dimanche 28 avril 2019

A crappy collection of venture shit (and some others) that went nowhere

Once in a while, I believe it's my duty to rant against venture stocks. Because there's always people looking on penny stocks for an explosive growth.

I've said it again and again: it's a bad idea to look there. I'm tempted to add some insults to people investing in that kind of stocks because it's been proved by science and me (two synonyms), a business not well estabilished is usually doomed to failure. You better bet on Spotify or Netflix, as speculative as they may sometimes look, than to bet on a fucking 80 million dollars capitalization that will probably be a 40 million dollars capitalization in a few years.

Let's take a look at 10 small caps that have been recommended by many analysts in Canada over the last 5 years. Most of these have been recommended by Jason Donville, but some others have been recommended by me and some other bad analysts. Some of these have experienced a big overvaluation period, so, if we take a look at the price 5 years ago and the price today, it looks good (CRH Medical for instance).

However, most of them did pretty bad. And we can seee that, usually, when a stock changes it's name to something else, it's because it tries not to be associated with itself anymore. How the fuck would you want to be associated with a stock that doesn't even want to be associated with itself?

That's how fucking crazy some investors are.

CRH Medical (CRH.TO):
5 years ago: 0,72$
Peak: 10,87$ on march 1st 2017
Today: 4,07$

Patient Home Monitoring (now Protech Home Medical) (PTQ.V):
5 years ago: 1,25$
Peak: 7,90$ on april 1st 2015
Today: 0,97$

Macro Enterprises (MCR.V):
5 years ago (which was also the peak): 5,25$
Today: 4,20$

High Arctic Energy (HWO.TO)
5 years ago: 5,48%
Peak: 6,15$ on january 1st 2017
Today: 3,96$

Nobilis Health (HLTH):
5 years ago: 1,11$
Peak: 6,83$ on may 1st 2015
Today: 0,23$

Rifco (RFC.V)
5 years ago: 5$
Peak: June 1st 2014: 6,11$
Today: 0,96$

Ten Peaks Coffee (now Swiss Water) (SWP.TO)
5 years ago: 4,05$
Peak:11,99$ on january 1st 2016
Today: 5,72$

Callidus Group (CBL.TO):
5 years ago: 18,60$
Peak: 22,80$ on august 1st 2014
Today: 0,70$

Delphi Energy (DEE.TO)
5 years ago: 3,54$
Peak: 4,53$ on august 1st 2014
Today: 0,31$

Concordia Healthcare (now Advanz Pharma) (ADVZ.TO)
5 years ago (which was also the peak): 210$
Today: 23,15$

9 commentaires:

  1. Small caps by nature involve more risk (more un known’s about the future) than larger cap stocks but there are also more inefficiencies in this sector of the market presenting the investor with more opportunities. And small caps over the long run have outperformed their larger brethren...But there are periods of time when they can under-perform…In other words there are going to be successes and failures when investing in this sector of the market. Small cap value is a much better place to look for investments than the growth area.

    For myself I’ve owned Nobilis Health, High Arctic Energy and Callidus Group. I got absolutely killed on Nobilis and Callidus but that is how you learn. And the mistakes I made on those two stocks have taught me a lot about investing in this sector of the market. I sold High Arctic Energy because the underlying industry (energy) was in a bear market, I still consider High Arctic to be a good company and even a good investment (I believe the supply side in energy has been so depleted that it looks like it could be a good place to invest right now.

    And I currently own Swiss Water which I consider to be a good investment (currently building another plant to expand their operations).

    In my experience to help improve your odds of investing in the small cap value area, an investor should focus on balance sheet quality, positive cash flow and the experience and quality of the management team. These stocks are often takeover candidates and can jump in price suddenly because of this. To avoid value traps, check to see if revenues have been growing over the last three years.

    I mean sure you don’t want all of your investment dollars in this area of the market but putting some money in this inefficient area only makes good sense and provides a little more diversification too.

    And your personal circumstances will affect the way you invest as well. If someone is retired he will probably want to tilt his portfolio toward dividend and dividend growth stocks…investing in the stock market is a varied menu and no one person has all the answers, the individual investor will have to make up his mind for himself what works and what doesn’t.

    1. High Arctic is probably one of the best in the oil and gas sector. The problem is that’s not a good sector.

  2. Well done Mr. Penetrator. A very good blog post with lots of examples. If I can just avoid the stocks capable of losing 95% or more of their value overnight, I should be ok.
    For my next purchases, I'm looking at Mastercard and Visa. I want to move as far away from the "crappy collection of venture shit" as possible.

    1. Visa and Mastercard are pretty expensive right now. You should wait.

  3. PTQ.V had a spin off into VMD.TO and has gone up about x5. Protech is also ramping up and has delivered.

      Is PTQ.v or VMD.to a better investment? How do you distinguish between the two? and how much of a moat can these companies have? might competition make it harder for them to make a buck? We're in search of moats here at dont fuck with penetrator blogspot.

  4. I agree on most of these, but I disagree on CRH Medical. That one is actually a great business that got hit by a combination of overvaluation and the CMS rate cut back in 2017. Because of GAAP accounting rules, net income looks like crap because you have to deduct amortization of intangible assets related to their M&A. But when you add this back, you get their real free cash flow number (which they have been spending on M&A and share buybacks). Using that cash flow number in your return on equity calculation (and adding back accumulated amortization to shareholders' equity in the denominator) gets you to 18-20% cash flow returns on equity. I think these are great numbers. Then add in the fact that the Company is only trading at ~6x 2019E pro forma levered free cash flow, and this seems like a steal to me. The stock has traded like crap the last few years, but this is quite a high quality business at a very cheap price.

  5. Hey PSD, while I used to agree that CRH was a great business I now question whether they will be able to turn things around. Ultimately a stock is only worth what someone is willing to pay for it. Based on your metrics it may seem undervalued but to frustrated shareholders over the last 2 years they are either down or up a couple cents in share price. Their growth by acquisition model is not increasing shareholder value. It may be increasing revenues but the margins are way thinner than they used to be due to CMS cuts. Also I wouldn't be surprised if more cuts came in the next couple years. I will say it was a good move to replace the CEO (Wright) and the new CEO seems to have useful experience but again its another question mark as to how he will turn out. I came to the realization that the market probably wasn't wrong about CRH for the last 2 years, I was likely wrong. I also don't like that they are now talking about extending their credit line to start acquiring more clinics on debt instead of using cash flow. The model didn't move the share price when they were self funding the acquisitions, it will be worse when they are using debt to fund them. I just think there are much better places to put my money and 2 years of no gains or a small loss would back that up. Good luck!

  6. Hey adrock, I respectfully disagree with your position. I think there's a huge difference between fundamental performance of a business vs. stock price movements. After all, isn't that the whole point of the allegory of Mr. Market? There are many great companies whose stocks don't move for some time, possibly for years. This can be due to many things...sentiment, overvaluation, etc. But if the business is fundamentally sound, and especially if the valuation is cheap, you're going to make money on it. The fact is that their acquisition strategy is increasing value for shareholders...there are not many companies that can do M&A and generate 18-20% returns on equity like CRH is doing. If Mr. Market wants to price such a company at 6x levered free cash flow, I am happy to take advantage of his depressive state. If you've read The Outsiders by William Thorndike, I would happily point out the stock performance of John Malone's TCI, which executed the exact same strategy in the cable industry...there were multiple multi-year periods where the stock did nothing before rocketing upwards when sentiment improved. All the while, Malone kept doing his thing...drive top-line growth through organic and M&A and keep costs low to keep growing FCF. On your point on margins, that margin impact was solely from the CMS rate cut last year...margins will now stabilize this year as the impact of the rate cut and changes in payor contracts are finally passed through. On your point on CMS cuts, my work suggests that it is highly unlikely that there are any further cuts anytime soon given past CMS rates history in other fields, but even with a cut, are you really complaining when only paying 6x FCF for a business with 18-20% ROEs? On the CEO, I would say that there is a difference between uncertainty and risk...I don't know exactly what he is going to do (hence, uncertainty), but with his outstanding pedigree in both medical expertise and capital allocation ability, I think the risk of capital impairment with him at the helm is low, and arguably reduced, relative to Ed Wright. Finally, I disagree vociferously with your point about debt...when you have the ability to borrow at LIBOR + 2.5% to fund acquisitions that generate cash flow return on equity of 18-20%, debt is highly, highly accretive to value. Sure, there is a risk that management borrows too much, but Dr. Ramani and CFO Richard Bear are both extremely intelligent, and have made clear that they will not leverage to the hilt even as they do acquisitions. Thus, I want them to borrow more at cheap rates when they can generate free cash flow that rapidly pays off debt. That's what Malone did at TCI and is doing today at Charter Communications. That's what the guys at Transdigm are doing in the A&D space. These companies are all trading at the very least at mid-teens multiples of FCF, if not 20x or higher. I would be much obliged if you could point out the much better places you've identified to invest your money, but I would respond that I think that CRH today is the cheapest high-quality name that I can find at any market cap level, and I strongly believe that patience will be rewarded...6x free cash flow, 18-20% returns on equity, low single digit organic growth coupled with mid to high teens growth from accretive M&A. Sounds outstanding to me. Best of luck to you as well!