Education: TSX Venture InvestingTSX Venture investing is not for the faint of heart. The Venture Exchange is where young companies strive to become household names, but more often than not fail in the process. It is an exchange full of ambitious entrepreneurs, promoters, bankers and brokers looking to capitalize on innovative concepts, the latest trend or the next big discovery...
Risk and Opportunity on the TSX VentureThe Venture is an exchange of great opportunity and substantial risk; and it often outperforms its big brother, the TSX. During its most recent bull market in 2016 (and a few before that), it outperformed every exchange in the world, drawing in tens of billions of speculative dollars from across the globe. Those who beat the billions into the market reaped massive gains... This was the case following the financial crisis of 2008 as well. The Venture rallied from the 675 level in March of 2009 to roughly 2400 around the start of April 2011. Two years, more than a 250% gain... for the entire exchange. The TSXV is routinely overbought and oversold - therein lies the beauty of it. Again, in the first half of 2016, the Venture rallied from a low of 466 in January to a high of around 720 in June. The exchange had nearly doubled to a high of 849.23 by February 22nd, 2017, just over one year later. These types of moves would be considered volatile for a stock, let alone an entire index! For some, that type of volatility keeps them up at night, but for us - as short to medium term investors - it's exactly what we look for.
Volatility on the TSX VentureIf forced to choose just two words to describe the TSX Venture, they would be risk and volatility. However, synonymous with risk is opportunity, which is what drives investment and speculation on the exchange. The Venture market is our sandbox; and, for a decade, we have worked directly with dozens of public companies who call the TSX Venture home. We have seen many investment crazes and fads come and go - from rare earth metals to marijuana-related issuers to gold and graphite plays. When a sector is hot, the gains can be incredible; but when it falls out of favor, well, if you're holding a micro-cap, look out below. The same is true with momentum. Startups and development plays can capitalize on momentum to increase their value by a magnitude of 10 or even 50 times if they deliver on corporate goals, and operate in a sector favored in the news cycle.
Promotion is GoodThe greatest investments we've been a part of on the Venture (minimum 10X, but even as high as 50X returns) are companies that combined tremendous business milestones with effective marketing campaigns. If a micro cap isn't professionally marketed, achieving a critical business development milestone won't be adequately reflected in the market cap. Simply, The Wall Street Journal won't be writing a cover story, ever, on a TSX Venture stock, no matter how successful it is. So it's up to the company, in large part, to get their story out there. If a TSX Venture company isn't dedicating a reasonable amount of capital raised (~10%) to marketing and investor relations, we're not buying in. Seen too many great deals flounder because management was too proud to spend capital marketing their story.
Management and Historical Statistics are Your Friends on the TSX VentureThe TSX Venture is quite seasonably predictable. Every year, in December, we publish an article related to the Venture's most historic and profitable trading opportunity. The last few years we titled it Shocking TSXV Statistics, TSX Venture Trader's Secret and, most recently, An Amazing Track Record. Check out below:
Take a look at the compelling chart below. It documents the potential return of the TSX Venture had you bought the index on any December 22nd (give or take a day) over the last thirteen years and sold within a sixty-day period. For the past 13 years, on average, the TSX Venture has increased approximately 11.85% within 60 days following December 22nd. In nearly a third of those years, the highest level hit for the Venture during that 60-day period came in January (2008, 2010, 2013 and 2015), making the maximum potential profit for traders unusually quick. This year was no exception. The exchange closed at 720.15 on December 22nd 2016. By February 22nd it touched 849.23 - representing a gain of roughly 17.5% in a mere two months.
*Over the last thirteen years, had you bought the TSX Venture index on December 22nd (give or take a day), you would have had the opportunity to sell within the next 60 days for a handsome and consistent profit. In fact, you would have had the chance to make a profit 100% of the time. Difficult to beat those odds
Seasonal Statistic #2 for TSX Venture InvestingThe infamous 'sell in May and go away' adage relates to the Venture as well. In a typical year, liquidity declines in the summer months as investors park available capital on the sidelines and await the more active fall period... As you study the TSX Venture since inception (near the turn of the century) and examine its annual trends, it becomes clear that the success of the exchange is typically influenced by seasonality factors, and exploration work programs... On an exchange dominated by resource-related equities (approximately 65% of TSX Venture issuers fit this criteria) one must be cognoscente of drilling seasons, fund raising seasons and slow news flow months. Historically, the exchange bottoms between late-June and early-August as money managers vacation (resulting in few financings) and news dries up while miners drill in northern regions of Canada. More often than not, late-June has proven an optimal time to invest in the exchange. In a report from 2013, titled One of the Best Times to Buy TSX Venture Stocks, Aaron Hoddinott, Managing Director at Pinnacle, wrote:
This stat has remained true. So, with respect to seasonality factors, late-December and mid-June have established themselves as optimal times, historically, to enter the Venture market.
"From mid-to-late June, to the end of December, over the past ten years, the TSX Venture has amassed an average gain of roughly 12.07%. During that ten year period, had you bought the index in mid-to-late June every year, you would have had the opportunity to make a profit in eight of those years."
Why Management is Paramount to TSX Venture InvestingThere is another factor, even more important than historical patterns, which cannot be ignored by TSXV investors: Management. If you follow TSX Venture stocks or invest on the exchange, understanding the powerful role a management team plays is vital to your success as an investor. While management always plays a role in any company, with just a handful of employees running the majority of micro cap issuers on the exchange, their importance is crystalized with these types of firms. Small companies are nimble and can make decisions on the fly, which is an advantage against larger, bureaucratic companies. However, quick decisions can also lead to downtrends if management of the startup isn't seasoned. Having experience matters... That's why at Pinnacle we track proven management teams who have or are poised to reach the 'pinnacle' of their careers. If we miss the first home run a young entrepreneur or CEO hits, that's okay; we won't miss the second or third. Through our research and experience, we have compiled an exclusive database of presidents and CEOs who run companies on the TSX Venture and have been bought out at some point in their careers, creating many millions (in some cases even billions) of dollars in value for their loyal shareholders... These are the folks we track very closely. By following the proven winners, you filter out the majority of the companies on the Venture rather quickly. In one of our recent eBooks, titled Leading Juniors to Multimillion Dollar Buyouts, we identify 50 leaders who led their previous companies to past buyouts and highlight which small-cap stocks they run today. Everyone wants to bet on a winner, and this rings true in the small-cap investing world. Problem is, the average investor doesn't necessarily know who those executives are. And that's why we prepared this free eBook - intended to aid in the search process. Proven management is more readily able to raise capital and advance assets than the 'new kid on the block' or unproven executive - it's just a fact of business. The proven leader already has the support team in place - from the right lawyers to the seasoned geologist or engineer, the network of brokers and bankers who made money on his previous win and so forth. Note: Successful management teams have become ever critical following the collapse of 2008 and the subsequent bear market on the TSX Venture which lasted from 2012 to January of 2016. Smart money is wisely cautious, only entrusting management teams that weathered those storms and have come out the other side not only intact, but in a stronger position than when they went in.
Final Thoughts on TSX Venture InvestingThe TSX Venture is a market that will always attract a certain 'gunslinger' investor because of the extreme volatility. Savvy investors know momentum is fickle and can change on a dime. The high attrition rate of startups and their dependency on strong capital markets are two reasons risk capital should be carefully allocated, and one should never go 'all-in' on any single Venture deal. Our quest at Pinnacle has always been to rise above the hype of any one deal or sector; and to get ahead of trends, capital inflows, and positive news cycles. To see through the fog of the market and volume gyrations, we meet with CEOs in a bid to gauge their conviction, intellect and to learn about the network they bring to the table. From there, if we like what we see, we lean on our vast network of industry professionals (investment bankers, geologists, engineers, PhDs, scientists, inventors and venture capitalists) stretching across North America to aid in our decision process. The intent is to get our money in a name or sector with the potential for near-term positive development and before a large wave of capital (bought deals, broker financings, positive news cycles etc.). Be among the early capital if you want to have a chance in this market. Don't chase. All the best with your investments, PINNACLEDIGEST.COM
Three TakeawaysIn addition to studying the company's assets, before investing make sure at a minimum:
- Management is proven
- The company is adequately marketing their story
- You are aware of the seasonality factors at play