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I no longer avoid investing in Canada based companies. When you screen for stocks to buy, you might have a desired set of criteria on a quantitative, qualitative and geographical basis.
If you isolate your screen to Canada, natural resource companies will dominate your list. If you love to invest in these types of companies, many of which are in the early stages of development and specialize in mineral and oil exploration and extraction, you’d be in luck.
Canada is one of the most resource-rich countries in the world as the global leader in potash production and a top five global producer of diamonds, gemstones, gold, indium, niobium, platinum group metals, titanium concentrate and uranium. Canada is also the world’s fourth-largest primary aluminum producer, and has the third-largest oil deposits after Venezuela and Saudi Arabia.
Canadian Stock Market Diversification
However, Canada’s economy is diversified, and the country is home to companies across different industries, including technology, financial services, and healthcare, just like the United States. This diversification broadens the opportunities for investors, and the Canadian stock market can be attractive for those seeking growth and higher returns outside the oil-laden status quo.
The Toronto Stock Exchange (TSX) is the primary stock exchange in Canada, with approximately 3500 companies listed on its main board. The exchange is known for its high liquidity and the high proportion of institutional investors, which provide a stable base of demand for Canadian stocks.
In Canada, many small and microcap stocks can be found on the TSX Venture Exchange (TSXV), which is designed to cater to early-stage companies and smaller enterprises.
Approximately 2400 companies in Canada fall under the category of microcaps. That represents about 21% of the total of about 11,000 microcap stocks available on North American exchanges.
As with a select subset of US microcap companies, one of the key opportunities associated with some Canadian microcap stocks is their potential for growth. Because many these companies are small, they have more room to expand and develop new products or services, which can lead to significant increases in their share prices. Additionally, as we’ve explained in the past, microcap stocks can be less well-known than larger companies, which means they may be undervalued by the market, making way for value investing.
Why Did I Originally Avoid Canada, and What’s Changed?
Earlier in my career, when I was younger, I avoided Canadian stocks because I assumed they were mostly either very speculative development stage companies or resource stocks, a category of issuers that I didn’t really care for, due to the unpredictability of the factors that impact their sales and margins..
Back in the late 80s and early 90s, I used to receive mailers whose appearance were akin to the suggestive approach that the then popular baseball card industry used to try to convince me to buy firm 3×5 “stat sheets” and visages of Not-So-Joe-Dimagio ordinary players.
Of course, instead of the players, they’d have stock profiles on them. Instead of stats, it was pump and dump verbiage laced with alluring expectations. Much of this hyped-up fireplace fodder tended to be from Canadian penny stock companies.
So naturally, I was skeptical.
Regardless, along the way I tried to make a few investments in some Canadian microcap stocks. I didn’t find the same success I experienced elsewhere, so I decided to hit the pause button.
But, as said, our northern neighbors are no strangers to other industries, giving companies a chance to slightly nudge the resource stereotype to the side, and investors a chance to discover what on the outside might look like risky enterprises, but on the inside reveals a chewy center ripe with quality.
Take a look at the move Biosyent Inc (OOTC:BIOYF) (RX:CVE) had from 50 cents in 2013 to its high of $11.69 in 2014. The company is a profitable Canada based specialty pharmaceutical company focused on in-licensing or acquiring innovative pharmaceutical products that have been successfully developed. It generates revenue of about $25 million (Canadian dollars).
So, speaking of nudges, years later it would take some GeoInvesting research contributors and investing peers to open my mind to legitimately taking a look at Canadian microcap stocks again, scoping out due diligence candidates by applying the same tools and modes of analysis that I gathered throughout my investing career.
When I started to speak with individuals such as Paul Andreola (@PaulAndreola) from Small Cap Discoveries and Philippe Bergeron-Belanger & Mathieu Martin from Espace Microcaps (@espacemc), I started to get the Canada stock bug.
So, I gradually started looking at Canadian stocks in the industries that I was most used to researching, where I could be exposed to companies that had a pathway to sustainable revenue and earnings growth, even if the were considered boring.
What you will find is that they’re not all pump-and-dump mining, zero revenue-generating companies. There are many respectable companies in Canada with crazy low valuations. And truth be told, the U.S. equity market is rife with pump and dump schemes and low quality stocks.
Open Minds Today
By now, if you’ve been a subscriber to GeoInvesting, you’d already be aware that we have opened our minds to Canadian microcaps. We just closed the chapter on Smart Employee Benefits Inc (OOTC:SEBFF) (SEB.V), an administrative solutions company (originally pitched to us by Research Contributor Thomas Birnie On October 21, 2020) when it agreed to be acquired by Co-operators Financial Services Limited on January 4, 2023.
Smart Employee Benefits enjoyed a 21-month tenure in our Model Portfolio, and although we had hoped for a higher buyout price, we were still satisfied that it played out the way it did. When all was said and done, the acquired price of $0.22 represented an 82.60% gain over the Model Portfolio initiation price of $0.12. The Q2 2022 conference call information arbitrage that alluded to a potential acquisition 6 months prior, as well as a recap of our full coverage history can be found here.
CliffsNotes and the Race to Find the Next Canadian Microcap Stock Multibagger
I’d like to further digress on the subject of idea generation since I never really made it too apparent that I had internal research notes that supported the notes that you ultimately see on the GeoInvesting pro portal. It may sound like an unneeded exercise, but I’ve learned that you sometimes need to count to 10 to temper any rash Model Portfolio decisions. Some notes don’t even make it to the portal. Some are nimbly transferred over after counting to just 3, as happens in instances where the confidence meter enters the hot zone.
We are beginning to see tier 1 quality BigCapMicro names in Canada. It’s a trend we intend to keep following as there are obvious winners that, if identified, will boost the quality of your portfolios’ returns. We just wanted to let you know that the spigot of ideas never really dries up, and now that we just have a larger pool from which to pull, it’ll just keep getting better.
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