2014 Performance Review

Happy New Year everybody. I hope you all had a fantastic holiday and have returned refreshed and ready to navigate the markets in 2015.

It’s that time of year to calculate performance returns and reflect on what went right in 2014 – and what wrong..

I only allow myself a handful of days at year end to do this. Anymore than that and I start pondering ways I can boost the number (which can be quite dangerous). I think Warren Buffett put it best with this quote: “Games are won by players who focus on the playing field –- not by those whose eyes are glued to the scoreboard.”

Alright, let’s get into it. Here’s how 2014 turned out:


My rate of return (XIRR function in Excel) in 2014 was 53.61%. This brings my cumulative return since I started seriously tracking my investments in 2012 to ~220% – significantly above the S&P 500’s return of ~75%. I must qualify these numbers by saying I am not working with a large capital base. I don’t think I could generate anywhere near these returns investing tens of millions. My strategy is simply not scalable.

Here is what my portfolio looked like on Jan 1 of 2014:


I always find it interesting to see how the portfolio would have fared had I not made a single trade in 2014. The average return for my starting positions was about break-even and given the weightings, I probably would have returned in the negative single digits.

Fortunately, I made some adjustments along the way and ended the year with a significantly different portfolio:


The ending portfolio consisted of all micro-caps – generally simple, cheap, profitable, and growing businesses. All qualities at the core of my strategy.

Also note the concentration. I ended with 7 positions and the three largest – HTLZF, MBXBF, and XPLT – comprised 75% of the total portfolio.

The concentration is largely a result of starting with ~10% allocations and seeing them appreciate throughout the year. I’m happy to hold as long as the fundamentals remain intact, but this is about as much concentration as I can get comfortable with. Once I have a new compelling idea, I’ll likely trim these positions to raise funds.

The last part of the story are the closed positions:


I closed 8 positions in 2014, which I consider an acceptable amount of turnover. Many of the closed positions were to get out of international stocks and focus on ideas I felt I could understand better. Most of the closed positions evened out with no effect on performance. But one- OPRX – resulted in a massive loss.  I took this loss for 2 reasons: 1) I was overly optimistic about the fundamentals of the business and 2) to raise cash for investing in HTLZF.

Lessons Learned

I learned a lot this past year, but three lessons standout:

1) Avoid Losses

We’ve heard Warrant Buffet say it a million times: avoid losses. Easier said than done. XPEL Technologies was my largest position for most of the year – and one of my largest winners. But every bit of gain I had in XPLT was negated by a 45% loss on OPRX.

With OPRX, I relaxed my standard of investing in high-quality management teams. I became enamored with the business model and overlooked some major warning signs. With a concentrated portfolio, comprising standards is just not an option. OPRX is a story for a different day but for now, I’ve chalked this one up to expensive tuition.

2) Sell Losers to Buy Winners

Value disciples may find this one a bit controversial I suspect. But I think this strategy was the single biggest factor in achieving outsized returns this year.

Many investors do the opposite – trim winners to average down in losers. I certainly did. At one point in 2014, I sold some XPLT at $1.77 to average down in OPRX at $1.45. This was a big mistake.

Intuitively it makes sense to average down. After all, Mr. Market is offering you a better deal in a stock you like. But what I have learned is Mr. Market is gets it right ~90% of the time. Mispricings are the exception – not the rule.

In a way, buying a losing stock is an audacious act. You are essentially saying, all those other market participants are wrong – and I’m right. I’ve learned to think hard about why a stock is undervalued and what the future path to value realization is before investing.

The ideal situation is a stock that is rapidly increasing its intrinsic value. Stocks like these can go up a lot and still be undervalued. XPEL Technologies is the best example I can think of. These are the ones you want to average up in.

3) Invest Where You Have an Edge

Very few investors will beat the market over the long-run. Time will tell if I can. We really need to see how my strategy performs over a full market cycle (5-10 years) – including a bear market.

Those that do outperform, probably do two things well:

1) Stay disciplined

2) Invest where they have an edge

Number 1 comes largely from temperament. Much of it is inherent. Some can be learned through practice.

Number 2 will differ for every investor. For me, it has meant focusing entirely on one space: the non-resource, Canadian microcap market.

I like micro-caps because many investors investing a significant amount of money can’t touch them. And I like Canada because the entire brokerage system is built around financing these ventures – leaving most of the non-resource plays shrouded in obscurity.

Add to this an informational edge from pooling due diligence with a network of talented Canadian investors and I think I have found an attractive space to play in.

There are many places to make money, but this space has consistently provided 6-8 ideas that meet my strict investment criteria. 2014 marked the year I put my focus on this space.


Overall, I’m pleased with how 2014 turned out but trying to remain vigilant and disciplined heading in 2015. There are always the “unknown unknowns” out there. I run a concentrated portfolio and a few poor judgements could eliminate much of the excess return I have generated over the last few years.

The market has been on a tear these last few years and one might wisely consider fortunes turning in the future. But I can’t predict what the market will do and have to stick to my strategy of investing in:

1) Micro-caps that are early on in the “discovery process”

2) Simple businesses that are showing steady growth and cash flows

3) Compelling valuations with a large margin safety

Thanks everyone for reading and supporting this blog over the last year and a half. Your comments and contributions have made this blog a joy to write and helped me improve as an investor many times over. I really appreciate it.

Here’s to a prosperous 2015!

Disclosure: Long everything in the ending portfolio


Genesis IT: Bargain Hunting Swedish Edition

I first mentioned Genesis IT AB (GENE.AKT) in my “Top 10 for 2014” blog post at the end of the last year. At the time, I noted:

after a breakout 2013 that saw revenues double and earnings rise 7-fold, this unknown Swedish micro-cap enters 2014 with the wind at its back. With stock trading at less than 7X earnings, this one could have a long way to run if management can continue to build on the growth fueled by the company’s new mobile ERP product, iFenix.”

Just a few weeks later in January, Genesis released their Q1 results and the stock rocketed 300%, reaching a high of 12 SEK/share. Then Q2 results came in and showed flat revenues and a sharp drop off in earnings. Q3 was more of the same. Predictably, the trend reversed, and we are now down over 50% from the highs. But could the market’s short-sightedness be an opportunity here? I think so.

The business of Genesis IT is simple enough. They bill themselves as an Application Service Provider (ASP) – the first ever in Sweden. They build custom software solutions, host the software on their servers, and then collect recurring revenues from clients. The model is similar to a software-as-a-service (Saas) model, but only a more customized service to a smaller number of clients.

Genesis IT is majority owned by two builder merchants. These companies distribute construction materials – plywood, drywall, etc. It’s no surprise then that Genesis’ flagship product – iFenix – is an enterprise resource planning application specifically targeting the building trade.

Now to the financials:


The launch of iFenix made 2013 a record year. Revenues nearly doubled and earnings were up 700%! The stock was up too – almost 500% in a year.

And then 2014 unfolded – revenue growth slowed and earnings were cut in half. The stock collapsed from 12kr to 5kr. The company also delisted their shares from the Stockholm Exchange to the less-liquid Aktietorget. The stock now looks quite cheap:


A valuation at 1X sales and 12X operating earnings for a high-growth software company? That’s cheap. But if you dig in, I think the stock is actually a lot cheaper than it appears on the surface.

Genesis has been spending heavily to support the roll-out of iFenix. They have exclusive contracts with their majority owners and can rapidly expand. They must expense all deployment costs up-front, and then realize revenues over the life on the contract. This means earnings will be depressed for now – but should surge once these contracts mature.

If you conservatively assume Genesis can grow revenues 10% and get back to last year’s ~20% operating margin, you are looking at a forward valuation under 1X sales and 5X earnings. It may take a few years to get there (if they can at all), but I would expect shares to re-rate significantly under this scenario.

In the meantime, the balance sheet remains rock-solid with no debt and .37kr per share in cash. The company has remained profitable even during a soft Q2 and Q3. And Q4 was a record for revenues – even with higher spending levels:


The main concern I have with Genesis is their ownership structure. They are 64.99% owned by Stenvalls Wood AB and 13.69% owned by Byggtrygg AB (the two large Swedish-based building merchants). These entities are GENE’s largest customers and are the primary driver behind the iFenix development.

Anna Flink, Chairman of GENE, is also an owner and operator at Stenvalls Wood AB. You can see the conflicts of interest arising in performing work for the parent company against performing work for external clients. There may be an incentive to get pricing that would be good for Stenvalls – but bad for GENE shareholders.

Despite this risk, I think shares are attractively priced – especially given GENE’s growth and profitability profile. If operating leverage unfolds as I expect, returns could be quite attractive for investors buying at these levels.

Disclosure: No position


Announcing Smallcap Discoveries

Since its inception, Moatology has been focused one thing: finding the best undiscovered small-caps – before the market does. So when one of Canada’s highest-regarded small-cap investors asked me to partner with him in writing a newsletter – I said yes immediately.

I first met Paul Andreola because well, we kept crossing paths on the same stocks. We were usually the only two people in the room during Canadian small-cap presentations at conferences. I’m convinced many days we would be the only two bidding against each other for shares of the obscure micro-cap of the day.

Paul’s style is just like mine. He is laser focused on the Canadian market. And on small-caps. No mining. No oil & gas. Just cheap, profitable small-caps that can grow and dominate their niche.

Paul lives of his investment gains – and his track record shows it. I have written up a few companies on this blog that have gone on to do well – XPEL Technologies (DAP-U.V, XPLT:OTC) at $1.47 (now at $3.48) and Microbix (MBX.TO, MBXBF:OTC) at $.37 (now at $.79). Yet Paul was in MBX at $.20 and DAP at… $.17! There’s just no one better at finding these companies before they make their run.

So after a while, we said why don’t we collaborate on an idea – interview management, compare notes, and put a write-up together. We picked Renoworks Software (RW.V, ROWFK:OTC) – an unknown small-cap that was right in our strike zone. We shared it with a few other focused small-cap investors. We had some fun, got great feedback, and generated good interest in a company we think will do very well.

We wanted to find another – yet do it on a larger scale. A newsletter was an obvious solution. But we were missing one key piece. And that piece was Keith Schaefer – writer of the wildly successful Oil & Gas Investments Bulletin. Keith has known Paul for 15 years and was thrilled at the idea of partnering with us on this newsletter. And so smallcapdiscoveries.com was born.

Keith has been at it for 5 years – and learned what it takes to create a great newsletter. He is providing us with the back-end – e-commerce, customer service, and marketing systems. Basically all the things that would have taken us years to figure out (if we could have figured them out at all!) Paul and I get to do what we love doing – all the research and writing. Beyond that, Keith will be solely an investor alongside us.

The service will be just like you have come to expect on Moatology. We will focus on only our best ideas and put together thorough reports on why we like them. We’ll do updates as we go along and be transparent about the performance of our picks. Just like you’d expect, the stocks will be small and illiquid – this newsletter isn’t for everyone. We want you know what you’re getting.

Right now in our Member’s Centre, we have updated reports on two stocks that have been written up on Moatology – XPEL Technologies and Microbix. These have had nice runs, but remain two of our favorites. We think there are some major catalysts on the horizon and we’re still buyers.

We also have a new conviction pick. It’s just what we look for. The business is profitable and growing. The valuation is compelling. And it’s a market leader in an industry with huge tailwinds.

The company is Hamilton Thorne (HTL.V, HTLZF:OTC). You can read the the report in the FREE Members Centre at www.smallcapdiscoveries.com

So what will happen to Moatology? It will live on doing just what it always has. My focus will be on Smallcap Discoveries but for the odd non-Canadian idea I have – you’ll get it right here. Stay tuned, as I have a Swedish micro-cap in the works that may be one of the biggest bargains I know of at the moment.

Thank you for all your support over this last year. If you’ve enjoyed Moatology, I know you will like what Paul and I have put together even more.

Go sign up today – www.smallcapdiscoveries.com

Disclosure: Long XPLT, MBXBF, HTLZF, ROWFK


Hedge Fund Job Opportunity

The firm I am working at currently is currently looking for an entry-level analyst to join our team.

What we do: Our fund is focused on emerging hedge fund managers. We are “Hunters of Greatness” and looking for young managers that we feel have the ability to become stars in the industry. Our model is to seed these managers and help them as they grow and scale their business.

What you will do: 

  • Conduct due diligence on managers – personal background, investing style, organizational structure
  • Maintain files of due diligence and lead funding decision process
  • Research and vet ideas to understand the manager’s process
  • Organize marketing events for managers and prepare fund marketing materials – tearsheets, presentations, investor letters
  • Provide administrative support – legal docs, fund financial statements


  • Must relocate to Houston, TX. We would prefer someone already based in the area.
  • Prefer someone with a few years of investing industry experience
  • CFA or pursuing CFA is a a plus

This opportunity is a great way to learn the investment management business and network with many others in the industry. You will gain exposure to a wide range of managers and strategies. And perhaps the best part – much of your day will be available to research stocks and speak with managers about their top ideas!

If this is up your alley or perhaps you know somebody interested, please email me at moatology@gmail.com

Much thanks,



Renoworks Software: An Emerging Hidden Champion

The idea I am presenting today is one I had a lot of fun researching and putting together. I collaborated on this idea with one of Canada’s best investors (IMO), Paul Andreola (Paul’s Twitter). Paul and I are active participants on the Silicon Investor Microcap Kitchen Canadian Stocks forum – I highly recommend checking out the thread if you play in this space.

We shared this write-up with some investors on the forum a few weeks back and the stock has had a good run since. Regardless, we think this company is an emerging growth story that should be on small-cap investors’ radar screens. Just be careful as the stock is very thinly traded. Below is the original report we put out. Enjoy!

Renoworks Software (RW.V / ROWKF)

Current Price: $.12 (CAD)

Shares Outstanding Basic/Diluted: 26.6M/28.2M

Investment Highlights

  • Innovator of visualization software for home remodeling industry
  • 30+% y/y growth with long runway for future growth
  • Compelling valuation at under 2X revenues, 12X earnings
  • Incentivized management team, 50+% insider ownership

Business Overview

Deciding to remodel a home is a big commitment. Costs often run in the tens of thousands and modifications aren’t easy once work has begun. Because of this, homeowners often become anxious and delay or abandon the project. This is where Renoworks come in.

Renoworks sells digital visualization software that allows users to virtually preview products on a rendering of their home. Users upload pictures of their home into the software and can then experiment with different windows, siding, and doors as they plan out the remodeling. They become engaged in the remodeling process and can turn blueprints/graphics into visions of their dream home.


Renoworks markets their software as a cost-effective lead generation tool for two main segments:

1. Manufacturers/Retailers

Suppliers of remodeling materials, like Andersen Windows & Doors, use Renoworks’ solution to drive brand loyalty. The homeowner loads his/her home into the software and explores the possibilities with the manufacturer’s products.

Customers experience brand engagement that pays off for the manufacturer when it comes time to buy. Renoworks’ clients have found homeowners are 5X more likely to request a quote when engaged through the software – results like these are moving this product from a “nice-to-have” to an essential marketing tool.

2. Remodelers / Builders

Homebuilders and remodelers use the software as a way to showcase their capabilities to clients. Clients play a more active role in the design process and are more satisfied with the end result. The software also gives the builder a platform for increasing the scope of the design and other upsells.

Renoworks’ begins by working with product vendors to build digital images of their products. These images power a customized solution that is then delivered on a website, a customer-branded app, or a desktop application.


The digital visualization software industry is in its infancy and there are very few independent players. The company sites only three competitors, one in the U.S. and two abroad. Renoworks competes primarily with U.S.-based Chameleon Power (privately owned).

Renoworks generates the majority of their revenues from manufacturers. The housing material manufacturer segment consists primarily of regional players. There are nearly 5,000 manufacturers in North America, with masonry and flooring comprising over half this total.

Renowork’s industry depends on the health of the broad economy and the housing sector. Renoworks software is also not “mission critical” and industry adoption of the technology is low. Fortunately, we see two key trends that should change this:

1. Recovering Remodeling Industry

Strong home sales and a low interest rate environment have kept remodeling activity buoyant. According to the National Association of Homebuilders, remodeling activity is at its highest point since 2006, up over 100% from the 2008 lows. When remodelers are flush with cash, they are more likely to commit to discretionary purchases like software.

2. Mobile Technology

Following an initial wave of consumer adoption of the iPad and other tablets, many businesses are now beginning to use them. Since remodelers must travel to the home for consultations, a tablet loaded with Renoworks’ mobile software makes for an ideal selling tool.

Growth Prospects

Renoworks’ opportunity for growth lies beyond their traditional manufacturer market in the homebuilder and remodeler segments. The builder market is concentrated with larger accounts while the remodeler segment is highly fragmented. The remodeler market alone consists of nearly 400K businesses throughout North America, representing a massive untapped market.

It will take time to reach this wide segment, but the payoff could be large. Capturing just 1% of this market would bring nearly $5M of recurring revenues (assuming $100/mo subscriptions) to Renoworks – not bad for a company doing $2M in revenues currently!


Renoworks has been adding customers rapidly over the past few years and it has shown in the numbers:


Revenues grew 34% in 2013 and 16% over the trailing twelve months while operating income hit record levels for the company. While this growth is impressive, the financials don’t tell the full story.

Over the past year, Renoworks began transitioning from on-premise to cloud delivery,trading in up-front licenses for recurring monthly revenues. We find it impressive the company delivered double-digit growth while sacrificing up-front license revenues.

Here are the company’s results broken down by quarter:


Renoworks sells their software through annual licenses on a per-user basis with one-time implementation fees when the software is deployed. As the company has grown, so have their recurring revenues (now ~65% of total revenues). This recurring business gives Renoworks visibility and a solid base of revenues to use for growth investments. We expect the portion of recurring revenues to incre ase as the company sells monthly subscriptions under a Software-as-a-Service (SaaS) model.

Renoworks has delivered double-digit growth in 5 of the last 8 quarters and gross margins have soared to over 90%. The business currently depends on large contracts with key clients so quarterly results can be lumpy. We anticipate that as the company grows their SaaS business with smaller contracts to a larger number of remodelers, results will smooth and sequential growth will accelerate.


Below is a summary of the company’s capital structure and current valuation :


Renoworks boasts a clean capital structure with only a small number of options outstanding. Shares are currently valued at 1.8X sales and 12.5X earnings – a modest valuation for a company that grew double-digits y/y. Given the company’s recent performance and long runway for future growth, we feel Renoworks should trade at a multiple more apt for early-stage technology companies.

Let’s compare Renoworks to a peer group of high-growth Canadian software companies:


Renoworks trades at less than half the peer revenue multiple – and most of their peers aren’t even profitable yet! Applying the peer group revenue multiple gives us a price target $.25, offering over 100% upside from current levels. This valuation implies a P/E ratio of 25X, again hardly a stretch for a company with Renoworks’ growth profile.

To justify our valuation, we must ask, can Renoworks continue its double-digit growth rate? When we think about the limited competition, large untapped market, and attractive business model, we feel they can.


Here are the key risks we see with an investment in Renoworks:

  • Renoworks software is not “mission critical” and awareness of the product is low. Great time and resources must be spent educating customers of the software’s benefits.
  • Penetrating the remodeling market will mean selling the software to a much larger base of customers. Renoworks will likely have to upgrade their infrastructure to target this fragmented market.
  • Revenues can be lumpy quarter to quarter. The company just became profitable and a weak quarter can quickly become loss-making.
  • The company is resource-constrained and has little capital to invest in growth.

Management / Insiders

Renoworks was founded in 2002 by Greg Martineau, an industry veteran with 30 years of home remodeling experience. Greg became Chairman and hired longtime friend Doug Vickerson as CEO in 2008. Doug was previously Vice Pre sident of Selling and Marketing at Guest-Tek Interactive and leads the sales efforts at Renoworks as CEO.

Rounding out the board are Nairn Nerland and Bob Schultz. Nairn Nerland is technology veteran who served on the executive team alongside Bill Gates at the Corbis Corporation. Bob Schultz is a renowned business professor at the University of Calgary and claims Greg, Doug, and Nairn all as former students.

Renoworks is tightly held, with insiders owning 53% of the shares outstanding. Nairn holds the largest stake at 20%. Greg owns 13% and and Doug owns 9%.

We have been impressed with management’s accomplishments thus far. They take modest salaries, built positions in the company with their own money, and have grown the business from scratch with minimal dilution to shareholders.


Renoworks has nearly everything we look for in a stock – high insider ownership, excellent growth prospects, a compelling valuation, and an attractive business model. The company is a market leader in a niche industry that we feel is at the early innings of widespread adoption. Renoworks remains virtually unknown by the market and we see significant upside as the company’s growth story gets out to a larger audience of investors.

Disclosure: Long RW.V


JEMTEC II: You Never Know

This past week, I sat down to begin my daily ritual of checking every filing on Canada’s SEDAR system. Every filing that is, except for anything containing “resource, ventures, or mining.” This process takes about 15 minutes and helps me get an edge in this overlooked market.

About halfway down the list, I came across a press release filed by a company called JEMTEC. Normally this wouldn’t catch my eye, but this was the company’s first press release to hit the wire since, well, ever! The cynic in me thought it must be another option grant for 10% of the equity to insiders. The optimist in me thought, well, I don’t know… Anyway, here is the news:

JEMTEC declares a one-time special dividend

 “VANCOUVER, Sept. 11, 2014 /CNW/ – JEMTEC Inc. (TSX-V: JTC) (“JEMTEC” or the “Company”) announces that the board of directors has approved the payment of a one time special dividend of $0.59 per common share (the “Special Dividend”).

 ..The Company has decided to pay a special dividend at this time after considering a number of factors including:

  1. The Company is returning surplus cash to the shareholders that is not needed to execute the Company’s business plans.
  2. The Company’s share price has been trading at a substantial discount to the book value per share for an extended period of time. It is hoped that a special dividend will help increase investor returns.
  3. Even after payment of the special dividend, the Company will continue to have cash reserves of approximately $1.5 million, which will allow it to continue to pursue acquisitions.
  4. The Company’s electronic monitoring business will continue to operate which will provide continued cash flow for operations.”

JEMTEC’s shares last traded at $.58 before the release. Shares are now at $.82. An investor who bought earlier this week will probably make one heck of an IRR (depending on where shares trade down to post-dividend).

You may remember JEMTEC from a blog post I did earlier this year. The thesis was simple: shares were trading at ~.5X cash and the business was operating stably at break-even. It wasn’t hard to see. And many other value investors found it (See: Oddballstocks’ JTC post).

Most investors, including myself, stayed out for two reasons:

  1. No catalysts
  2. Shareholder-unfriendly management

Reason #2 has its merits. Management has essentially sat idly while the business has withered away since 2007. And they have demanded high salaries from shareholders to do this. They even granted themselves options for 10% of the equity – after a year of disastrous performance in 2009!

Reason #1 is a bit trickier. The idea of catalysts has a certain elegance in investing. Identify the catalyst, hang tight, and cash out once the market reacts. Sometimes it works like this. But many times the most critical developments come out of left field – both good and bad.

The point of this post is not to express regret in passing on JTC’s cheap shares. I don’t at all. I would have underperformed buying this at $.72 when I presented in February – both the TSXV and my own portfolio. And investors who bought a few years ago when it was just as cheap would have massively underperformed.

The point is to show that many “catalysts” lie outside our comprehension. And the idea of buying dollar bills for $.50 will always have it merits. I think Nate from OddballStocks drove the point home with his conclusion of the company:

“The truth is I, and no one else has any idea what happens next.  An investment like Jemtec is impossible to model, there is no model that handles infinite possibilities.  The company is just as likely to wind down as they are to start selling slap bracelets or pet rocks.”

I’ll leave you with this tweet from fellow blogger Paul:


You never know.

Disclosure: No position


XPEL Technologies II: The Art of Averaging Up

If you’re like me, you love the thrill of combing through thousands of stocks in search of the next great undiscovered company. It’s just exhilarating to feel like you’ve found a potential multi-bagger before anyone else. But investing isn’t about excitement, it’s about generating returns. And often times, the best ideas are in our own portfolio, staring straight at us.

It takes a long time to understand a business, research the industry/competition, and perform a proper valuation. And even after entering a position, it takes time to get comfortable with management and build conviction in your idea through the market’s wild swings. So that is why when I looked at all the new ideas I have generated over the last few months, I decided to put cash right into my top holding, XPEL Technologies (XPLT, DAP.U.V).

We got XPEL’s Q2 report recently and results exceeded even the most optimistic projections I had seen. Revenues increased 70% y/y and hit a record $8.3M. Gross margins were stable and operating income grew inline with revenues, reaching nearly $1M. If there was one knock on the results, it was the lack of operating leverage. This was of little concern to me – XPEL is wisely investing in sales & marketing and earning were impacted by some one-time professional fees.

The stock had run-up before earnings and has since edge up slightly. Still, the price has a long way to go to reflect the underlying value. I found two key clues in the earning release I think market is missing in its assessment of XPEL. Let’s go through each of them.

1. International Growth

We learned from the earnings release XPEL’s international business went from 31% of revenues last year to 36% this year. We can now break out their business and make a few projections:


The domestic business grew ~55% and the international business nearly doubled y/y. The key insight here is that since the international business is growing about 2X the rate as the domestic, international growth could actually accelerate the overall growth rate (as it becomes a larger part of the business). You almost never see this in a company’s growth profile. And when you do, it’s almost always accompanied by a sky-high valuation.

2. Company-Owned Retail Stores

XPEL first experimented with opening a company-owned installation shop in Houston, TX in late 2012 (outside of their flagship San Antonio shop). Since then, they have opened shops in Austin, Palm Springs, and most recently, Atlanta. The fact they dedicated a line in their brief PR to these tells me they are serious about expanding their footprint with this model.

Rolling out retail stores will of course drive revenue growth. But what the market may be missing is how these shops will alter the company’s margin profile. From my research, here’s an estimate of the shop unit economics:


These shops require little capital to set-up beyond computers, the film cutter, and initial inventory. I estimate start-ups costs are ~$50K per shop. And OPEX is essentially just rent and salaries. It’s not hard to see the company rolling out 20 of these over the next couple years with their cash on hand.

Twenty shops up and running likely adds $5M EBIT – not bad for company on a $4M earnings run-rate!

The roll-out will need to be done with care. Local install shops form XPEL’s customer base and they don’t want to upset them by stealing business. I think we see the “Apple Store Model” for their retail expansion, with a large installation shop in each major market to build brand awareness and support their local customers.

So what’s XPEL worth? Putting it all together, I think it’s easily worth over $5/share – if not a whole lot more:


You’ll note the conservatism in these projection. Any number of positive outcomes – accelerating international growth, an aggressive retail roll-out, operating leverage – could put the actual numbers far higher. I’ve played with a number of scenarios and believe $10/share may be more likely as the company comes on the radar screen of institutional growth investors.

I continue to search far and wide for misunderstood and undiscovered stocks. But right now, there is not a better risk/reward set-up I know of than XPEL Technologies. That’s why I’m adding here.

Disclosure: Long XPLT


Thoughts on OptimizeRx’s Q2

Few housekeeping items to start. I hope everyone is having a good summer. Apologies for the lack of posts lately, I have taken the last few weeks off to do some traveling and am just now getting back up to speed. I have a few long posts in the works on some under-the-radar ideas (and I mean really under-the-radar!). I also have an exciting investing-related project I am working on that I will be in announcing in next couple of months.

The main news I missed while away was OptimizeRx’s (OPRX) Q2 release. Headline revenue came in at $1.45M, up 33% from last year. Distributions were up 30% sequentially, but revenue only increased 10%, indicating some compression in payout per coupon. Earnings and cash flow were roughly breakeven. On the positive side, gross margin came in a good bit higher than I have been modeling with the LDM royalty impact (63% vs ~55%).


I think I speak for many investors when saying these results are disappointing. I wasn’t expecting much, but language in their July shareholder update led me to believe revenues would at least recover to the ~$1.7M level we would have had without the setbacks in Q1. Novartis was brought back, but Allscripts (MDRX) remained offline due to “technical issues.” Not only has this taken out an estimated 20-25% of their business, but it has delayed the expanded roll-out to Allscripts PRO. If this estimate can be believed, the company should be on a ~$2M run-rate and business is actually accelerating ex-MDRX.

On one hand, this is the one-time solvable issue we look for in buying opportunities. On the other, this is now the second quarter in a row with negative operational surprises –skepticism is justified. Management has brought their case to Allscript’s senior management and walked away with a commitment to resolve the issues and complete the roll-out by September 30th.

Management is also taking action to reduce barriers to adoption and address the risks of working with larger, more bureaucratic customers. From the 10-Q:

“We will also be launching downloadable code which will streamline the integration requirements for our solution from a few weeks to a few days if they choose to utilize this method. This addresses one of the biggest hurdles in getting health systems and EHRs to implement our system based on minimal available resources.”

Execution issue aside, expansion looks to be on-track. So far in Q3, SampleMD was launched into Quest’s Care360, into eHealthline on a limited basis, and will be launched into LDM’s network of 100K doctors. Management expects these three integrations alone to double the platform’s active users. And then buried in line 7 of company highlights section was this line:

“Successfully tested automated e-coupon solution at Walgreens to automate received coupons, versus manual upload.”

What this could mean in terms of revenues is anybody’s guess but I see it as evidence of the growth optionality in this business the market is giving little credit for.

Valuation / Conclusion

I originally based my valuation on management’s loosely guided 1M quarterly distribution run-rate (eq to $4M revenues) by Q3 14. This goal is now out of the question this year, but I think it’s still quite doable. Bringing MDRX online should put them back on $2M quarterly run-rate. Double the platform’s reach with consistent utilization and you get $4M. Annual revenues of $16M would give us ~$4-5M in operating income and a $80-100M EV. Whether this happens in 2015, 2016, or even 2017 the IRR will be quite attractive for an investor purchasing shares at these levels.

The shares it seems are priced for disaster. Accounting for the business qualities and prospects, it may be one of the cheapest US equities I know. And if you figure in the $3M in cash and reduced FD share count from the Vicis buyout, you’d have to go back to 2010-2011 to find a valuation this low for OPRX.

There are risks one could argue are significant and increasing. Specifically, the drug coupon macro environment (see comments in my last OPRX post and SA article). I’d contend the risks are priced in and the stock’s path to revaluation appears clear to me. If management can prove to the market that all the exciting developments in their business translate into meaningful revenues, shares will be far higher. If not, they will likely stay where they are. I believe odds favor the former.

Disclosure: Long OPRX. Added a few shares at $1.15 following the release.


Sangoma Technologies: Growth for Less than Net-Net Working Capital

Sangoma Technologies (STC.V, $.295) is a provider of hardware and software solutions to the rapidly growing Voice-over-Internet Protocol (VoIP) industry. The company is a tale of two businesses – growth in new products has masked the inevitable decline of their legacy business. Despite management’s progress in saving the business, shares remain dirt-cheap, trading at a 5% discount to net-net working capital and under 7X depressed earnings levels.

Legacy Business

Founded in 1984, Sangoma built up its legacy business as a manufacturer for hardware and software that enabled computers to communicate with telephony networks and other Wide Area Networks (WAN).  In short, this meant connecting a PC to the Public Switched Telephone Network (PSTN – legacy global telephone network) or a Private Branch Exchange (PBX – enterprise telephone system). The company developed a reputation as a market leader behind Digium, creator of Asterisk, the original open source software that became the standard for these telephony applications.

Sangoma’s legacy business was a good place to be. Gross margins were over 70% and business boomed in the early 2000’s.

Business Transition

In 2008, a shift in Voice over Internet Protocol (VoIP) methodology from PSTN-based to internet-based was underway. Technology to support voice transmission over the internet had evolved and enterprises jumped at the opportunity to reduce costs by running voice/data communications on a single network. Despite the warning signs, previous management stood idly and milked the PSTN business just as competitors started fleeing the market.

New management was brought on in 2011 and saw two choices for Sangoma: innovate or die. Fortunately, they chose the former and launched an accelerated product development program that pushed new product introductions from 3 per year to 10. Now after burning through half their cash reserves, Sangoma has a full product line of session border controllers, VoIP Gateways, and innovative Microsoft Lync products for small business.


In layman’s terms, these products ensure security and interoperability between various enterprise communication systems (fax, voicemail, SMS, etc.). The trend, dubbed Unified Communications (UC), has grown in complexity as companies now want all communications delivered via any means to any device.

Sangoma is a small fish in a big pond but industry trends are on their side.According to Infonetics research, the VoIP/UC  market grew 8%  last year to $68B and is projected to grow 6% over the next five years. The main driver cited is “SIP-trunking” (50+% growth), which is the key technology standard Sangoma’s products address.


Sangoma’s picture is neatly painted in the financials:


Note: R&D expense was not broken out until 2011

The years 2005-2009 were heady times for Sangoma. They had strong brand recognition and didn’t need to ramp marketing spend.  R&D spend was kept modest because competitors were leaving the market. The result was big profits, topping out at $4.6M in EBIT and $2.5M in FCF in 2008.

With new management’s strategy came soaring R&D and marketing expense to build out new product lines. These investments appear successful as profitability was maintained and the revenue decline reversed. But the consolidated financials don’t tell the whole story. Here’s the breakdown of new product and legacy sales over the last few years:


Note: This breakdown is not disclosed in details and these figures are my estimates based on management’s comments in the conference calls

We can now see management grew the new business from nothing in 2011 to a nearly $7M run-rate today. As tough as 2013 was for Sangoma, it would have been a disaster without new products to offset a 30% dip in legacy sales.


Whether we’re looking at assets or earnings, Sangoma appears quite cheap:


The market is valuing Sangoma at a discount to NNWC and less than 7X EBIT. The EBIT multiple doesn’t look unduly low but remember the company has spent heavily to build out new products and sales channels. Profitability may never reach 2008 levels, but I think we could easily see $2M in a couple years.

And what happens if they fall short of achieving scale in the new business? Well then I think a competitor come in and sees a full product suite and high-margin revenues available for 40 cents on the dollar.  A strategic acquirer could easily combine sales forces and merge R&D to lower the purchase price – taking just 10% out of Sangoma’s OPEX would effectively double EBIT.

From this angle, I’d argue for a valuation at 1X revenues + excess cash. This would put shares at $.55 on a FD basis, leaving 85% upside.

Even this valuation would be at the absolute low end of their industry. Direct comps include AudioCodes (AUDC) at 1.1X revenues/26X EBITDA and Acme Packet, acquired by Oracle in early 2013 for 6.2X revenues. Less direct comps include 8×8 (EGHT) and Shortel (SHOR), both of which are viewed as premier plays on VoIP/UC trends and command high valuations (2-5X sales, 40-50X EBITDA).


The biggest concern I have with this investment is technological obsolescence. A shift in technology already threatened their existence and another shift could happen any time. Their products are also not simple to understand and I doubt I’d be able to keep up with shifting trends in the industry.

Sangoma arrived late to the VoIP/UC party and faces the challenge of making inroads on competitors with far higher engineering/marketing budgets. Results will be lumpy as they sell to larger OEM customers and I believe the longer sales cycles will be a drain on their resources.


Insiders collectively own 20% of the company, with Chairman David Mandelstam having the largest stake at 18.5%. Current CEO Bill Wignall and CFO David Moore both came from Truition in late 2011 and have led the effort to revitalize Sangoma’s business.

I’ll credit current management with transparency. They go to great lengths on conference calls to detail their strategy and address the company’s challenges. Management ownership is not as high as I usually like to see, but they have acted like owners thus far, returning the business to growth and buying back shares at depressed prices.


I like the risk/reward scenario with Sangoma. As I see it, either management will be successful in scaling the new business or a competitor will come in and seize the opportunity. And in the worst case, Sangoma’s rock-solid balance sheet should provide downside protection if business falls off a cliff again.

Personally, I don’t have much cash available for new ideas so I’ll be on the sidelines for the time being. I’ll be closely watching the company’s progress in stabilizing their legacy business and growing new product sales.

Disclosure: No position


ViryaNet to be Acquired

Earlier this month, ViryaNet (VRYAF) announced it had signed an agreement to be acquired by Verisae for $18.8M in cash. Verisae is a SaaS company that serves many of ViryaNet’s verticals, including grocery, retail, and food service. Here is how the proposed transaction breaks down:


At first glance, it doesn’t look like too bad a deal for the company. A deal at 1.7X revenues is only a slight discount to where ClickSoftware (CKSW) trades and 20X EBITDA is no paltry multiple. But keep in mind the deal comes after an awful loss making quarter for the company. Based on last year’s FY numbers, they are selling out for 11X EBITDA – and remember,  this business converts a high percentage of EBITDA to FCF.

The other kicker is this nugget buried in the company’s 20-F:

“The Preferred A Shares have all rights and privileges that are possessed by the Company’s Ordinary Shares, including, without limitation, voting rights on an as-converted basis, and have an aggregate liquidation preference of $ 2,500 over the Ordinary Shares in any distributions to the Company’s shareholders.”

Note: The filing has the 000’s omitted so the figure is actually a $2.5M claim over the common equity.

Accounting for this and other working capital adjustments, management expects the final payout to shareholders to be in the range of $3.15-.3.40/share.

I have to question why management would sell literally weeks after an awful earnings release and 40% sell-off. Revenue multiples aside, I believe ViryaNet could have done $.50 in EPS this year, which puts this deal at just 8X earnings. I also feel ViryaNet’s sales had yet to fully reflect the value of their solution in the marketplace. My sense is they could have negotiated a much better offer if they took another year to build out their cloud delivery model and recurring revenue base.

But alas, there is no crying in micro-cap investing and it looks like I’ll be taking 5-10% loss on the investment after the payout. I’m not enthused about the deal price but who knows, maybe business had continued to struggle and management felt now was the time to cash out before things got worse. I’ll also admit I may have let VRYAF’s strong Q4 skew my projections and the risk/reward turned out to be not as enticing as I had originally thought (after all, my base case had only 39% upside against 37% downside in the bear case).

I am now a perfect 2-for-2 on predicting buyouts on this blog (VIFL, VRYAF). Before you congratulate me, keep in mind I will have net lost money on these predictions! I never bought VIFL and will take a 5-10% loss on VRYAF. Overall, a disappointing investment but I’m glad to at least almost break even after the company’s disastrous Q1. On to the next one.

Disclosure: Long VRYAF