WHAT YOU MISSED FROM GEOINVESTING LAST MONTH
May 2022, Volume 2, Issue 4
STUDS VS. DUDS
Stud (in the making) – Canterbury Park Holding Corp (NASDAQ:CPHC)
One of Minnesota’s largest and well-known entertainment venues, Canterbury Park hosts pari-mutuel wagering and card games at its facility in Shakopee, Minnesota. Pari-mutuel wagering is offered on live thoroughbred and quarter horse races each summer, and simulcast wagering on races held at out-of-state racetracks is available year-round.
Canterbury Park’s Card Club hosts a variety of poker and casino style card games 24 hours a day. Revenues also come from related services and activities, such as concessions, parking, admissions, programs, and from other entertainment events held at the facility.
We touched briefly on our past coverage of CPHC in a recent “Special Sunday Alert” highlighting how Information Arbitrage we discovered during a preliminary March 20, 2022 call with management culminated in a research note for our Premium Members.
To refresh your memory, an Information Arbitrage exists when:
“a disconnect between stock prices and available public information on a company is noticeable and monetarily worth pursuing. Sometimes, the mispricing of micro-caps can be substantial. This strategy has “paid dividends” for many investors. Part of the reason the “InfoArb” opportunity exists is that investors often incorrectly label ALL microcap stocks as pump & dump schemes promoting companies with no revenues and profits.”
Our research conveyed that we believed the stock may eventually see a large expansion in its valuation multiples as new management begins to exploit untapped growth opportunities in its casino operations. The stock was trading at $19.27.
Canterbury is throwing off a crazy amount of earnings and cash flow and carries very little debt. At the time of our interview, CPHC had a P/E of only 5x. So, it was a best of breed company in its industry, selling at the lowest valuation compared to its competitors who tend to carry mounds of debt.
On April 27, 2022, just over a month after announcing that the company had entered our research funnel, CPHC hit a 52 week high, trading at $32.92, about a 52% gain from the initiation of our coverage.
This is a perfect example of why we focus so much of our energy on finding and highlighting InfoArb for our Premium Members, and why we believe this company certainly has the ingredients it needs to become a Stud. It’s also a perfect example of why investors who are obsessed with performing their own research subscribe to Geoinvesting. We bring ideas to our subscribers very early in our research process and continue to provide updates as our due diligence progresses. We do this because we know price discovery on mispriced stock can occur over time, sometimes within days in the microcap universe. We’d like to congratulate any of our subscribers who were able to take advantage of this research.
Dud – Liberated Syndication Inc (OTC:LSYN)
Per an SEC filling highlighting the results of a hearing on LSYN, the stock’s listing was revoked after failing to comply with Exchange Act Section 13(a).
This delisting effectively left anyone that was still holding this stock with a stack of “useless paper.”
This company is a clear example of what happens when management shirks its fiduciary responsibilities it owes to shareholders. Unironically, this is delisting number 2.
When we went speculatively long on LSYN on May 31, 2019, we knew the risk involved. Prior to our several-year bullish stint on the company, it was a much different story.
The company was a spinoff from Fab Universal, a U.S. Listed China-based media kiosk company. We exposed Fab’s failure to disclose materially substantive debt in its U.S. filings, putting it squarely on the SEC’s radar (and thin ice) for the foreseeable future. This was on top of a multitude of other damning articles by other well-known short-side authors questioning the legitimacy of the company’s operations.
After we exposed the company, shares of Fab Universal eventually traded for under a penny.
In other words, LSYN needed not to mess up too badly for shareholders to be exposed to unfortunate results, as is happening today.
In light of the company’s delisting last month, their past dereliction of duties, although different in nature and a bit more opaque, turned out to be a window into what was just transpired.
We touched upon this bear story gone bullish in an article titled, “Liberated Syndication: An Unlikely Spinoff Takin Off”, giving a little bit of background into the company’s past operations and ultimate demise (delisting number 1), and the transition into the spun off company, Liberated Syndication, in the business of podcasting and webhosting, an industry accelerating at a record pace.
After LSYN was spun off, the stock had an incredible run. We eventually decided to go bullish on the stock in May 2019 at $2.70 per share.
They seemed to have cleaned themselves up, and the CEO came across as knowledgeable and motivated to take the business to new heights.
Although the stock made a small run here and there, it never really took off like we wanted it to. We still thought it had potential, and we honestly got caught a little blindsided by the turn of events.
Having said that, in the back of our minds, we are keenly aware, especially now more than ever, that there is always delisting risk with companies of this size due to the Dark Stock rule, a new SEC standard that we extensively covered in 2021 that requires companies trading on the OTC to regularly file financial reports, or suffer certain consequences.
At the end of the day, this can be chalked up to a risk/reward play in the realm of Microcaps, where management is given a chance to reconcile with its past misdeeds to carve out a brighter future. It is worth noting that if the company ever goes public again, investors’ shares in the stock would be reinstated.
Additional notes: To be clear, we were directionally right on the growth story, but shame on us for betting on a company that was still being run by the CEO who was heading operations when we outed Fab Universal as a fraud. We just assumed that because the CEO was eventually kicked out of the company that a new turn of fortune would arise.
On the heels of new management and an activist investor, the company has been making operational strides, growing revenue and making important acquisitions. Ultimately, we believe the activist will not let the company sit in the dark and will make their financials current and have the company re-IPO
Keep in mind that there is risk that the company gets sold privately, and does not relist.
The lessons here are:
- Beware of companies that don’t report their financials.
- Heed unresolved fraud issues the company might have in its past.
- Remember to size your positions accordingly.
Luckily, this is only a very small speculative position for us.
Why Microcaps, And Why Now?
Why have we been able to find a few stocks that have easily surpassed the market’s performance this year?
- Rcm Technologies, Inc. (NASDAQ:RCMT), >50% since the resumption of our coverage in April 2022
- Verde Agritech Plc (OTC:AMHPF) (NPK.TO), 69% since our RFT on February 16, 2022, so far peaking at 107%
- Canterbury Park Holding Corpora (NASDAQ:CPHC), >50% since adding it to our research funnel in March 2022
What did all these companies have in common?
Not only were they growing revenue, but they were also generating earnings and cash flow, while selling at insanely cheap valuations based on price to sales AND price to earnings multiples.
This is unlike many big caps that were selling at nosebleed price to sales multiples, many with little net income.
Earnings matter again!!!
Read on to find out why we see the potential for a change in market dominance to microcap stocks once the bear market dissipates.
If you were to look at the past 14 years’ performance in the stock market, there was a distinct haven for investors to flock to when looking for “sure gains” in their portfolios. Of course, we have to be careful with the word “sure”, since nothing is a certainty, although a 20/20 hindsight view might disagree.
That advantage was the large cap arena, where a handful of household names accounted for a substantial portion of their respective addressable markets, but were still Small enough (with a capital S) to expect a runway for growth due to the voracious appetite of consumers to, well, consume. From everything to IoT, media, commerce, communication and basically everything else comfortable and convenient that makes the Western nation’s standard of living achievable, we lifted Goliath up.
Stocks like Amazon.com, Inc. (NASDAQ:AMZN), Netflix, Inc. (NASDAQ:NFLX), Zoom Video Communications, Inc. (NASDAQ:ZM), MSFT, Intel Corporation (NASDAQ:INTC), Ringcentral, Inc. (NYSE:RNG) and more enjoyed unfettered success in their growth profiles. As long as their revenues grew, it seemed nobody really cared about how to value their bottom lines…it was all about broadcasting revenue GROWTH and gains in market share. During the magical run some of these stocks had, investors were valuing companies at nosebleed price to revenue valuation multiples with disregard to price to earnings multiples.
In the end, people were of the opinion that there was no real reason to invest in smaller companies with “perceived” higher risk profiles. Why would you if you could get huge returns from companies you knew weren’t going anywhere any time soon and we’re growing revenue at an accelerated rate?
Now, to be clear, we’re not saying that a lot of irrational exuberance also did not occur in the microcap universe over the last several years. Biotechs, pump and dumps, SPACs and overly speculative sexy microcap stories also pumped to illogical valuations. The thirst for these types of stories came from investors’ desires to make money in the short run, not wanting to wait for multibaggers overtime.
However, it was the big caps, mainly in the technology area, that led the market rally over the last 10 years or so. So, if that momentum was to break, the market was sure to be in trouble and drag everything down with it – the good and the bad.
Now, we are starting to see growth headwinds for these same companies. It looks and feels like a large cap tech bubble, one that’s been brewing for at least a decade.
If you are a realist, you’d seriously wonder how such highflying P/Es and P/Ss that some of these companies sported could be substantiated if their revenue growth slowed down. How could these mega caps continue to command the same bloated valuations at lower rates of growth?
There’s increased competition, new innovations, disruptors, and if you look under the hood, yes, large caps can bleed just like the rest. AMZN, for example, just reduced its guidance, and NFLX expressed concerns over its ability to maintain its dominance amid a slew of unavoidable factors such as the entrance of other market participants into its industry, and concerns over the improper use of its services worldwide.
The stocks in our microcap Model Portfolios might get caught up in the capitulative mayhem in a macro sense, but we know that their growth outlooks, combined with their cheap valuations, will make for a recovery that we think will blow the pants off of their mega cap counterparts when this new cloud of dust settles.
When you look deeper into RING NFLX and ZM, you will notice that their price to sales ratios crumbled from highs of over 100x for ZM, 30x for RNG and 11x for NFLX to the current range of below 7x for all. NFLX is even as low as 2.7x now.
This reminds us of the dotcom bubble, when we saw so many high flying internet stocks crumble. The only difference is that dotcom was a two year bubble.
We’re not just covering this because we are fans of the GARP (Growth at a Reasonable Price) model of investing in the realm of microcap stocks, but because we always thought that earnings growth, bottom line EPS, actually meant something. In fact, it should matter to everyone, else be left holding the bag if caught at the top of one of the charts illustrated above.
To distill it down just a tad, it’s easier to double a $10 or $20 million revenue base than to double a greater than a $1 billion dollar revenue base. Furthermore, the potential drop in stock prices of these large companies is steep. They’ve already grown to near their max potential but many still have P/Es in excess of 50x to 100x, or non-applicable P/Es because they’re losing money, which in a literal sense means there is no bottom to the stock’s price until you get to the value of ip, customer base, plants, property and equipment. It won’t take much for the latter to crumble, nor will it take much for the former to excel.
Now, we believe the pendulum has swung to where earnings and P/E ratios will matter again. Hopefully, it will be the dominating factor in valuing companies as we transition from this bear market into the next bull trend. That’s how the environment was set up for the first 20 years of my career, where high-quality undervalued microcap companies were in high demand.
We refuse to dismiss the notion that higher valuations will be assigned to high quality microcaps on the next bull run. We are ready for a reset, and you should be too. The stocks we follow and cover are aggressively growing revenue, doubling and tripling earnings, yet selling at low price to earnings AND price to sales multiples, providing a definable downside protection given the real numbers. We sweat to find these gems, and there is something to be said about that.
We might have to deal with some short term pain as the broad market follows the negative sentiment of the overall averages. However, in the end, we think our focus on investing in Tier One Quality microcap stocks will be handsomely rewarded.
RESEARCH AND IDEA PIPELINE
In last month’s iteration of the GeoWire we touched briefly on the publication of our most recent research article, “IT Staffing Trio – RCM Technologies, Inc., TSR, Inc., Mastech Digital, Inc. – The Trend Is Your Friend,” which was made free for anyone to read, in our write up on Rcm Technologies, Inc. (NASDAQ:RCMT).
RCMT increased as much as 43% and still maintains, as of market close yesterday, a gain of 38% since we published our research and a tough market environment
In the last month we have worked diligently to secure Management meetings with all 3 companies and look forward to releasing those invites to our Premium Members in the near future.
Our next goal is to determine if the other two staffing companies that we wrote about will have similar price appreciation potential.
Find out, alongside our premium subscribers.
Try GeoInvesting today and see all of our Calls To Action and to join us for our next Live Fireside Chat.
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WHAT YOU MAY HAVE MISSED THIS MONTH
We know it’s not easy to have a mindset to keep performing research when your portfolio might be getting decimated, but there’s always a bull market somewhere. Even though a diversified portfolio still might not go up during these rough patches, we can maintain some level of optimism by finding a few stocks to cherry pick while we are waiting for things to turn to positive. For example, we’d like to point you to three stocks that entered our research funnel this year. We’ve covered them in either Reasons for Tracking articles or a high alert research summaries. They’ve performed nicely, bucking the market trend.
Keep in mind that one of our goals is to provide you with insights into how we identify red flags while we are performing bullish research. This is especially relevant if you are or want to aspire to become a full time investor. Or maybe you just really enjoy the research process and digging into companies before you buy them. If that’s the case, then this case study is for you.
On the bright side, we were able to follow through with Friday’s live chat with Verde Agritech Plc (OTC:AMHPF) (NPK.TO) of which we are excited to get the replay to you as early as tomorrow. We were pleased to get to know the company’s CEO, Cristiano Veloso, who was very forthcoming with answers to the questions we posed, so we think you’ll enjoy it. We know the event was a bit early in the morning, but we try to be as accommodating as we can when it comes to most executives’ busy schedules.
While over the past several years, it was possible to achieve great success by investing in lesser quality companies that may have had the potential to become tier one quality companies, the current environment dictates, more than ever, that tier one quality investing is where the majority of the focus needs to be.
Revenue and good stories are no longer enough ammo to push stocks higher. It’s back to appreciating companies that can generate cash flow and earnings that are in a good liquidity standing. Like many others before us have stated in times when adaptation was necessary, “when times change, so must you.”
So, it’s time to reassess our model portfolios to differentiate between the top quality and lower quality stocks, and which ones lie somewhere in between.
We conveyed a #PodClip message by @majgeoinvesting w/ commentary on strategy & focus amid the microcap investing malaise, w/an emphasis on categorizing our Model Portfolio companies based on certain criteria & buckets they might fall into.