an index. Why bother ?”
To be sure, there are many ways to make (and lose) a dollar, but for me, the investing process has never been only about making money. I have always been the kind of person that wants to know how (or why) something works. Personally, there is always a great deal of satisfaction in the understanding of something, as understanding usually leads to confidence, which in turn leads one to repeat the process, and hopefully learn a bit more. For those that are wondering why I “do what I do”, here’s 10 reasons why I continue to take the time to do my own research, and invest in the small, the ugly, and the underfollowed.
The Apple IPO is long gone. As is Netflix, Tesla, and Google…. On any day of the week, you will be bombarded by news about major companies, most of which are the current “darlings” of the market. Don’t get me wrong – I use the services of most of them, and they are fine companies. But I would venture to say that both you and I never had the opportunity to invest in the IPO for any of these. OK, maybe you did, but then I have to ask why you’ve landed here, as it would seem you have more money (and perhaps better connections) than myself. In any case, while these companies have made vast fortunes for those that invested early, most of us “regular folks” will never get the opportunity to “get in early” on companies such as these. While you are unlikely to find the next Apple, it is not impossible to find a company that can provide returns that are 10x, 20x, or even 50x your initial investment in the small cap market. Not only have I seen this happen, but I have seen it happen more than once, and I have been invested in companies like this – more than once.
The small and micro cap market is the home of inefficiency. The flip side to being bombarded by news about Apple and Tesla is the fact that you will almost never see any news about Macro Enterprises, Vitreous Glass, or Pyrogenesis – unless you go looking for it. All of these companies were totally accessible at prices affordable to the smallest retail investor, and were found primarily as a function of “sniffing around” the small cap marketplace for interesting opportunities. Two of these (Macro and Vitreous) signaled their opportunity well in advance, and provided the opportunity to invest at compelling prices for months. Arguably, Pyrogenesis was more difficult to read, but has nonetheless provided investors with enormous upside. While each of these companies are markedly different from one another in both industries and management styles, they were all found in the same place – the small and sometimes very inefficient TSX Venture.
Small company CEOs will actually talk to you. This point should be taken with a grain of salt. Tim Cook will never talk to you – Apple is just way too big, and you are just another peon wondering what the future holds. But that also means that Tim Cook will never tell you gilded tales of future company success – at least not to you directly. The good (and bad) thing about small companies is that you can actually get in touch with the CEO, and he or she will actually talk to you. This I have learned firsthand. Many times, I’ve had to peel myself off the phone, as I get nothing but smarmy proclamations about how awesome the company will be, at some time in the future. But other times have been very interesting, as small company CEOs are often thrilled that an investor is actually calling them. While they won’t offer up “insider” information, sometimes a lot can be gleaned from fairly innocuous conversation. I once recall speaking with the CEO and CFO of a small cap company whose share price had been steadily gaining ground. The shares had risen significantly, but based on fundamentals, they should have been much higher, and were still well under $1.00. I explained that I was a shareholder, that I had a substantial position (for me), and that while I was happy with the share price gain, I was concerned that the market wasn’t recognizing the true value of the company. There was a long pause, and then the CEO asked if I had sold any shares. I said no, as I thought it was too early. He paused again, and then said “good”. This struck me, as in all the calls I had ever made before, nobody asked me how many shares I held, or if I had sold any. He didn’t communicate anything that wasn’t public knowledge, he didn’t talk up the company, and he didn’t say that I shouldn’t sell, he just asked a question that is typically never asked. I don’t remember the rest of the call, but the tone of his answer stuck with me. I held, and was very happy I did. The shares went on to reach much loftier heights, and one of the reasons I held was because of that phone call.
Not only will they talk to you, they may actually give you a tour. I will freely admit that this is not like getting a backstage pass to your favorite band, but for investment geeks, it is pretty cool. At some point in time, you will end up looking at the financials of a company whose operations are actually in (or close to) your hometown. If that company is small, then there is a chance that you can arrange a tour. This is another thing that I have learned from firsthand experience. Sometimes, a tour is superficial, and you learn nothing – but sometimes it gets right into the guts of the operations. I once recall touring a small waste processing facility, and let me tell you, I was right in the thick of it. It wasn’t particularly pretty, but it was small and efficient. The fact that my guide, one of the senior management, owned a sizable chunk of shares made it even more significant. When he was walking through the plant, he wasn’t just looking at a bunch of machinery, he was looking at things that would make his compensation better – or worse.
You will probably learn something that’s not “investment” related. Unless you unfailingly invest in only one industry, you will probably be exposed to different sectors that are new to you. Sometimes the lessons are directly related to the sector that the company operates in, and sometimes they will seem to come out of left field. When I first started investing in small Canadian energy companies, I came across the term “break up”, and had no idea what it meant. Was there a love interest that I was unaware of ? I just needed to ask, and discovered that “break up” and “freeze up” are related terms which refer to how passable the Northern parts of Alberta are on a seasonal basis. Crews are unable to move drill rigs in the latter part of the year until after winter “freeze up”, as the muskeg literally needs to freeze so that the equipment won’t sink. In the spring, if they want to move equipment in or out, they should do so before “break up”, as the muskeg starts to thaw. From the telecom sector (Total Telcom to be specific) I learned that even though one often sees diesel trucks idling for what seems forever, that idling is actually bad for the engine, and causes excess carbon buildup, which in turn causes that ugly black diesel exhaust. One of the products Total has developed controls an ancillary heater that allows the cab and engine to stay warm, without actually running the vehicle. As the saying goes, you learn something new every day – or perhaps with every investment.
You will also learn to recognize errors that are investment related. One thing about learning to manage your own investments is that you will discover (eventually) that big name brokerages and companies with fancy investor presentations will make mistakes. This is not to say that these mistakes are malicious, but at the end of the day, people are human, and humans mess up. This too I have learned this from experience. My brokerage once sent me a tax slip which classified a very large, one time return of capital as an eligible dividend, which had significant tax implications. More recently, take a look at the statement (below) from the audited financials of a company that currently trades on the TSX Venture. If you can make the numbers add up to the circled value, I will send you a prize – seriously, I’m not kidding. If you can make those numbers add up, I tip my hat to you!
It’s your money. Most people reading this post probably work, so most of you can identify with the concept of trading your sweat for a dollar. Regardless of whether you turn a wrench or plunk away on a keyboard, you are using your finite life as a mechanism to gain some of those almighty dollars. Last time I checked, your life (and mine) was worth something, because that money you earn is the result of you giving up some of that finite “life time”. The truth is that once you give that money to someone else, they see it as only money. When you hand over a fist full of dollars to someone to manage it, you have effectively handed over part of your life. Some of those managers are good, and some aren’t. While you might not be the best money manager (to begin with), you will learn, and you don’t have to go full tilt from the beginning. Start small and learn. One thing is certain, and that is the fact that you will always have your own best interest in mind.
Bernie Madoff is still out there. OK, so he really isn’t out there (he is still doing time), but you don’t have to live in New York to fall victim to a good scam. Not that one should be paranoid, but charlatans abound, and they come in all shapes and sizes. Bernie Madoff dealt with all sorts of high rollers, as his client list included none other than Kevin Bacon and Steven Spielberg, but the point is that you don’t have to be famous to lose money to someone dishonest. Take it from me – I know. When I first started out, I briefly subscribed to a newsletter known as “Buy Low, Sell High”, which eventually wasn’t worth the paper it was printed on. The publisher of that newsletter, Al Budai, was eventually banned from working in the industry, as he was simply running a better version of the classic “pump & dump”. More recently, a former CFL player was convicted of fraud, as he used his persona & charm to convince people to invest in his “non-profit”. The truth is that if you walk into your local bank and buy index funds, you won’t get ripped off – but there are lots of other folks out there that are interested in doing so, and they are a persistent and charming bunch.
You will release yourself from the yoke of the financial services industry. Let’s face it – the financial services industry has no interest in a “smart” you and is much more interested in the “clueless” you. I recall a meeting I had with a rep from my bank, whose job it was to convince me to invest with them. He showed me all of their mutual fund offerings and told me which ones he thought would be best for me. I then asked him a pointed question about the funds, specifically, had they outperformed any particular benchmarks over the last 10 years? He very kindly pointed me to the annualized return number, and I asked again, did this represent outperformance or underperformance? After a deep study of his own shoes, he admitted that he wasn’t sure. Now, I don’t know if this was just a function of him being really nervous, not actually knowing the answer, or not wanting to admit that the funds had actually underperformed, but the point is that one shouldn’t pay for underperformance. A reasonably intelligent individual who decides to manage their own money will start small, learn from their small mistakes, and eventually know why they are under or outperforming – and they will have learned something. Over the long term, such an individual is just as likely to perform as well or perhaps even better than what their local bank is offering.
Lastly, most of your returns will be normal – but some will make a huge difference. Investing in small and microcap companies is not an immediate ticket to riches, despite what Instagram or TikTok might be telling you. Some investments will make money and some will lose money, but if you are doing your homework, the winners should outpace the losers. However, when one goes long on a small or micro cap company, the really “fat tails” live only on one side – the upside. Yes, you can lose 100% of your capital, especially if you are sloppy and are not really researching and understanding the companies that you invest in. On the other hand, if a small company does well, you can make much more than the typical market return. When one finally crystalizes a gain that pays off the mortgage (or something as impactful), it creates all sorts of options – which is probably “why I bother” to invest in these types of companies to this day.
For those with questions, comments, or their own “Grey Swan” stories, I can be reached at mark@grey-swan.com.
Normally, an update on a company is issued when financials (or significant information) becomes available. However, Pioneering last issued Q3 financials back in late August of 2020, so this is a bit late for an update, and full year financials won’t be issued till late this month. Nevertheless, Pioneering is the one company that probably has the most coverage on this website – but the least recent coverage. Given that we have a large position in Pioneering, and that the last post occurred far too long ago, a brief recap and some thoughts on the future outlook are perhaps in order. If nothing else, it means that the review slated for late January (or early February) will be that much shorter. It should be noted that because this update is occurring “off cycle”, we will not be delving into the typical analysis of the balance sheet, income statement, or cash flow statement. Given that a significant amount of time has passed since the issue of the last financials, we would suggest that detailed analysis is best saved for later this month, when Pioneering issues full year numbers. This means that this post will be considerably shorter. On the other hand, for those with time on their hands, Part 1 of the original series can be found here.
A quick summary of Pioneering: Pioneering has been in the “cooking safety” business for over 10 years, as they manufacture various products designed to eliminate the risk of kitchen fires. It is perhaps noteworthy to point out that Pioneering products, particularly the SmartBurner, are designed with the idea of eliminating the possibility of fires. There are some other products that are designed to put out a fire automatically (once it has occurred), but like many things, an ounce of prevention is worth a couple pounds of cure. As someone who has experienced a minor kitchen fire first hand, it’s fair to say that one wants to avoid the mess of a fire in the first place. Yes, the fire extinguisher will put out a fire, but then you are stuck with the mess of cleaning up after the fire extinguisher (it is very messy), and potentially explaining to the fire department why it all happened in the first place.
Things were going well for Pioneering – sales from fiscal 2014 through to fiscal 2017 grew at approximately 50% per year, and in fiscal 2017 Pioneering recorded over $10 MM in sales, and shares peaked at $1.50. The company embarked on a new sales structure that would allow them to move more volume, and the future looked bright – but all wasn’t well.
While the company enjoyed business success (and share price success) in 2017, 2018 proved to be quite the opposite. Sales fell precipitously from $10 MM to just under $5.0 MM, and while the switch to a new sales process was one of the factors, it was later revealed that some executives of Pioneering were also less than cooperative. On January 23rd 2019, Pioneering issued a press release indicating that three senior executives, including the VP of Sales, had been terminated for cause because of “participation in a scheme aimed at competing directly with Pioneering in the cooking fire prevention market in North America.” From that point on, it was clear that Pioneering had more than the usual challenges to deal with.
All of which brings us to today – January of 2021, at a time when many jurisdictions in North America (and globally) wrestle with a 2nd round of COVID. As some jurisdictions debate more lockdowns, others have already enacted them. It’s at this juncture that an existing Pioneering investor has to determine whether or not to “continue fishing or cut bait”, as the current Pioneering story is murky to say the least. However, regardless of the current investing climate, this is where we pick up the Pioneering discussion. For the sake of consistency, the usual green, amber, and red formats are used to highlight areas that are considered to be bullish, neutral, or bearish.
The chart is giving us mixed signals. The Pioneering chart is the story of almost getting out of the penalty box….and then turning around and going right back in. In the early part of 2020, Pioneering hit the abysmal low of $0.03/share (yes, we did buy more), and appeared to be at an inflection point. Not two months later, in the spring of 2020, Pioneering hit the lofty heights of $0.15, as Q1 results were better than expected….and then COVID arrived, crushing not only Pioneering but many larger companies. So, while the shares are up over a 100% from January of last year, the chart is still “skipping along the bottom” in our opinion. For those looking to acquire shares, it is probably unlikely that the shares will get much cheaper, as the traditional “tax loss selling” season has come and gone. Based on current information, we would not expect the shares to move significantly until we get closer to the release of Q4/ full year results in late January.
The company is still solid. As previously mentioned, we won’t delve into the usual details around the financial statements, as the information from August is likely dated. That being said, the company is not facing looming insolvency. The company is actually sitting on the highest cash balance it has seen since fiscal 2017 (the year Pioneering last raised capital), and at $3.78 MM, this equates to $0.067/share – about a penny lower than the price that the shares are currently trading at. The company is debt free, and total liabilities are virtually unchanged (after adjusting for IFRS impacts), so while it has been a tough year (and some cash has been eaten up) the company is on solid footing. Perhaps even more interesting is the fact that at the current price, Pioneering is almost trading at “net-net” book value ($0.07/share) and 20% under the book value of $0.10 per share.
COVID hit Pioneering hard.Anyone who has been following Pioneering knows that the share price strength in the early part of 2020 was a function of Q1 results, as Pioneering saw a strong rebound in sales at $2.2 MM, a 73% improvement on a YoY basis. But, once COVID hit, all bets were off. Sales fell significantly, and it looked like any progress Pioneering had made was erased. Add the additional impact of tariffs, and it would seem that the combination of these events might conspire to sink the company entirely. To be sure, the company took a beating given the combination of reduced sales and tariffs, but it would be inaccurate to dismiss the company entirely based on these issues alone. The world that we all inhabited less than a year ago is markedly different than it is today, and we believe that some of the trends that have emerged during COVID may yet breathe life into Pioneering. Follow our shaky logic as we walk through the reasons why Pioneering isn’t dead…
When COVID arrived, 140 million North American households locked down.Based on the latest information, there are 128 MM households in the United States, and despite the fact that a decent link can’t be found, StatsCan suggests there are approximately 12 MM households in Canada, for an aggregate total of 140 MM households in the US and Canada. All of these people, while they weren’t going to work, certainly had to keep eating.
So, companies like Skip the Dishes got busy. While companies like Skip the Dishes and Uber Eats saw an uptick in activity, the truth is that many restaurants were (and still are) teetering on the brink of disaster, as many Americans (and Canadians) still feel unsafe eating out. Simply put, it will be a while before we see restaurant dining habits return to “normal” levels. While many establishments are open, most are faced with reduced seating capacity and increased safety protocols, all of which lead to smaller numbers of diners.
However, many folks were (and still are) dealing with reduced incomes.When entire States (and Provinces) start mandating who can stay open and who must close, the unfortunate side effect is that many people lose jobs – and income. While it is true that Governments provided assistance, it’s not rocket science to deduce that Government assistance is usually less than a solid full time job, and it’s certainly more finite. While some people could afford to pay for take out every day, many simply did not have the finances to do so.
So people started cooking more – probably a lot more. The NY Times stated that the rise in home cooking is “…at a scale not seen in 50 years…”, as people are not only cooking more, but people who never used to cook are now learning. As the saying goes, necessity is the mother of invention, or in this case, the impetus to learning a very useful skill. Never in my life did I think I would be able to use the phrase “mason jar shortage” in a sentence with any relevance, yet there it is. When millennials start looking up canning recipes on their phones, you know something is brewing.
All that cooking means a few pots are going to boil over.Sure, some of those people that are cooking already know what they are doing, and some of them have gas stoves, and some of them will never learn to cook no matter what happens – but a lot of people will try their hand at cooking, or will cook more, and it’s simply a statistical fact that some of that extra cooking will result in a few overly crispy dinners, with a bit of smoke thrown in for good measure. It is no secret that cooking fires increased during the first round of lockdowns, by some estimates as much as 300%. While some of those fires might be little annoyances, some of them aren’t, and insurance companies and landlords can’t be happy. The average cooking fire costs $30,000 USD to remediate, so a $200 investment in a gadget that eliminates this risk is well worth the money.
Some of those new chefs will install some sort of safety device.Ultimately, we don’t know how many people will opt for a Smartburner (or another Pioneering device), and some households may just go out and purchase a few more fire extinguishers. But to suggest that all these events will have no impact is a stretch. Someone – not everyone, but someone will decide to install some sort of safety device. One of the statements that has been made here before is that Pioneering doesn’t need to sell to everybody, they just need to sell more. To get a handle on what sort of impact that could have on the Pioneering top line, let’s assume that in 2021, 1/10 of 1% of total North American households decide that a Smartburner is a wise investment. Since we don’t know how these households might want to purchase the Smartburner, let’s just assume (for the sake of simplicity) that they go to the Pioneering website and shell out the $200 CAD for a Smartburner. The simple math here is:
140,000,000 households x 1% x 1/10 x $200 CAD = $28 MM CAD
Is this a prediction ? Absolutely not. But it is a demonstration of the fact that Pioneering doesn’t need everyone beating a path to their door – a small fraction is just fine. One can juggle the math six ways from Sunday, but the truth is that COVID inadvertently created a situation where far more people will think about cooking fire safety, either because they just filled the kitchen with smoke, or they think they might.
But wait – Pioneering is getting killed on tariffs. This statement is correct. Yes, Pioneering is getting stiffed with tariffs, but the tariffs aren’t so steep that the products are unprofitable, they are just less profitable. While we don’t have any more political insight than the next person, it stands to reason that if one has a looming problem, you don’t just hope that it might go away. Recent pundits have suggested that despite the changing of the guard South of the border, tariffs aren’t going away anytime soon. However, Pioneering is actively seeking to either remove or mitigate the impact of the tariffs, as they do have a reasonable argument to make. As per the MD&A, Pioneering has indicated that “….Pioneering is currently working with the various industry participants and legal counsel to pursue a potential exemption from these tariffs on the basis of the uniqueness of its products, their public safety benefits and the fact that many of the Company’s customers in the U.S. are governmental agencies funded by U.S. taxpayers.” We would be very surprised if the Executives of Pioneering were not working overtime to mitigate the tariff issue, as any progress on this front flows right to the bottom line.
It was once said that one should never let a good crisis go to waste. As ugly as COVID-19 has been, the environment it has created is an opportunity for Pioneering. The mandated “stay at home” orders issued by Governments, in conjunction with the closing of eateries and the almost palpable fear of risking exposure forced Canadian and Americans to do what they had not done for a very long time – cook in their own homes. While it’s too early to tell what Q4 (and full year) numbers will bring later this month, we would suggest that despite it’s almost “flat lined” share price performance, Pioneering has some life in it yet.
As always, these are only my thoughts & opinions. If you have questions or comments, I can always be reached at mark@grey-swan.com.
For those of you that are looking for last minute investment ideas, this post will be of little use, so you may want to cut bait quickly. While most of the content on this site is rife with numbers and estimates of various probable (or improbable) events, this one is a distinct departure. But, if you have time on your hands, and are comfortable with a bit of philosophical musing, read on….
I think it would be a fair statement to say that 2020 has been a less than stellar year, regardless of the context. Some more eloquent colleagues of mine have suggested that 2020 has “sucked ass”, and while that language may offend some, I would tend to agree with that assessment. The onset of COVID-19, ongoing lockdowns, widespread unemployment, rioting in major cities, and divisive political rhetoric have all contributed to a distinctly negative tone, and most of us will be glad to see 2020 come to an end. While no one can unequivocally state that 2021 will be better, I’m guessing most of us are hoping for that.
However, there are a few days left in 2020, and in those last few days (and nights), there is one “Grey Swan” left that is free, beautiful, and may offer a moment of peace in an otherwise painfully hectic (and noisy) world.
Today (December 29th, 2020) is the day of the “Cold full Moon“, the last (and highest) full moon of the year. If you happen to live in a snowy climate, this means you may be witness to a confluence of events that constitutes what I would suggest is a Grey Swan of sorts.
When I was much younger, I grew up in a small Canadian town where there were few (if any) streetlights, and once it was dark, it was really dark. However, I do have distinct recollections of those few nights in the winter when it wasn’t snowing, the sky was crystal clear, it was cold (but not too cold), and there was a full moon. On those evenings, you didn’t need any light, as that giant flashlight in the sky bathed the world in blue luminescence that was amplified by the snow cover. As I got older, I made it a point to get outside on evenings like that, as that combination of events is worth taking in. While I can’t profess to say what the actual probability of such an event is, some very rough math tells me that “small” is the right word. If one assumes a 50% probability of a clear night, a 50% probability of full snow cover on the ground, a 50% probability of “goldilocks” temperatures which won’t freeze fingers and toes, and the ~10% (3 days our of 31) that the moon is effectively full, the conditional probability is 1.25%. The point here is not to prove out the math, but that this happens less often than one would think. For those of you that are mathematically inclined, my apologies for any incorrect use of nomenclature.
So what does that mean for you (or me)? Well, given that 2020 has proven to be so ugly, it would seem to me that it makes sense to partake in a moment where one can enjoy something rare and beautiful, that also offers up a chance to get away from the “Sturm und Drang” that is daily life. If you have the chance, bundle up and take a walk outside in the moonlight. If you can find a place that is away from the glare of city lights, all the better, and if you live in a rural setting, you will have a front row seat. Small moments of tranquility like this are guaranteed not to last, and if nothing else, you will have a few moments of time to yourself. Trust me – once you get back to the office (or the home), life will assume the same frenetic pace, and will continue to throw curveballs at you.
This is likely the last post of this year, so with that in mind, we wish you all the best for the remaining Holiday Season, and best wishes for the New Year. See you in 2021.
