Titan Logix update – update at Q1 2021

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 Titans bullish, 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 – update at Q1 2021

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 greenamber and red format to indicate areas which are thought to be bullishneutral, 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.


10 reasons why I bother…..

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.

Pioneering Technologies – update at January 2021

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. 

Year end note – December 2020

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.

Ripper Oil & Gas (RIP – TSX.v)

Position opened: First purchase on October 10 2008, total average cost of $0.134 CAD

Position closed: Last sale on March 08 2011, total average proceeds of $0.120 CAD, plus $0.40CAD dividends ($0.52 CAD)

Hold period: 2.40 years

Rates of return: 89% (simple) and 30.5% (annualized)

Ripper started out as “just another” junior oil and gas investment, but eventually became such a learning experience that I’ve often considered writing up an entire post about it. Regardless, the purchase of Ripper came about because it was a profitable oil & gas producer – which is rarer than it should be. In an industry known for blowing its brains out with cost overruns, Ripper year end (2008) financials provided a glimpse of a company that was earnings positive, was creating $0.14/share in cash flow, and had healthy insider ownership. Eventually, the folks at Ripper decided to orchestrate a full exit from the industry, and issued a press release indicating that they had sold some significant properties, and that because of this, “they may declare a dividend”. That last part was not unlike spotting the Loch Ness monster and the Yeti at Sunday brunch, but because of Rippers size, the market hardly moved the shares. As a result, I bought all the shares I could, and any faith I had in the efficient market theory evaporated. My return on Ripper actually would have been better, as I purchased more shares after the special dividend (which skew the return values), as I thought the future might hold more nice surprises. I was wrong, but despite my misplaced optimism, the special dividend made all the difference. If anything else, Ripper cemented my belief that small companies can be mispriced for significant periods of time, which usually spells opportunity for the small investor.

Titan Logix – update at fiscal year end 2020

Titan released full year financials on November 26th, 2020, and as expected, the market reacted with a big fat yawn. While the shares are up slightly ($0.365 as of December 10, 2020), they are still inexpensive, given that the company is sitting on $0.33/share in cash, has no debt, and has skated through the pandemic with only marginal balance sheet impacts. Titan is currently still in a “holding pattern”, as it is not benefitting from the “Vaccine trade” that is pushing Canadian energy companies to recent highs. So, without further ado, we delve into the good, the immaterial, and the ugly parts of Titan Logix.

The chart is improving. As mentioned, the shares are up a bit, and this is reflected in the chart. That being said, the energy sector is still decidedly “unsexy”, so we would not be surprised if the current share price strength waned somewhat. In the very short term, the bottom line is that some of the easy money has come off the table, but it would not a total surprise to see the shares fall back down to $0.32 – $0.34. If the market is a beauty contest, Titan is still perceived as ugly, albeit with a bit more lipstick as of today. Bear in mind that we have been long on Titan since late 2018, so for those that are out of the money – we feel your pain.

The balance sheet is virtually unchanged. There is really not much to say here, as the balance sheet is only slightly changed from Q3. Once the dust settles, there is a $110,000 deterioration in net equity from Q3, which translates into a loss (in book value) of approximately $0.001 – not really something that’s going to move the needle. In short the balance sheet is the same – lots of cash, no debt.

The income statement is worse than last year – as expected. Not surprisingly, revenues are down (-26%), COGS are down (also -26%), and the company declared a net loss of $578K vs a small net income of $50K last year. To be fair, Titan was the recipient of a total of $440K of Government wage subsidies, which cushioned the impacts of the COVID slowdown, but virtually every organization that was paying attention managed to participate in such programs. While it’s true that if one adjusts for this amount, then the net loss (and the balance sheet) would be worse, but exclusion of this amount would not be a game changer. All things considered, the income statement story isn’t that bad. Gross margin held steady at 53% on a YoY basis, G&A is actually down 4% even after adjusting for the impact of the $440K wage subsidy, and the only noteworthy increase is a 62% ( + $410K) increase in Engineering expense. In the MD&A, this increase is addressed, as the MD&A states:

“….during the fiscal year, the Company incurred engineering expenses of $1,067,211 compared to $658,711 in fiscal 2019. The Company developed software and cloud based applications for its first IIoT products, the Titan Data System (TDS) and the Titan API plug-in for its guided wave radar gauges. The increase in engineering expenses was offset with wage rollbacks, discretionary expense reductions combined with benefits received from the CEWS program...”

In a sea of bad news, statements like this are a solid indication that the company is not sitting back and hoping – they are actively making the effort to come out of this very dark period with a better product offering. So, in closing, while the income statement is ugly, it could be a lot worse.

Cash flow from operations is negative – as expected. Not unlike the income statement, cash flow isn’t great. However, in light of the fact that revenues YoY were down by almost $1.5 MM, what can we expect ? The way that one views the cash flow statement is a matter of context. Yes, in absolute terms it’s bad, as cash flow from operations are negative, and would be negative to the tune of -$1.11 MM if one adjusts for the $440K of Government assistance. If this were representative of cash flow in a normal year, this would look very bad – but in the context of one of the worst years ever, it’s expected. It would be very surprising if Titan revenues continued at the same muted level in fiscal 2021, so while this cash flow statement isn’t “good”, it shares the same thread as the income statement – not good, but not surprising, and very likely to get better.

Insider ownership continues to increase. Since the Sep. 30th update on Titan, the largest shareholder, the “Article 6 Marital Trust created under the First Amended and Restated Jerry Zucker Revocable Trust dated 4-2-07” has continued to increase their position, purchasing an incremental 119,500 shares at an average price of $0.33. This means that the Trust now owns a total of 10.5 MM shares, or about 37% of the total shares outstanding. The consistent purchase of shares may suggest that the Trust has an interest in taking the company private, but this is conjecture at this point. Whatever the case, the Trust sees value in the company, as they would not continue to purchase in the open market if they felt the upside wasn’t significant.

The news cycle continues to be dormant. This is not a company that is shouting from the roof tops – they are simply trying to execute as best they can. Given that Titan is associated with the energy sector (for better or for worse), and the fact that they utilize media on a bare bones basis, the shares are not enjoying any sort of “hot news” premium. In fact, for those wishing to acquire shares, tax loss selling season may prove to be lucrative, as some investors who have short time frames may start selling as the end of the year draws near.

We continue to hold Titan, and continue to buy at the low end of the price range. The Titan story hasn’t changed much since the last update, and realistically, expectations were low. In closing, we would reiterate the following points:

  • The chart is definitely looking better: While there hasn’t been a sustained upward move, this is still a good place to accumulate cheap shares. Aside from tax loss selling, it would seem unlikely that the shares get much lower.
  • Tax loss selling will provide patient investors with opportunity: For those that would like to get in “really cheap”, it probably makes a lot of sense to put in some laddered stink bids. There are always some sellers out there who have either lost patience or aren’t sure why they bought in to begin with.
  • Titans balance sheet is very solid – many competitors may not be: An oft repeated theme on these pages is “there is no bankruptcy risk”, but the other side of that statement means that competitors who are poorly capitalized are dying a slow death, and new entrants are certainly thinking twice before competing in this decidedly “unsexy” space.
  • When activity picks up, Titan will be one of the few left: Commodity sectors (and those industries related to commodities) tend to endure long hot & cold spells, but when they do turn around, it can get busy – very busy.
  • The fact that Titan is diversifying their revenue stream is not priced in: At this time, the market is pricing Titan as a “pure energy services” firm. While it remains to be seen as to whether or not they can truly diversify their business model, it’s clear that this possibility is not priced into the company today.
  • This is a value play – patience is required: If your investing time horizon is short, then maybe this isn’t the right place to be. While a quick bounce in price could happen, a longer recovery is more likely.
  • The low hanging fruit is around $0.55: If nothing else, it would seem quite likely that the shares at least trade at the 2016-2019 average of the price/book ratio (1.07x), which would imply a price of $0.55, or upside of 50% from current prices.

I am long on Titan, with an average purchase price of ~ $0.45 CAD, and will continue to purchase at the current levels.

As always, these are only my thoughts & opinions. If you have questions or comments, I can always be reached at mark@grey-swan.com. 

Armada Data Corporation.

In the universe of “small companies”, Armada may take the crown for being the smallest market cap company covered here. With only 17.67 MM shares outstanding, and a (current) market price of $0.13, the market cap of just over $2.0 MM is by all measures small, if not microscopic. But as the saying goes, good things come in small packages, and the current Q1 financials for Armada suggest that while they are indeed small, they are off to a blistering start to fiscal 2021.

Who is Armada ? Armada, which is based in Mississauga Ontario, has been around as a public company since 1999, but only started reporting as Armada data (and using the name) since 2004. In its current form, the company website states that the company  “specializes in the collection, re-packaging and distribution of Canadian new car pricing data.“, so it truly is a data only company – but that wasn’t always the case. At one point, Armada had a significant interest in the operations of “Mr. Beer”, which was referred to as their “bottle brew division”. Needless to say, while the combination of these two was surely interesting, there were little or no synergies to be had by these two lines of business. The Mr. Beer division was shut down in January of 2015, and Armada embarked on a more focused business plan. As of December of 2020, they have a singular focus, the automotive data market.

The Armada chart is waking up. We have been long Armada shares since early 2018, with an initial purchase around $0.15, and eventually averaging down to around $0.115, which means we were “early to the party”. From 2018 through to most of 2020, the Armada investment was dead money. However, solid Q1 financials have brought some life back to the chart. The shares have come off their lows, and even at prices around $0.12 – $0.13, Armada shares are still fundamentally cheap.

The balance sheet is cash rich and debt free. Readers who visit often may say this is an oft repeated line, but that’s the way we like our companies. Armada is no different – cash is up both on a YoY and 3 month basis, as are current assets and total assets. While there is some Goodwill and Intangibles on the balance sheet, there hasn’t been “inflation” of these assets, and they comprise a fairly small part ( ~ 15%) of the total asset base. Additionally, both short term and total liabilities have fallen, and there is no long term debt to worry about. For those looking for “book value”, it should be noted that Armada isn’t a “deep value” play when viewed in a book value context, and this isn’t what we are looking for. As a “data services” company, the value of Armada lies in the ability to leverage soft assets, not in the “bedrock” value of hard assets. In any case, the balance sheet suggests that Armada won’t be faced with undue financial pressure any time soon. The fact that the retained earnings deficit continues to shrink is also good news – which brings us to the Income statement.

Revenues and earnings are up significantly. During the prior fiscal year, Armada achieved total revenues of $3.28 MM, so the fact that they hit over $1.0 MM in one quarter is significant. While costs have come up along with revenues, the growth in revenues YoY of + 29% outweighs the +19% growth in total costs, which means earnings are still up 130% YoY. It might be argued that some of this revenue may be attributable to pent up demand after a prolonged COVID lockdown, but even if that is the case, if Armada can bring in a grand total of $127,000 of net earnings for the remainder of the year, it will achieve total net income (for the fiscal year) of $353,000, or $0.02/share – which would be its highest net income recorded going back as far as 2011. In turn, if it achieves $0.02/share in net income, then it suggests an earnings multiple (today) of 6.5x. Essentially, a higher valuation is well within reach. If Armada achieves EPS of $0.02 and the multiple corrects to 10x – 11x, the upside today is still ~ 50%.

Cash flow is solid on all fronts. Despite some hiccups on labelling of the cash flow statement (see below), cash flow is solid both before and after changes in working capital. If one assumes that (a) Armada can repeat this over the next three quarters, and (b) one selects the lower of the two cash flows ($159,562, after changes in working capital), it would bring in $638,000 for the fiscal year, or about $0.036/share. At todays price of $0.12 – $0.13, this implies a very attractive cash flow yield of around 30%.

Insiders have held a significant position since the beginning. Insider holdings that stay consistent over the long haul indicate executives and management are committed to the long term success of the company, as they have maintained their “skin in the game”. Armada has a very strong insider following, as the three largest insiders hold approximately 11.74 MM shares, or about 66%.

  • James Robert Matthews (CEO) – owns 3.55 MM shares (20%).
  • Paul & Daniela Timoteo (former director & spouse) – in aggregate own 6.48 MM shares (37%). It should be noted that Paul Timoteo passed away in 2012, so my assumption is that the shares that were listed under his control (3.0 MM shares) are now controlled by his spouse.
  • Eli Oszlak (VP & CTO) – Owns 1.7 MM shares (10%).

With this level of insider holdings, it suggests that there is clear alignment between the management/executives of Armada and the average shareholder.

No analyst coverage and no self promotion. We recognize that this is a two way street, in that attention moves the share price, and lack of attention doesn’t. However, we are approaching this from the lens of someone who might want to accumulate shares of Armada, not someone who already has them. Arguably, there has been an increased amount of attention focused on Armada recently, but this is entirely due to solid financial results. The amount of eyeballs that this company has drawn is still fairly small, so the shares are (at this point) by no means “overhyped”. Given the tiny market cap, we don’t expect any analyst coverage any time soon, so unless something unforeseen draws more eyes to the Armada story, it will continue to trade almost solely on the merits of financial performance.

No share issuance, and it’s unlikely there will be a capital raise. The company has not issued shares since 2013, and we believe it’s highly unlikely that there will be significant dilution any time soon. If the company continues to execute at the same level as its Q1 numbers, then there is no need to raise outside capital.

The product offering might not be “disruptive”, but some of it is very timely. Armada has been involved in the “digital” side of the car business for some time, as the CarCostCanada website has offered pricing information to consumers since 1999. But over the last year, consumer behavior has shifted even more to an online presence, as COVID imposed lockdowns and mandated social distancing has meant that even more consumers have gravitated to digital solutions. On the other side of the coin, dealers who traditionally conducted much of their business face to face are finding a growing volume of requests from consumers are coming via an electronic format – and they need to keep up. Armada issued a press release on October 30th 2020 about their agreement with ETA Response Inc., a technology company that specializes in managing the online relationship between consumers and companies, thereby ensuring that dealers adequately respond to customer requests and concerns. Incremental agreements such as this dovetail nicely with the Armada business model, and are the “right solution at the right time” given how COVID has forced changes in how both consumers and service providers interact.

In summary, the valuation is in a sweet spot – even if Q1 is anomalous. As mentioned previously, at the current price ($0.13), the shares are still inexpensive on several fronts. While Q1 may have benefitted from pent up COVID demand, the impacts of this quarter means that even if other quarters underperform (on a relative basis), the shares are still relatively inexpensive. For the sake of argument, let’s assume that Armada achieves at the following “underwhelming” level, as shown by the table below:

If Armada can achieve revenues over the next three quarters that are 30% lower, and is saddled with a much higher COGS%, it can still achieve EBITDA of just over $400,000 that is within earshot of its highest ever EBITDA ($465,000 in 2011). Additionally, at this muted performance, it would also achieve EPS of $0.02, which would be its best EPS since 2011. At the current price, the only thing Armada needs for a 50% return (from $0.13 to $0.20) is to hit mediocre targets, and a reversion to a market average 10x earnings multiple. Other valuation parameters suggest the same.

  • Book value: Using data going back to 2010, Armada has traded at an average of 3x book value. At the current price ($0.13) and a tangible book value of $0.05/share, Armada is trading at 2.5x book value, slightly under its long term average. It should be noted that fiscal 2015 was excluded from this dataset, as Armada tangible equity was slightly negative that year.
  • PE multiple: As already indicated, Armada needs to execute at a “mediocre” level, and the PE multiple needs to normalize to a market average 10x, which would provide 50% upside from todays price.
  • EV/EBITDA multiple: Since 2010, 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. The current EV/EBITDA multiple, again assuming mediocre results for the remaining quarters, is 4.4x.
  • Cash flow yield: Lastly, if one uses EBITDA as a proxy for cash flow, and Armada executes at the levels shown above, it will achieve $0.023/share in cash flow. This suggests a healthy current cash flow yield of 17.5%.

On the other hand, if Armada can execute at levels similar to Q1, then there is much more upside – but that remains to be seen.

At the current price, Armada provide low risk, small cap potential.  The reason investors look to small and micro cap companies is because they provide the potential for non-linear upside. As every small cap investor knows, it is extremely difficult to make the perfect pick with the perfect timing – but sometimes it is possible to make a very good pick which provides the possibility of abnormal (100% or more) upside, an even greater probability of more reasonable (but still attractive) upside (~50%), and a minimal risk of dilution or bankruptcy. With this in mind, the Armada opportunity can be summed up in the following bullet points:

  • Trading may still be choppy in the short term: While liquidity has improved, trading will likely be choppy until another decent quarter comes out.
  • The chart is looking attractive: From a technical perspective, the price appears to have turned the corner, with all MAVGs exhibiting a tell tale upward move.
  • Investors needn’t worry about bankruptcy or dilution risk: Barring a direct hit by an asteroid, it is highly unlikely that bankruptcy/insolvency is an issue, and Armada has not demonstrated a propensity to dilute existing shareholders.
  • COVID may be a partial impetus for improving results: The change in consumer behavior due to COVID may have juiced the recent Armada results, and if this is the case, the long term change in consumer behavior may continue to do so.
  • As is the case with many small caps, try & bid at the lower end: Trading volume has picked up, but pricing will likely be volatile. Given this situation, one can bid at the lower end of the bid/ask spread rather than hitting the ask right away.
  • Patient investors may see the greatest returns: If Armada continues to execute at Q1 levels, then potential EPS could be closer to $0.05/share, which suggests much more upside. If this is the case, then investors will have resist the urge to make the “easy 50%”.

I am long on Armada, with an average purchase price of ~ $0.115 CAD, and will continue to purchase at opportunistic prices.

As always, these are only my thoughts & opinions. If you have questions or comments, I can always be reached at mark@grey-swan.com. 

Total Telcom Inc. – update at Q1 2021

It seems just like yesterday when the fiscal year update for Total was published, and not two weeks later, we get to do it all over again. Such is the life of someone who is a slave to routine – but I digress.

Given that the ink on the full year update has hardly dried, this update will be relatively short. However, as they say, good things come in small packages, and the package of Q1 appears to be just that. Without further ado, we will get right into it. Key sections continue to be highlighted in green, amber, or red to signal issues that are bullish, neutral, or bearish.

The chart still looks flat – depending on the time frame. Trading in Total has been choppy over the last 12 months, and there were times that it could go days without trading at all, but this has changed since the last update. From mid- October onwards, Total has traded approximately 1.6 MM shares. This may not sound like a lot, but to put this into context, over the last 12 months, the entire volume of Total shares that traded was approximately 3.3 MM shares. So, about 50% of the total volume over the last 12 months has been concentrated over the last 60 days. Given that Total is still “unknown” to say the least, this would seem to suggest that those close to the company have been busy. This increase in activity is a good sign, and the price may be at a point where the chart starts looking decidedly different. At this point, the chart is still “skipping along the bottom”, but this could change in the relatively near future.

The balance sheet is boring – but better. Trust me, it is hard to come up with new and novel ways of saying “this balance sheet is essentially risk free”. Nonetheless, despite lacking creativity, it’s nice to see that the balance sheet is solid, and is actually better than it was at the fiscal year end. The cash balance has increased, and there’s no real debt, as the $40,000 COVID loan is both interest free and eligible for partial forgiveness. Simply put, as of September 30th 2020, Total has $3.95 in current assets for every $1.00 of total liabilities. At June 30th, this ratio stood at $3.55 / $1.00. To be blunt, there’s not much to talk about here, other than it’s just better. The main thing worth mentioning is the fact that there’s more cash – which means Total had a profitable quarter.

The company is on track for its 2nd best year in a decade. Revenue is up 16% YoY and COGS (as a % of sales) is unchanged, which means gross margins are also up 16% – you have to like consistency. Other cash costs are essentially flat, which in turn means that EBITDA, at $168,532, is up 25% over the same quarter last year ($134,560). Net earnings are actually a little lower on a YoY basis, but this is almost entirely attributable to movement in foreign exchange. Excluding FX, income from operations is up a solid 28%. All in all, there is nothing to complain about here – the company is starting off fiscal 2021 on solid footing. If Total can continue to execute at approximately the same level, it will be just shy of its best year (2018), when it recorded $476,000 in net income, and would be on track to hit $0.017/share in earnings. At the current price of $0.125, this implies a PE of 7.3, which is still inexpensive, and means there is 35% – 50% upside to a “market average” PE of 10 or 11.

With solid earnings comes solid cash flow. In the movies they say “with great power comes great responsibility”, but it’s kind of hard to insert that line here, so my version will have to do. Whatever the case, the story is the same – nothing earth shattering, just solid execution. Cash flow from operations is essentially the same as last year, due (again) to the the flip-flop of FX – last year was a gain, this year is a loss. Even so, at $160,000 for the quarter, this implies full year operating cash flow of $640,000. Viewed another way, an investor (today) at $0.125/share is getting a return of $0.025/share from operating cash flow, a cash flow yield of 20%. Again, this is if Total can execute at the same level, and doesn’t require an increase in revenues. If the following quarters see increased revenues, then this story will get better.

No changes in insider ownership or significant media releases. Given that there hasn’t been any movement on either of these fronts, we might as well kill two birds with one headline. Insider holdings haven’t changed (details can be found in the prior post), and true to typical form, Total has continued to keep a low profile, with only “bare bones” press releases. On that note, it was interesting to see that the original release of financials (on November 27th 2020) didn’t actually include the financial statements – a bit of an oversight. Someone must have noticed, as full financials appeared on SEDAR on the 30th.

The opportunity is essentially unchanged – with a new twist. Rather than repeat the same key points, interested (or new) readers can visit the prior post. However, there is one change worth mentioning, and that’s the fact that the dust has finally settled on the U.S. Presidential election. While this might seem like a fairly unrelated event, a snippet of the MD&A stands out when it makes the following statement:

A shorter translation might be “The Donald repealed a lot of environmental regulations, and Joe is likely going to bring some of those back”. In short, while this comment has been bouncing around the MD&A for some time (along with other comments about growth in new markets), it was previously discounted given that the political situation in the U.S. was still up in the air. With the dust finally settling on this, it means that a segment of the Total revenue stream that has been in hibernation for a few years is likely to come back.

In closing, Total is on solid footing for fiscal 2021, and if it can simply execute at the same level, the market should eventually re-price it to a more “normalized” valuation ( ~ $0.20). If Total can manage to increase revenues and maintain the existing cost structure, there is the distinct possibility that increased market awareness could push the shares well beyond the $0.20 level, as they traded north of $0.40 in 2017.

As always, for those with questions or comments, I can be reached at mark@grey-swan.com.

The “Grey Swan” of COVID-19

One of the few upsides of getting older is experience. When something happens, it’s no longer necessarily something “new and novel”, and from that well of past experience, one can better formulate actions as life presents new challenges.

When COVID-19 arrived, some might have argued that it was a “Black Swan”, and while I agree that it has been impactful, I would suggest it fits more into “Grey Swan” territory. Human history is peppered with stories of germs and viruses that have decimated populations, and while there hasn’t been an event of “Black Plague” proportions in modern history, we needn’t look too far back to find numerous smaller pandemics, such as SARS (2002-2004), Avian flu (H5N1 2008), and MERS (2012), all of which have happened in the very recent past. With these having occurred so recently, it suggests that COVID-19 was a swan much more grey than black.

Most of us (myself included) could never have predicted how exactly an event like COVID would play out, or exactly what impacts it might have. However, from an investing perspective, if there is one thing I have learned it’s that events such as this will continue to happen – with almost painful regularity. Investors who are successful over the long term learn from these events, and come back more prepared the next time. The pain of each of these events are valuable lessons, and the learnings which they impart are ignored only by the foolhardy.

I started managing my own capital in the late 90’s, and in doing so, I have seen my fair share of bumps along the way. Wikipedia lists no less than a dozen or more crashes and mini-crashes since 1997, but the most significant of these that I distinctly recall were the Tech bust (2000), the impact from the world trade center attacks (2001), and the Financial crisis (2008), to name just three. Since all of these are so different, some might ask how learning from one helps predict (and avoid) the next event, but that isn’t the intent. Forget about “predicting and avoiding”, because it’s usually a fruitless task. Sure, I can predict that there will be a major health scare (or financial crisis) in the future, but when, and where? Predicting when crashes will occur is a mugs game. The learning is utilized not in avoiding, but in having a plan, preparing, and reacting – appropriately – when such an event does occur.

Each of these market downturns (and all the others that I didn’t mention) were different with respect to the root cause, but each were the same when one views the outcome: initially there is shock, followed by denial, despair, acceptance, and finally, recovery. When that shock initially hits, it signals to the prepared investor that they need to implement their plan, as opportunities will undoubtably present themselves.

I once heard a money manager compare the investing process to fire fighting. For firefighters, there are long stretches of boredom, when there are no fires or emergencies to attend to, and finally, a fire breaks out somewhere. Firefighters often experience long stretches of “nothing”. Those with experience know that this time is precious – it allows the firefighter to train for the actual event and check and re-check the life saving equipment they will need when things do get ugly. When that call finally comes the last thing you want to think about is whether or not the fire engine tires are pumped up, or whether those holes in the hoses have been repaired. What you want to be able to do is put on your gear, turn the ignition key, and go – without any thought other than getting the job done. Preparation is the groundwork on which useful actions takes off from.

For the investor, this means doing “something” when nothing is really happening. Too many novice investors are action junkies, and feel compelled to hit the buy or sell button in order to feel like they are really investing. The brokerage loves this, but this isn’t what I mean when I say that one should be “doing something”. This may mean different things to different investors, but at the very least, there are some common themes. On a proactive basis, here are just a few examples of what an investor should be doing – before the market starts to nosedive.

  • Determine how an extended downturn might impact you. Is some of the money that is currently invested earmarked for something important in the near term?
  • If you derive income from your portfolio, how much will dividend cuts impact you? During this last downturn, more than a few companies reduced or eliminated their dividend.
  • If you are employing margin, ensure you understand to what degree a margin call might impact you. During the 2008 credit crisis, I personally knew of more than a few investors who did not understand how the margin on their account was calculated.
  • Identify those sectors (or companies) where you truly have insight. If you work in a particular sector (tech, real estate, energy, etc.) then your experience gives you an edge.
  • Maintain a shopping list of companies you would like to own, especially within those sectors where you have experience or insight.
  • For those companies you wish to acquire, develop a 5 or 10 year history of where the shares have traded in relation to various valuation metrics. Data such as this is invaluable in identifying when companies are under or overvalued.
  • Develop an understanding of what factors will help (or hinder) a particular company’s prospects. Read whatever you can get your hands on to expand your investing knowledge.
  • Lastly, because this blog tends to deal with small and obscure companies, research the different ways to ferret out good small cap opportunities – aside from paid newsletters.

During the first few downturns that I experienced (in the early 2000’s), my portfolio was small, and I didn’t have significant amounts of capital. Not only was I unprepared, but many of the companies that I owned were small and illiquid anyways, so the impact on me wasn’t the same as what I saw in major indexes (and large companies). However, I knew that I was missing something. I knew that opportunities were appearing, but I didn’t know how to assess them, or to determine if they truly were opportunities.

This changed during the financial crisis of 2008. During the credit crisis, I was both lucky and unlucky – lucky because I dealt with a sector that was heavily impacted (banking) and unlucky because I couldn’t allocate as much capital as I might have liked. In 2008, much of the work that I did peripherally involved the world of banking, and I had come to understand how Canadian banks differed from their American counterparts. From both my work and my travels in the U.S., it had become abundantly clear how many more banks were competing for business in the U.S. when compared to Canada, even after adjusting for population size. Nowhere in Canada could I go to a “First Farmers bank of Easter Manitoba”, whereas in the U.S., First Farmers bank is a real thing. What was clear to me was that while Canadian consumers complained bitterly how the “Big Six” gouged them on fees, the fact that they dominated the industry in Canada, and the fact they were an oligopoly made them more stable than their American counterparts (a comparison of the two can be found at Visual Capitalist). When the financial crisis hit, I was lucky in that I already had an understanding of the banking sector. At that time, everything in the banking space was painted with the same brush, and when I saw the dividend yields on Canadian banks hit unprecedented levels, I knew that the opportunity wouldn’t last. I took what little money I had and invested in a basket of the “Big Six”. At the time of writing this, these same investments spit out dividends whose average today is 15% and growing – such are the fruits of preparedness.

When COVID hit, I didn’t quite have the same advantage, but since that time (in 2008) I have always maintained a “shopping list”, I have 10 year histories of many companies on hand, and I update my personal financial snapshot on a monthly basis. As the markets weakened in Q1 and Q2 of 2020, it was clear to me that many companies were “on sale”. Readers who have visited here before are already familiar with the kinds of small (overlooked) companies that I tend to write about and hold in my “high risk” bucket, but I also kept an eye on larger companies, and many of these were fire-sale priced during the depths of COVID. While it was difficult to do, during some of the dark days of the market downturn, I tried to ignore that unsettled feeling in my gut and purchased various companies such as Deveron, Pioneering Technologies, Scotiabank, Suncor, and Vitreous Glass, to name a few.

Ultimately, we can’t reverse COVID and turn back the clock, and by no means am I trying to downplay the human cost of the pandemic. It is my sincere hope that something like this never happens again, and it’s also my hope that the various nations can learn from the missteps of this pandemic, and be better prepared next time. In the meantime, on a much smaller scale, if investors learn from the pain of this event, it also means that they will be better prepared for the next financial downturn, and will be better able to react appropriately once the next Grey (or Black) swan arrives. If there is one prediction I am confident making, it is that another such event will occur in my lifetime – and probably a lot sooner than I might like.

As always, If you have questions or comments, I can always be reached at mark@grey-swan.com.