April 18, 2017

Top 10 under 10: Where are they Now?

A key part of our strategy is to keep the pipeline full of undiscovered companies that meet our criteria. In March of last year, we released a “Top 10 under 10” list to our subscribers. The idea was to find the top 10 companies under a $10 million market cap that were close to meeting our investment requirements.

These were just watchlist stocks. But our strategy was to follow them closely and be ready to add to our portfolio once we saw the progress we wanted.

Here’s how the group fared has fared to date (in our original order of most attractive to least attractive):

The group performed exceptionally. If you had bought equal amounts of these stocks when we profiled, you’d have finished up 260.1%. The only loser in the group was Biorem (BRM.V / BIRMF:PINK). It was down a modest 4.9%.Now we’ll take you through each of these stocks. We’ll review the progress they made. We’ll talk what we bought — and what we passed on. And we’ll close with what we’d need to see to buy.1) Namsys (Formerly Cencotech, CTZ.V)

What it does: Namsys sells currency management software. Their software allows businesses with lots of bills, like banks and retailers, to track their cash in real-time.

Namsys was the only one of the bunch we owned when we published last year. And it stayed that way — Namsys is still the only one we own.

If you weren’t lucky enough to own AXE or SSG — which we’ll discuss in a minute — this was the one to own. Namsys had the third best performance. Shares are up 204% since our profile.

Consistency is the name of the game with these guys. Here are the highlights over last year:

  • Q1 17 revenues +39.5%, over 80% of revenues recurring
  • Q4 16 revenues +38% y/y. CTZ reports last of preferred shares redeemed and debt-free.
  • Q3 16 revenues +57%. $712,000 in sales mark all-time high.
  • Q2 16 revenues + 24%.


Bottom Line: We really like the setup of this one. Central banks are pushing cash management duties onto regional banks and creating a demand for this software. As one of the only suppliers, CTZ has been riding the wave. We see no reason that doesn’t continue in 2017.

2) IBEX Pharmaceuticals (IBT.V)

What it does: IBEX produces and markets enzymes for the biomedical industry. IBEX also sells diagnostics kits used to test patients for arthritis.

We rated this one number two because it was so darn cheap. At $0.105 last year it was trading less than cash on hand. You almost never see that in a growing company.

They had also grew revenues 125% in the latest quarter and were trading for 5X earnings. Management hinted the last quarter was an anomaly and fluctuations could be ahead. We decided to wait for another quarter. Good thing we did:

 

  • Q2 17 revenues $1.5 million, +35%
  • Q1 17 revenues $1.2 million, down 14% y/y.
  • Q4 revenues $860,000 down 31% y/y
  • Q3 revenues $696,000, down 22% y/y.


Bottom Line: IBT posted three straight quarters of double-digit revenue declines and the stock still went up 50%. That’s the power of buying cheap stocks. Then after growth swung positive in Q2 2017, the stock went up another 50%. With management revising their guidance from flat to double-digit growth we are interested — but want to see another solid quarter first.

3) Acceleware (AXE.V)

What it does: Acceleware sells high-power computing solutions primarily to the oil & gas market. Their solutions are used by seismic interpreters who must look at massive amounts of data to find oil reserves.

We wrote an entire dispatch on this one. Here was the headline:

Watchlist Pick Acceleware Up 1333% in a Single Day

You’re reading that right. Over a 10-bagger in a single trading session. How’s that possible?

By announcing a partnership with General Electric (GE:NYSE) to develop an oil sands heating technology based on radio waves instead of steam. They claims you can save 50% on operating costs and 66% on capital costs using their radio wave technology. This will be huge… if it works.

Before we get too excited, we must confess to not owning any. Here’s what we said last year:

“AXE hits just about all of our key criteria: niche dominance, rapid growth, and cheap valuation. The only thing it’s missing is two consecutive quarters of profits.”

And it’s still missing that… Revenues have gone straight down — including a 53% decline in their last reported quarter.

Bottom Line: The news with GE is exciting but we liked this stock a lot better when it traded for less than the value of an empty shell. We need to see growth and cash flows to invest — not just sexy stories. We’re watching this one from the sidelines.

4) AirIQ (IQ.V)

What it does: AirIQ sells GPS tracking systems that allow owners of vehicle fleets to manage their assets.

In our analysis last year, we assumed the transition from the 2G sunset was complete. We called 3G technology a positive. We thought obsolescence from a low-cost app was their big risk. We were off here.

Revenues grew 10% in Q4 16, 12% in Q1 17, but then turned flat in Q2 and declined 12.5% in Q3. That’s not a trend we like to see. IQ still cites the 2G transition in the MD&A as a driver. And they note a delayed roll-out with a major customer. That’s why revenues declined in their latest quarter.

Bottom Line: IQ should hit an inflection point where 2G customer phases out and growth from 3G sales take off. We just don’t know when that will be. We’re happy to wait until we see things have turned in the financials.

5) Sangoma Technologies (STC.V )

What it does: Sangoma makes hardware and software that enables various forms of enterprise communication to interface with each other. Think office telephones that link to the internet.

We’ve known this company for a long time. We also know the patience needed with STC. Patience we didn’t have. We sold out years ago after STC failed to deliver consistent growth.

Patience can pay off in this game. STC was our 5th best performer. Shares are up over 100% from our profile price. Here’s why:

● Q2 17 revenues $6.6 million, +29% y/y. 8th consecutive quarter of revenue growth
● Q1 revenues $5.9 million +24%
● Q4 revenues $6.1 million +14%
● Q3 revenues $5.3 million, +11%

Bottom Line: STC has proven game-changing acquisitions do exist. Their purchases of Schmooze and Rochbocks in January 2015 have paid off. Growth is accelerating and STC has returned to profitability. This one will be at the top of our watch list throughout 2017.

6) Appulse (APL.V)

What it does: Appulse’s business is as simple as it gets. They sell centrifuges — both new machines and parts to maintain them. A centrifuge is a machine that spins particles at high speeds. It’s often used to spin liquids to separate solids from them.

This one is a simple — and boring — business. Those can be our favorites as investors tend to yawn and pass on them. Unfortunately APL’s financials have been as boring as it’s business:

● Q3 revenues $2.17 million, +1.2% y/y
● Q2 revenues $2.2 million, +23% y/y
● Q1 revenues $1.8 million, -13% y/y

Bottom Line: While APL is diversifying into other industries, their fate is still tied to the oil & gas business. Until oil sees a stronger recovery, we don’t see APL delivering the growth we need to invest.

7) Redishred Capital (KUT.V)

What it does: Redishred owns and operates a network of document shredding stores.

This is another one we’ve followed for years. Here’s what we said in our Top 10 list:

“Redishred is one of those stocks that seems to always be atop our watchlist — but never quite makes it to purchase. It posts consistent headline revenue growth and profits, and has a solid recurring business. But we are always left wondering how much of their growth is organic and how much must be bought through acquisitions. We’d need to get comfortable KUT can continue to grow profitably and organically before starting a position.”

Redishred grew same-store sales 15% (this is the organic piece) and posted a $100,000 net profit in the latest quarter. The quarter before that same-store sales grew 24%. Acquisitions are still part of the plan (they announced one two weeks ago) but no question this company is growing organically.

Bottom Line: Management has shown us they can grow organically. But the market has figured it out — KUT shares are now up 104%. We’re content to hold out for a cheaper price.

8) Biorem (BRM.V)

What it does: Biorem sells air emission control systems. Their systems eliminate odors and pollutants from air streams.

Biorem is a contracting business. Their revenues are project-based and can fluctuate — sometimes erratically. Here are the highlights over last year:

● Q4 16 revenues $4.7 million, +36% y/y
● Q3 16 revenues $4.0 million, +36% y/y
● Q2 16 revenues $2.9 million, -30% y/y
● Q1 16 revenues $4.2 million, +27% y/y
● Q4 15 revenues $3.3 million, -21% y/y

Bottom Line: Lumpy results kept us from investing last year and nothing has happened to change that. The market pays a premium for consistent growers and we can’t see BRM getting there. BRM was the worst performer of the group, delivering -4.9% returns since our profile.

9) Sigma Industries (SSG.V)

What it does: Sigma Industries manufacturers metal components for industrial applications. Their parts are used in the heavy-duty truck, machinery, agriculture, and wind energy markets.

Sigma was one of those stocks that looked too good to be true. Here’s what we said last year:

“SSG currently has a P/E ratio of 0.9. Yes you read that right.. less than 1X earnings. Though there are a few caveats we will discuss in the cons, you almost never see a company trade this cheap — much less a growing industrial with over $40M in annual sales.”

Now that caveat was Sigma’s debt load. After accounting for that it was trading at 13.5X enterprise value. Still cheap, but SSG is a cyclical business. We wanted to see another steady quarter. Here’s what we got:

 

  • Q3 17 revenues $13.1 million, -13% y/y
  • Q2 17 revenues $12.6 million, -30% y/y
  • Q1 17 revenues $13.6 million, -19% y/y
  • Q4 16 revenues $15.4 million, -17% y/y


Even after cratering revenues, SSG shares rocketed up 556% since our profile. Again showing there are no bad companies — only bad prices.

Bottom Line: Debt is sky high and revenues are going straight down. SSG is cyclical and it wouldn’t take much to swing to losses. And the valuation isn’t so cheap anymore. Our comfort level isn’t there.

10) BluMetric Environmental (BLM.V)

What it does: BluMetric specializes in designing and building environmental treatment systems. Here are the last five quarters:

 

  • Q1 17 revenues 8.3M, +4% y/y
  • Q4 revenues $7.3M, -21% y/y
  • Q3 revenues $8.3M, -3% y/y
  • Q2 revenues $7.9M, +2% y/y
  • Q1 revenues $7.9M, +2% y/y


Management cites timing of projects as the driver behind revenue declines. But that couldn’t explain a whole year of negative growth. We’ve always felt contracting is a tough business and BLM reminds us why. Here’s what we said back in March:

“General contracting is a tough market to invest in. Margin are thin, competition is high, and a few project mishaps can cause bad results in a hurry.”

Bottom Line: We need to see stellar numbers to invest in a general contracting business (think LTE). We’re not seeing it out of BLM. And with over $10 million in debt on the balance sheet, there’s not much to be excited about here.

Wrap up

We spend a lot of time at SCD talking about “fat-pitch” stocks. These are companies doing all the right things. The companies we put hundreds of thousands into. Think Lite Access Technologies (LTE.V / LTCCF) and Pioneering Technologies (PTE.V / PTEFF).

The Top 10 under 10 has shown us that you don’t need to find these companies to do really well in the market. This list of obscure and mostly boring companies delivered 260.1% average returns in just one year.

The TSX Venture returned 42.8%. It’s not even close. And one stock — AXE — delivered more return than LTE or PTE in single day!!