September 3, 2015

Paul Andreola Talks About Smallcap Stocks on BNN

scd1Small cap stocks can offer big potential returns but often with heightened risk.And to cut down the potential dangers our next guest says he screens all Canadian listed small caps manually reviewing their quarterly and annual financial statements.Joining us now is Paul Andreola; he’s the Editor of a newsletter called, Small Cap Discoveries. Paul thanks so much for joining us.

Paul: Happy to be here.

Amber: Let’s start with Venture and it’s been absolutely been beaten up. Most of those are resourced types of names but you have seen some, even the smaller tech players get caught up in that. It’s been a tough environment.

Paul: Yeah it has. I think and that’s probably driven by obviously the different dynamics that are going on around the world, things like lower oil prices, currencies. I think you’re seeing a lot of things that are influencing the large caps but more specifically the small caps.

Amber: You see a lot of stocks on there that don’t have analyst coverage, that don’t have a long track record. So take us through some of the homework that you do in your process to make sure you’re getting the full picture of a company.

Paul: Sure. I work with a young man out of the US with an extremely analytical mind, good researcher. What we do is we actually screen every single financial statement that comes out on CEDAR (Sp? 1:19) on a daily basis. In some cases, during earning season there will be hundreds during the day.

And when we go through those we take a bottom up approach when we look for investing. So we’re looking for organic growth in both revenues and earnings and specifically looking for other things.

Once we qualify the company growing at a rate that we want then we start doing a lot more homework and digging deeper into things like share structure and ownership positions of mangement and things like that.

Amber: What’s the ratio of quality out there? So for every 30 companies that you evaluate how many gems are there really?

Paul: I’d say maybe 1 out of 100 if we’re lucky.

Amber: Wow!

Paul: We see 5 to 10 really good stories a year, its slim pickings sometimes.
Interviewer: So what sectors do you like and which ones would you avoid in this kind of environment?

Paul: So what we avoid is the resource sector and more because it’s hard to find anything in the resource sector that’s repeatable. We’re looking for businesses that in some cases have recurring revenue or repeatable revenue.

So sectors that we seem to fall into are software and we’ve been quite fortunate in the farm and bio-tech sector. And then there’s a lot of eclectic businesses that we’ll stumble upon.

Amber: Let’s talk about one of the bio-tech ones that’s Microbix Bio-Tech Systems. Give us a little background and what you think the upside is.

Paul: Yeah, the reason we like Microbix is they have a core business in the antigen (sp? 2:57) development or drug testing business. They’re growing at about 10 to 15% in their core business, but they also have 2 pipeline products that are very late stage that we think could be blockbusters.

Both are very close to monetization and they’re looking for partners right now so they’re not…the company itself isn’t spending a lot of money pushing these forward.But yeah both of them we think have the potential to move the stock multiples from where it is right now.

Amber: Given your wheelhouse I imagine you’ve analyzed patient home monitoring a couple of times. What are your thoughts?

Paul: We found it early and unfortunately missed it early and then we watched it keep going from there.

We try to stay away from companies that are sort of over exposed, companies that have had the opportunity to be seen by all the analysts and all the bigger investors. We’re trying to find them before these guys come to these deals.

So for us now it’s long gone and we’re looking for the next…

Amber: Even on the pull back, PHM on the Venture if we can pull up the chart.

Paul: Yeah even on the pull back. Like I said, we prefer to find companies before the masses do. We think we get the best what we call “discovery” opportunity when we’re looking at companies that others aren’t.

Amber: Okay thank you very much for your thoughts.

Paul: You’re welcome and thank you.

Amber: That was Paul Andreola, Editor of the Small Cap Discoveries newsletter.