Every investor in microcap stocks is in it for the big win, targeting double-digit or larger gains virtually every time they make a purchase. Alas, if only it were that easy…most microcaps don’t turn in market-beating performance, and far too many end up costing investors all of their money.
Professional money managers typically follow a strict set of rules for choosing the stocks to include in their portfolio – a formula, if you will, to help make the right choices. Stellar returns remain far from assured, but winning companies seem to share particular traits that are easily identifiable.
By the same token, public company managers can take certain steps to give their companies the best chance for success, both in attaining corporate goals and in achieving full valuation in the market – objectives that are not exactly mutually exclusive.
The CSE has been home to more than a few prolific performers over the years and we profile four recent success stories in this article. What makes these companies tick, why are their shares investor favourites, and what exactly do they do that enables their respective stock prices to perform so well? Is there a magic formula? Let’s find out.
RESAAS Services (CSE:RSS)
“There is no magic formula,” states Cory Brandolini, CEO and founder of RESAAS Services Inc. which at its peak to date sat 1,892% above its February 2011 Initial Public Offering price of $0.25. Priced at around $1.60 at date of publication – despite its business being miles ahead of where it was when the stock was at $4.98 – the share price still represents a gain to original investors that anyone would be happy with.
“Share price appreciation is a function of two things,” Brandolini explains. “One, execute your business plan and make sure you are growing every month, and two, get that message out so people can understand clearly what you are trying to do. There is no magic to that – it is just hard work, execution on your model, growth of your user base in our case, and messaging that to the investment community.”
RESAAS was deliberate in formulating the right course of action before executing its business plan, spending over a year canvassing potential clients through focus group-style forums and one-on-one meetings with brokers and CEOs from all of the major brands. RESAAS clearly had a vision as to how they felt the industry needed to evolve and the results of a year’s worth of industry data collection served to confirm the team’s ideas.
The company then went into a calculated “stealth development” phase before launching the platform on a global basis. The result is a cloud platform connecting the entire real estate services industry around the world in real time. Finding out what you don’t know after you’ve already created your product can be lethally expensive, and since Brandolini and RESAAS CFO Cam Shippit come from the financial industry, they understand how critical a strong start is to long-term success.
“Our ideology is that we wanted to transform the industry – not disrupt professionals but advance their model,” says Brandolini. “Technology was not the industry’s strong suit. It needed to be solved from an outsider’s point of view, an agnostic point of view, by somebody who didn’t have a dog in the fight but was simply trying to address the legacy based problems within the real estate services industry.”
And what an industry to choose. As estimated by the US Federal Reserve, the value of combined commercial and residential real estate assets in the United States alone totals some US $40 trillion. Even though only a small percentage of properties change hands each year, the commissions available to real estate agents reach into the billions.
The RESAAS platform is a gorgeous piece of online architecture that gives realtors, brokerages, multi-national franchises and associations their own industry-specific enterprise social network. Users get to custom-brand their own environment and enjoy the functionality of real-time information sharing. Think of the power of Facebook (NASDAQ:FB) and the productivity of Salesforce.com (NYSE:CRM). “There had never been a platform built exclusively for the real estate enterprise side that advances the industry past its early baby boomer designed infrastructure,” says Brandolini.
In the third quarter of 2015, the company expanded its suite of services with the addition of the RESAAS Marketplace, where industry professionals can access a wide variety of services from companies such as Top Producer, DocuSign and Dotloop at prices available only to RESAAS members. There are now over 50 participating companies, and counting, in the RESAAS Marketplace. “Our strategy early on was to allow other real estate service providers that offer best in class products the ability to integrate directly into our platform and expose their services within our Marketplace,” says Brandolini.
Then in the fourth quarter of last year RESAAS introduced an exciting new feature on the platform called RealTimeMLS.
“At the end of 2015 we launched a game-changer for Real Estate Associations. RealTimeMLS is a technology that looks to eliminate static data collecting and turn that process into a real-time model,” says Brandolini. “With RealTimeMLS, for any listing that an agent posts on the RESAAS platform, all of the members of his or her local association will be notified of that listing in real time, and the listing information will be pushed to that agent’s local MLS.”
Standing behind this young tech juggernaut is a balance sheet that at December 2015 boasted $6.8 million in cash and just over $438,000 in accounts payable and liabilities. RESAAS has raised well over $20 million since it was established but at the end of last year had barely over 33 million shares outstanding. Talk about solid corporate financial management.
Modern tech companies often get high-per user valuations, and there is little reason to believe RESAAS will not one day visit those hallowed realms. After all, its user base is ultra-focused and full of high-paid professionals with shared interests that at the same time have something in common with every single one of us, as we all need somewhere to live.
Asked about achieving appropriate share valuation, Brandolini has one more piece of advice. “You have to be able to get your value proposition across,” he says. “Are you disrupting an industry, are you advancing an industry, or are you solving an industry problem? You had better be able to answer one of those three questions affirmatively if you want the value of your company to be properly recognized on the stock market.”
Lite Access Technologies (CSE:LTE)
Lite Access Technologies listed on the CSE in a transaction that saw the company raise just over $1.84 million at $0.25 per share, with its first trade printing on June 1, 2015. Since then, its stock price has closed as high as $1.80, up 620%, and at time of publication was $1.61, or 544% higher.
Lite Access could hardly have chosen a better time to go public, what with a worldwide “supercycle” in optical fibre installation by large telecoms driving growth for the company’s products and services. And if that cycle is, as the company suggests, merely in the second inning, it is easy to understand why investors have gotten so excited about the prospects for strong, sustained earnings.
“Everyone today is touched by the digital world and realizes that high broadband speed and capacity is essential to a modern economy, economic growth and the daily lives of most consumers,” says Michael Plotnikoff, Lite Access co-founder and Chief Executive Officer. “And as rapidly as fiber optic deployment is growing in a general sense, the micro-trenching and air-blown fibre sub-sector that Lite Access specializes in is growing faster. We not only offer pure-play exposure to the space, but our total integrated solutions are based on both proven technologies and widely accepted installation methodologies considered to be the solution of choice for fibre-optic connectivity – that is pretty difficult to find.”
Lite Access uses specially designed proprietary equipment to create “micro-trenches” into which it places exclusive crush-proof microduct (micro-conduit) designed for all types of telecom applications, both for today’s needs and those of the future. The microduct serves as a medium through which optical fibre is blown using compressed air to create high-speed broadband connectivity in a matter of minutes and at a cost far less than with traditional cable installation methods.
The beauty of the system, and a main factor driving demand, is the lack of interference with the local environment and archaeologically sensitive areas both during initial installation and any subsequent upgrade cycle. As the micro-trenches are narrow, Lite Access installation teams can be in and out of a site quickly (micro-trenching and installing up to 1 metre per minute of microduct) and at a cost much lower than more disruptive conventional methods.
Later, when fibre needs to be replaced due to technological obsolescence or upgraded in support of future growth requirements, there is no need to dig up the roadway again. Lite Access simply blows new fibre from the starting point through to its destination at the other end and, voila, there is your upgrade. Nobody outside of the companies involved even knows it took place.
As Plotnikoff explains, Lite Access is a pioneer in the micro-trenching and air-blown fibre business, and as the industry shifts into high gear he has a proven team behind him that has successfully completed dozens of projects globally, some quite challenging from an engineering perspective and at times not possible using traditional installation methods. Well-rounded project and management experience is serving Lite Access well from both an operations standpoint and in the market with investors. It is one of several important boxes it has ticked.
Good people? Check. And that includes over a dozen partners around the world certified to install microduct and handle air-blown optical fibre installation. These partners will contribute to a re-balancing of the revenue stream in future years as they collectively come to install more of Lite Access’s patented equipment and supplies than the company does itself.
Good financial management? Check that box, too. Lite Access has just 30.6 million shares outstanding and no financing has been conducted since the initial $0.25 round. A corporate update released February 1 explained that milestone payments had been received on a $7 million project for BC’s Haida Gwaii community, plus there was over $1 million in receivables and inventory on the most recent balance sheet.
Another key point to note is that with the types of customers Lite Access has – which include cities and municipalities, First Nations and Native Americans, as well as private enterprise and local governments – odds are the company rarely, if ever, finds itself chasing anyone for payment.
Plotnikoff speaks warmly about shareholders he has interacted with over the past year, saying some have essentially become advocates for the brand, helping build awareness and even calling in with business opportunities. Shareholders are welcome to visit the company’s headquarters and main warehouse in Richmond, British Columbia, if that level of contact is important to them.
“Our shareholders are comfortable because they have an open line of communication and clear, transparent access to information,” explains Plotnikoff. “I like to think that if we preserve that approach as a principal component of our corporate culture and continue to deliver growth, we will always have a strong degree of support in the market.”
PUDO Inc. (CSE:PDO)
PUDO Inc. debuted on the CSE on July 28, 2015 at $0.70, proceeded to drop to $0.18, yet within two weeks was conducting a private placement of 1.1 million shares at $0.63. Using that as a reference price, the stock has closed up as much as 443%, and as of publication date is up a still respectable 280%.
“While you are out and about, we’re here accepting your deliveries” reads the tagline on the company’s website, and that pretty much captures the essence of the PUDO service. We all know how frustrating it is to be waiting for a package, only to arrive home and find that someone tried to deliver it, but unable to do so left a sticky message indicating that you cannot obtain your parcel until the following day. Even more annoying is learning that the package had been delivered, only to be stolen off the front stoop.
PUDO completely eliminates this inefficiency by creating locations called PUDO Points where customers can specify their parcels be dropped off so as to be picked up at their convenience.
The benefits to all participants in a transaction run deeper than that, but at its core the service makes life more convenient for consumers. It is the simplicity and connection to all of us that PUDO CEO Frank Coccia believes is behind the impressive performance by the company’s shares in the short time the company has been public.
“It is a story that everyone understands,” says Coccia. “It is not a biotech company or mining exploration where it can be difficult to see the real potential. I enjoy going out and speaking with investors. They see that couriers, retailers and consumers can have a field day with this.”
Digging a little deeper, one learns why the concept would have more natural allies than competitors. Coccia explains that PUDO seeks nothing more than to provide pick-up points inside convenience stores and other established physical locations.
Couriers thus know they have a guaranteed delivery and save money by not having to attempt re-deliveries after a failed visit. Retailers that ship product to fulfill customer orders gain flexibility to negotiate with multiple couriers and thereby reduce their shipping costs. The consumer gains the peace of mind that comes with knowing a parcel is available to pick up at a convenient location whenever they like. Convenience stores and other PUDO Points not only earn fees for holding and putting parcels in the hands of their owners, but also from impulse buys thanks to the extra foot traffic.
Coccia says that investors also like the fact that PUDO keeps its costs under control by needing little more than to maintain and support the technology behind the service. “The beauty of PUDO is that we don’t own anything outside the technology,” explains Coccia. “The bricks and mortar is already there. We are just taking advantage of the elements in an ecosystem that already exists.”
Growth on the ground has been quick to date, with Coccia saying that the company has already established some 800 PUDO Points in Canada and the US and over 6,000 registered locations, this latter category being locations signed up that have yet to go through training so they are fully ready to roll.
“Once we hit 3,500 to 4,000 locations in Canada then we should be exactly where we want to be,” Coccia says. “In the US we have over 3,700 registered locations at present and ultimately want 16,000 to 20,000. Once we reach those two numbers we will have a fixed cost with a control centre that manages everything.”
Experience helps small companies avoid costly mistakes, and fortunately for PUDO Coccia has been at this for 35 years. “I built niche courier systems, which basically are courier systems for one industry. We did it for the travel industry and the financial services sector and for lawyers serving one another documents and papers. It is all about consolidation where people can pick up mail and drop off their mail.”
Coccia expects growth to continue apace, thanks in part to several potential partners he is talking to in the US. “We’d suddenly have a network in the US that could rival that of any national carrier – UPS or even the post office,” he says.
With just 15.6 million shares outstanding, PUDO has plenty of room to maneuver if Coccia deems it necessary to raise equity capital for supporting growth. And while the company is not flush with cash, liabilities are fairly low as well, so with revenue beginning to come in Coccia has a good shot at preserving a nice share structure until PUDO reaches the point at which it becomes self-funding.
Experienced management, enviable share structure, rapid growth, consistent communication. Does that qualify as a formula?
VirtualArmor debuted on the CSE in November of last year at $0.25. It sat quietly for its first couple of months before starting to build a following that has since seen the stock close as high as $0.75 (a 200% gain), and more recently at $0.65 (up 160%).
A basic analysis of the company yields some familiar themes, including experienced management and rapid growth underscored by hard-won advantages in a large, fast-growing market.
Founder and Chairman Christopher Blisard explains the challenges facing every entity with a presence on the Internet, and thereby the opportunity for VirtualArmor, in a manner hard to dispute. “Where we are going as a world is that everything is being moved to the edge,” Blisard explains. “You as a consumer or business want everything available all the time at any location. We’ll continue to grow because technology is pushing the boundaries of where data is stored and those areas can become very vulnerable very quickly. You really have no choice but to call companies like ours to take care of your problems.”
Established in 2001, VirtualArmor has crafted a business model over the years that Blisard says literally has no peer within the industry. It involves working closely with hardware manufacturers so that the VirtualArmor team can go beyond providing a security overlay “a mile wide and an inch deep” and get inside the actual hardware, where the most talented of hackers often go to lay their traps.
“We work hand in hand with the manufacturer, plugging their software into our platform so we can go incredibly deep into every piece of equipment we are managing on your network. It is not just a reactive environment at that point, but also a proactive environment.”
When VirtualArmor discusses security with a potential client, it insists on bringing the hardware that will serve as the backbone of the entity’s computer network. Instead of trying to fix the myriad bugs inherent in a system that should have been designed better in the first place, VirtualArmor brings in what it knows will work.
Looking at the financial picture, accrual earnings were skewed in 2015 by non-cash items related to the go-public effort, but cash flow was positive for the year, and that’s the number that really counts. Fiscal 2016 should be more indicative, and thus far is shaping up nicely. The company announced on March 8 that it had booked US $2.4 million in sales in the previous 90 days. Given that revenue for full-year 2015 was US $7.4 million, VirtualArmor is so far on pace to beat handily year on year.
Matthew Brennan, Vice President of Sales, points to the importance of convincing investors that growth in revenue and earnings is sustainable. “When you have an organization as successful as ours and all of that revenue came from two salespeople, to know we are going to end the year at between six and eight salespeople suggests you will see things move in a positive direction,” he says.
Blisard adds that part of the benefit of listing on the CSE has been to broaden the understanding of VirtualArmor and give it new tools to conduct the full extent of the expansion it envisions. “Looking at 2016 to 2017, the objective will be to expand our reach internationally,” he says. “That includes going into Canada and Europe, and particularly the London market.” Blisard goes on to explain that the company has a 10-person Security Operations Center, or SOC, just outside of London that can play a very helpful role in landing and serving local customers.
The revenue outlook is further enhanced by the stickiness of the client base, which is actually very easy to assess: “We have never lost a managed services customer and our longest one has been with us for 10 years,” says Blisard.
Also helping the share price was the announcement March 16 that the company was cancelling just under 3 million of its shares outstanding, and that several third-party shareholders had agreed to put a total of 3 million shares into escrow. The resulting reduction in dilution, not to mention clear vote of confidence, set a positive tone that the stock price responded to immediately.
Blisard is happy with the way the stock has performed to date but points out that he knows education is a process and that it will take time for the company to build the following it thinks it ultimately deserves.
“For the Canadian markets a company like this is unique,” Blisard explains. “The investment community understands the importance of cybersecurity in their lives. The people we talk to understand the way our company is structured, how it drives revenue, how it drives profit, and where it sits within the cybersecurity world.”
Concludes Brennan, “It is very important that an investor understands there is a roadmap. We made a good decision in not growing too quickly, taking our proceeds and placing smart bets on particular territories and hiring the right people. I think it is key that the investment community understands this.”
The keys to success? Good people are absolutely indispensable – a capable management team knows how to get the most out of a business, and has the ability to address problems and get things back on track if something goes wrong. From corporate strategy to financial management and dynamic communications, they know what makes successful businesses work and how to fire on all cylinders. There is no substitute for experience.
Share structure is another aspect valued by most investors and managers – if things go right, good structure makes it easier to achieve high EPS, and having fewer shares out to weigh on the market price is clearly a good thing. If things go wrong the well-structured company has superior flexibility in accessing capital markets for the funds needed to right the ship. More often than not, good share structure is a reflection of skillful financial management as, of course, is a strong balance sheet.
Then there is being in the right business at the right time (good management again?) – considered another way, it is easier to ride a wave than to fight one. And when a company’s growth outlook is built on a history of expansion already, it serves as a key to winning investor confidence.
So, no magic formula, unfortunately. Just hard work, knowing what you are doing, achieving consistent growth of your business and communicating all of this efficiently. It may not be the whole puzzle, but these are definitely some of its most important pieces.