Pockets of Opportunities - Part 1

There are multiple ways to make money in the market.

So far this year, a few pockets of the microcap market have done really well, with some stocks exploding higher.

I was curious to see if I could find any common denominators between stocks that are up more than 60% year-to-date.

This list is not exhaustive; I based it on stocks I know well and follow (so I hopefully have something intelligent to say).

I found 15 stocks that I grouped into four buckets.

I'll cover the first two buckets today and the remaining two next week in Part 2. In each group, I'll also provide one or two ideas that could be next up.

Let's dive right in!

#1 Institutional-grade Microcaps

This category is about well-established businesses with a track record of revenue growth and profitability. When institutional investors come down the market cap spectrum, these high-quality opportunities tend to attract capital. And if they need to raise capital to accelerate their growth, that's even better as it provides a liquidity window for big money to get in.

Recent examples (with YTD returns) are:

• Kraken Robotics (TSX-V: PNG) + 63%

• Vitalhub (TSX: VHI) + 74%

• Tantalus Systems (TSX: GRID) + 91%

• Zedcor (TSX-V: ZDC) + 112%

These companies all took advantage of their share price increases to announce bought-deal financings in the last two months or so. Some will use the capital for organic growth, while others intend to do M&A. Either way, the capital should fuel more growth, and that’s what investors are looking for in microcaps.

What could be next?

• KITS Eyecare (TSX: KITS): Although the stock had a phenomenal performance in 2023, it's flat in 2024 despite continued execution and revenue growth. Several analysts cover the company, which is clearly on the institutions' radar. Given the high insider ownership, the stock is relatively illiquid. If there's another leg up in the stock, I suspect KITS could raise money and allow more institutions to get involved, fueling further share price increases. It looks like a prime candidate to follow the playbook of the four companies highlighted above.

#2 Deep Value

This group is pretty self-explanatory. The stocks have been extremely cheap, trading for as low as 4-5 times EBITDA. Suddenly, they show one impressive quarter, and the market wakes up.

Recent examples (with YTD returns) are:

• Tornado Global Hydrovacs (TSX-V: TGH) + 81%

• Biorem (TSX-V: BRM) + 97%

• BQE Water (TSX-V: BQE) + 115%

• Ztest Electronics (CSE: ZTE) + 229%

What could be next?

• Covalon Technologies (TSX-V: COV): Covalon is a medtech company with a few proprietary/patented technology platforms. Revenues have been growing lately, the balance sheet is solid, and the company is approaching profitability. A new CEO with deep industry experience took the reins earlier this year. Based on my sum-of-the-parts analysis, I believe the stock is extremely cheap, but it’s illiquid with no clear catalyst. One or a couple of solid quarters could be the spark that investors need.

• Illumin Holdings (TSX: ILLM): Illumin is an adtech company, and adtech isn't the most popular industry these days. After a massive bubble in adtech valuations in 2020-2021, the stock was taken to the woodshed and declined 95% from its peak. The company has been heavily investing in the development of a new self-serve platform that's starting to gain traction in the market. The balance sheet is rock-solid, with $55 million in cash and no debt. The valuation currently stands at 0.3x EV/Revenue (2023). Illumin has been generating 15-17% EBITDA margins in its good years. If they can return to those metrics (a big IF), the stock could trade for something like 2 times EBITDA.

I'm sure I missed several opportunities that fit in those first two buckets. If you know one, please share it in the comments section so all readers can benefit!

And stay tuned for Part 2 next week, in which I'll cover the remaining two categories and offer a few more ideas!

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Disclaimer

This publication is for informational purposes only. Nothing produced under the Stocks & Stones brand should be construed as investment advice or recommendations. Mathieu Martin, the author, is employed as a Portfolio Manager with Rivemont Investments. This publication only represents Mathieu Martin’s own opinions and not those of Rivemont. Rivemont may own positions and transact on any securities mentioned in this publication at any time without prior notice. At the time of this writing, the Rivemont MicroCap Fund holds positions in Kraken Robotics (TSX-V: PNG), KITS Eyecare (TSX: KITS), Biorem (TSX-V: BRM), BQE Water (TSX-V: BQE), Covalon Technologies (TSX-V: COV), and Illumin Holdings (TSX: ILLM). Always do your own research and consult a professional before making investment decisions.

If you’d like to invest in small public companies, check out this post.