Investing In Non-Resource Canadian MicroCaps, by Paul Andreola

When Ian asked to me write a blog about Canadian Microcaps I quickly said yes. After all, I’ve had a love affair with this tiny little slice of the investment world for over 20 years. It’s been one that has brought me both great joy and bitter heart break. I can’t count how many little gems that I have owned that have gone on to become “multi baggers”, some of them, unfortunately, after I sold them. It’s the treasure hunter in me that keeps me looking for the next potential 20 bagger.
As most good treasure hunters know there is little point in searching where others have looked, the best finds are likely to have been discovered and chances are what’s left is of little value. A treasure hunter today has to search where few others have looked and away from the crowds. It’s a simple analogy but it’s just common sense. Those old pirates didn’t hide their loot in places where it would be easy to find, right?
My investing experience has proven to me that the Canadian microcap sector is a treasure hunter’s dream. Many of these non-resource microcap companies, in my opinion, appear to be extremely under-followed and unrecognized by the North American investment community. Maybe it’s because these microcaps are poorly understood. Maybe few investors know how to find them or how to research them. Or are investors just too lazy and prefer to keep taking advice from an industry that has little to gain by recommending companies with higher perceived risk and little in the way of reward for the brokers and analysts that live off of financing fees? Quite likely it’s a mixture of all these things. The typical retail investor and broker just don’t seem to want to do the necessary work to uncover these little buckets of gold. I spoke to a Canadian broker recently and told him how I was having some great success with a couple of microcaps showing impressive earnings growth and his response was “I didn’t know there were any profitable Canadian microcaps”. Ah yes, I’m treasure hunting away from the crowds.
The Canadian public venture market, the TSX Venture exchange, exists to finance start-ups. Its predecessor, the Vancouver Stock Exchange originally came into existence to finance the various gold rushes and the dreams of prospectors and miners who promised to make investors wealthy beyond their wildest imaginations. Not surprisingly the majority of companies on TSX venture exchange today are mineral exploration start-ups. Just like in the days of the old Yukon gold rush prospectors and miners continue to offer the promise of great riches. The odds however are not very good; roughly one exploration project in one thousand ever becomes an economic deposit. The majority will only deliver failure and heart ache. Many international investors associate the TSX Venture exchange with mining and to a lesser degree oil and gas.

Chart of the TSX Venture, Junior Gold Miners ETF, Russell 2000

Canada has a very diverse and thriving economy that is not solely dependent on the resource extraction industries. Granted we do have some of the best mining companies and mining professionals in the world. In Canada there is however an amazing amount of emphasis on the financing of resource exploration projects. The TSX Venture exchange finances more junior mineral exploration than any other exchange in the world. Most small brokerage firms in Canada have at least one full time mining analyst on staff and a good portion of financing revenues generated at these firms will come from IPO’s and secondary financings of mining and oil & gas exploration. Many larger firms will have several analysts covering different segments of the mining industry. The investment newsletter industry in Canada is dominated by dozens of mining investment experts. Investment journals and websites that cater to the mining sector outnumber all other sectors by a very wide margin. There are literally hundreds of small organizations that do investor relations consulting for mining companies. Add it all together and the promotion and financing of the mining sector is an industry onto itself and grabs an amazing amount of investor attention especially in the microcap space. Herein lays the opportunity for a microcap investor, one who is willing to look at the ignored sectors and companies that are building and growing their businesses far away from all the noise generated by the mining finance “industry”.
There are a number of great Canadian non-resource companies and most of them like everywhere else in the world began as small companies. From telecom to software to biotech and more, it’s all here. Many of these companies accessed the public markets for  early stage funding just like the US, but the private venture capital market in Canada is no where near as mature. Many of Canada’s future industry titans will get their start on the TSX-V.  There have been many companies originally listed on the Canadian venture exchange that have gone on to senior exchange listings, to Nasdaq, Amex or NYSE. There is no reason this will not continue.
Companies such as Valeant Pharmaceuticals (VRX), Catamaran Corp. (CRTX), Lions Gate Entertainment (LGF) and IMAX (IMAX) got their start as Canadian listed microcaps. I fondly remember a little microcap company called Bowflex trading on the Vancouver Stock Exchange at little more then $0.10. Bowflex’s revenues and earnings exploded and with that the company eventually moved to Nasdaq and then on to the NYSE. Accounting for share splits Bowflex, now called Nautilus Inc. (NLS), went well north of $150 per share.
Microcap investors who seek out great little Canadian listed companies with healthy fundamentals and growing earnings have little competition from most of the retail investment community in Canada. The “competition” is too focused on mining ventures. Very few brokerage firms have analysts dedicated to microcaps or even small cap companies. There are a small handful of publications in Canada dedicated to non-resource microcap companies and a number of those are “hired” to help generate investor attention. I have found that there are not many investors that have taken the time and effort to understand, look for and research these undiscovered little treasures. Therefore many of these companies can trade at significant valuation discounts to larger companies or to their peers in the US.
Biosyent Inc. (RX.V or BIOYF), Xpel Technologies (DAP-U.V or XPLT) and Cipher Pharmaceuticals (DND.T or CPHMF) are three great little Canadian listed companies that I think qualify as undiscovered Canadian “treasures”. While the TSX Venture Exchange is down 28% year to date and the mining sector measured by the Market Vectors Junior Gold Miners ETF (GDXJ) is down 56%, these three little gems are up an average of 107% year to date and yet only one of these companies has any analyst coverage, interesting eh?. These three companies are not alone, Macro Enterprises, (MCR.V or MCESF) up 199%, Iplayco (IPC.V) up 316% and Solium Capital Inc. (SUM.T or SIUMF) up 101% are just a few more examples. Two of these companies are just now starting to get some analyst coverage.

There are dozens and dozens of great little, profitable and growing microcaps listed in Canada that deserve greater investor attention from international investors and especially those south of the border.
Ok, so let’s now assume you’re interested in taking a better look at what Canada may have to offer. Where does one start? How about research? Apart from a company’s website there are several other online resources that will help in your pursuit of information on a Canadian listed company. Just like in the US with SEC filings for public companies Canada has SEDAR ( ). All Canadian listed companies must file on SEDAR. Here you will find a company’s prospectus filings, news releases, annual and quarterly financial reports, AGM documents and various other publicly disclosed documents. Insider share holdings and trading information can be found at System for Electronic Disclosure by Insiders or SEDI for short ( ) and Canadian Insider ( ). For Canadian listed companies’ price quotes and press releases I use TMX ( ), Stockwatch ( ), or Yahoo Finance ( ). Some of the US sites will require a .TO or .V suffix when requesting a quote.
As a Canadian I have bought and sold US listed companies with ease for years and have no concerns or difficulties purchasing shares across the border yet many of my US friends are leery doing the same up north. It may require a change in the type of brokerage account a US investor has and of course it will require some understanding of the nuances in the Canadian markets but as a friend of mine in California attests once you have a few things in place trading in Canadian stocks should be just as easy as trading US listed companies. My friend uses Fidelity Investments but many firms now allow international trading. You’ll have to ask your current brokerage firm if they allow international trading and if so what their specific requirements are to allow you to trade shares directly on the Canadian exchanges. Many Canadian listed companies have their Canadian symbol and a US OTC or pink sheet symbol. It may turn out that trading Canadian listed company with a US symbol is as simple as tracking down the corresponding OTC or pink sheet symbol to execute the transaction.
I hope I’ve encouraged you to take a better look at what the Canadian markets have to offer to a microcap investor. There is plenty of treasure to be discovered up here. You just have to know where to look.

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