Why Canada’s non-resource sector is one of the market’s best kept secrets
By Paul Andreola and Brandon Mackie, SmallCapDiscoveries.com
Pop Quiz! Which country has produced – on a percentage basis – more microcap 5-baggers over the past five years:
The United States or?
The answer may surprise you.
The US OTC had 113 companies that went up 5 times over the past five years, or 1.1% of the 10,584 listed companies. Canada’s Toronto Venture Exchange (TSXV) minted 54 companies out of 1,980, or 2.7%. That means if the future is anything like the past, you are more than twice as likely to find a 5-bagger in Canada vs the US OTC.
That statistic is no coincidence. Once only a mining mecca, the Venture Exchange has transformed itself into the world’s most efficient public venture capital marketplace.
So if thinking about Canadian investing conjures up an image of a slick back haired man holding an ore deposit, we suggest you look take a closer look. Here you’ll find a vibrant technology and healthcare sector that has outperformed nearly every global market this year.
Here’s David Wolf, CEO of US-based but Canadian-listed Hamilton Thorne: “The (TSX) venture (exchange) can be a good place for a development-stage company to access capital, along with solid regulatory framework and reasonable costs.”
Hamilton Thorne is a healthcare company we have owned since 2014. Once completely undiscovered, it has become a microcap blue chip today. Shares are up 820% in just over 3 years.
David’s story – along with many other Canadian microcaps we have found – lead us to believe: if you are a US microcap investor and not thinking about Canada, you are crazy.
And today, we’ll share our Top 4 reasons why.
Good treasure hunters know there is no point searching where others have looked. The riches are gone. You’ve got to look in undiscovered places.
The US is the world’s premier stock market. If it wasn’t competitive enough, investors all over the globe also want to invest there. But in Canada, you’ll find far fewer eyeballs on microcaps.
And even within Canada, the whole brokerage industry is built around one thing: the resource sector. These are after all the companies that need to raise tens of hundreds of millions to bring a project to life. That’s a lot of fees for the brokers and bankers! What incentive do firms have to research small, profitable companies outside of this sector?
Let their neglect be your opportunity.
One of our biggest winners was XPEL Technologies (DAP-U:TSX-V). When we invested in 2013 at $0.17, it was growing 100% year-over-year while trading at 4 times earnings. Shares trade over $5.00 today. It was a gem hiding in plain sight.
2) Access to Growth Companies
Intel (INTC) went public in 1971 at a $8.2 million valuation. Imagine investing in Intel as a microcap. A $10,000 investment in Intel’s IPO would be worth $302 million today.
It’s the American dream. Well, at least it was. Now companies are staying private longer – opting for a waterfall of VC money over the headaches of going public.
Take SnapChat. At a valuation over $30 billion, most of the upside – you could argue – is already gone. Uber has raised capital at a $70 billion valuation, yet is still private.
What is great for the VCs, is bad for you as a public markets investor. Since 2000, the average number of US smallcap IPOs (<$100M) has fallen a staggering 74% from the 1990’s.
Canada has fared better. The VC and private equity industry is less mature as compared to the US. Going public is still the route of choice for many innovative, high-growth companies.
Catamaran Corp (CRTX), Lions Gate Entertainment (LGF), and IMAX (IMAX) all got their start as Canadian-listed microcaps. We invested years ago in a company called Bowflex, which made home exercise equipment. It traded at $0.10 (yes, ten cents) and after many years of growth, moved onto the NYSE renamed as Nautilus (NLS). Accounting for splits, shares trade at $230 today.
3) Regulatory Protection & Transparency
Despite what the media would have you to believe, Canada’s regulatory framework offers microcap investors as much or more protection than the US.
On the TSX Venture, you cannot do a financing under $0.05 (except under extraordinary circumstances). This means you can’t structure a deal where 100M shares are issued at fraction of a penny to insiders – only to list at $0.10 or $0.20 a few months later.
You also can’t do financings lower than 25% of the last trade. This protects investors from the dreaded “death-spiral” financing where shares are issued continuously at ever lower prices.
Lastly, the venture requires full disclosure of ownership and share structure. There is no hiding the faces behind each deal.
4) Built for Small Companies
In our opinion, The TSX Venture is the most efficient public venture exchange in the world. This is because the entire infrastructure – from the lawyers to the accountants to investment bankers – is built around bringing small – and we mean really small – companies public on the exchange.
From the fees service providers charge to less onerous filing requirements, small companies have it easier when it comes to listing in Canada relative to the United States. US investors expect companies to be worth billions before listing, and the whole financial infrastructure has evolved to make that expectation a reality.
Because of Canada’s thriving ecosystem of speculative industries – think mining, crypto, and cannabis – there will always be reasons to be cautious of investing in Canadian-listed securities. But investors who can look through the noise can find innovative companies like Shopify (SHOP:TSX), which has returned 897% since its IPO in 2015 or Covalon Technologies (COV:TSX-V) which has returned over 4100% since 2013.
We believe Canadian investing gives Americans the best of both worlds – you get the valuation arbitrage of international investing without the headaches – time zones, language barriers, and immature regulations to name a few.
Over just the past 5 years, we’ve had the good fortune to invest in 7 companies that went up over 10 times from our purchase price. We believe Canada’s non-resource sector is one of the market’s best kept secrets. And it’s only a matter of time before international investors figure it out.
Disclosure: Paul and Brandon are long HTL:TSX-V and DAP.U:TSX-V. No position in any other securities mentioned.
By Paul Andreola and Brandon Mackie, SmallCapDiscoveries.com