How to Find Winners on the TSX Venture
Subscribers to our Weekly Volume likely noticed the number of profitable calls we made in the past 18 months. While it didn’t come easy, or without losses (this is speculative investing after all), there were common threads worth noting. We’re dubbing them the “five strategic keys to successful TSX Venture and small-cap investing in Canada.”
A Canadian success story that concluded this past week shines light on our first key to successful investing in the broader market. On Monday, February 12th, Scotiabank (one of Canada’s largest banks) agreed to pay roughly C$950 million or USD$755 million for investment firm Jarislowsky Fraser. Consequently, Scotiabank will add more than C$40 billion in assets under management to its books.
Stephen Jarislowsky built his firm from scratch, beginning six decades ago. He is a living legend in the world of Canadian finance, known for his willingness to roll up his sleeves when it came to due diligence, and for managing his clients money as if it were his own. Now retired at the age of 92, he will no doubt find comfort in Pierre Lapointe, who’s been president for about five years, continuing to lead the business he founded. According to Bloomberg, it will still operate under its original brand, despite being owned by Scotia.
Understand the Importance of Management in Small-Cap Investing
Knowing the product and the people one is buying into is essential to successful investing in general; that’s obvious. But is vitally important for small-cap investing in Canada. The challenge for many retail investors is getting to know who’s who in the world of management teams for small cap Canadian companies – a market that isn’t adequately covered by the mainstream financial media. That was a founding reason Pinnacle was created over a decade ago.
Management, in virtually every instance, is the most valuable asset a small to medium-size company has. Their unique ability (or lack thereof) to identify opportunity, strike deals and maximize coverage for their company is paramount in small-cap investing. The quality of their network, oftentimes, can make the difference between attaining the funding the company needs to expand, or fail.
In respect to the Jarislowsky buyout, Bloomberg reported a tidbit we found relevant,
“Jarislowsky Fraser began by conducting field research on Canadian companies, developing statistical tools to find and value companies, according to a presentation posted on the firm’s website. Fund managers made more than 100 annual company visits, interviewing executives “and ascertaining the quality and growth prospects of their companies.”
100 annual company visits to ascertain the “quality and growth prospects of their companies” – what dedication to due diligence. It’s inspiring.
First-hand Knowledge is Irreplaceable to TSX Venture Investing
Jarislowsky’s approach can be directly related to small-cap investing and is the approach we have embraced at Pinnacle. For this reason, we travel to every project or head office of companies and clients which we invest in and introduce to you. If the prototype is ready, or the drillers are in the field, we like to be there. Touch the product, see how it works, look the CEO in the eye to gauge his confidence level and better understand the plan of attack. The nuances that don’t show up in the text of a press release can sometimes be the determining factor. People matter most.
Featured Companies | Speculation is About Discipline
Pinnacle Digest launched more than a decade ago, and we’re one of the longest-running publications dedicated to small-cap investing (speculative investments) in Canada. Broad brush strokes here, but small cap investment opportunities are essentially known for two things among speculators: the potential for massive gains or significant losses. Remember that…
Risk mitigation is critical to long-term successful small-cap investing in Canada. As trivial as this may sound, if you’re going to play in this high risk/high reward arena, only invest what you can afford to lose.
While this is commonly known among speculative investors, it is often ignored. It’s shocking how often people over-invest in small caps. We understand the allure, of course, but take it from our experience in the business: never go all in on one particular penny stock.
You will make smarter decisions when to buy or sell if you only allocate what you can afford to lose; and you will sleep well at night.
A sub-rule to this one is to never fall in love with any particular stock. No matter how enticing, cool or frequently people are talking about it at the watering hole, stay level headed.
The beautiful thing about the TSX Venture, and more broadly the Canadian small cap market, is that there will ALWAYS be another home run opportunity or hot sector that skyrockets in value in a relatively short period of time. The small cap market has a way of attracting the herds. The key is to beat them in. Never follow.
In Small-Cap Investing Always Ask: Does the Market Care?
Does the market really care about the company or sector you’re about to invest in? If not, will it in the future?
The Venture exchange, for all intents and purposes, is an auction… and people get excited when there are several bidders jockeying for position. Buying begets buying.
With thousands of investors crowded around, chances are the companies with the loudspeaker will get the bids. Consequently, those without might as well not even be there.
Trends, driven by macro economic fundamentals, media and marketing, take over the exchange and dictate winners and losers for periods of time. Bullish trends in Canada’s small cap space typically last six months to two years.
If a particular stock is not in the trend (which is typically where the lion’s share of financing capital is allocated), it will be difficult to achieve a strong return and beat the overall Venture market. Thus, your opportunity cost may increase if you take a position in a stock/sector that is out of favour. The company without the proverbial ‘loud speaker’ will potentially have a harder time raising funds, producing newsworthy results and, inevitably, generating liquidity in their market.
Company Goals | Seeing is Believing
IPOs aside, we prefer to watch a company follow through on its corporate goals for roughly two quarters before investing or introducing them as a featured company. The speed at which a company delivers is not everything; however, a management team with a track record of hitting milestones on time can make a huge difference (from an ROI perspective) for your portfolio.
No question, in some instances this patient approach has cost us, particularly in the marijuana space; but the majority of time it saved us from taking significant haircuts.
Companies in the early stages of development which make statements in relation to goals years down the road are ones to avoid from our past experience. Look for small cap companies that provide guidance one to three quarters out. We love companies who under promise and over deliver, and you can see why from the response the market gives them. Nothing pays like discovery. The second best is when companies surprise the market with positive, unexpected news.
Play Big with Small Cash in Small-Cap Investing
As high-risk, speculative investors we only buy a stock if we see the potential for a 100%+ return in the short to medium term (4 to 15 months). We know full well some of these investments will not pan out; however, if we can hit a home run, possibly even a 10-bagger, every few at bats, the gains can drastically outweigh the losses. In a bull market, when the trend is moving an entire sector higher, the returns can be life-changing.
We target companies aiming to make a massive discovery, develop a new, potentially industry-transforming technology and breakthroughs…
Our industry coverage is designed to provide dynamic content retail investors will not find on mainstream financial sites. And we aim to introduce companies in the early days of their development – ones you likely would never have heard of otherwise.
Remember these five key small-cap investing principles as we approach winter’s end and spring launch, typically a busy news-flow season for the TSX Venture and CSE in Canada.
All the best with your investments,
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