Canada | Divestor

By: Divestor  09-12-2011

I have spent the better part of the day doing some screening and research on microcap companies (generally those with market capitalizations of under CAD$50 million). I discarded most of the energy and mineral-type firms as these firms are generally impossible for third-parties to get any sort of edge on.

However, there were two interesting “discards” that I will share.

Unfortunately, their shares are completely illiquid. With $10,000 in volume traded over the past 30 days, a single trader can probably take the stock price up 50% in a day. Hence, this company is in the “interesting but not practical” list of investment candidates.

What is particularly strange is that when you read the management/director biographies, you ask yourself “What the heck are these people getting into this business for?”. I will post the following from their most recent management information circular and let you come to your own conclusions:

The company itself seems to be financed mostly with equity, with the company raising equity capital through private offerings as the need arises. The last private placement was at 10 cents per share for $500,000 and warrants to purchase shares at 15 cents a piece expiring in 3 years. The current market value is $8.6 million and 13.5 cents per share. Operationally they are losing money, but this is due to the lack of economies of scale associated with having such a geographically dispersed operation and relatively low numbers of operating coffee shops.

Gross profit margins have been improving – the most recent quarter being 73%, which is a good improvement over the previous year. Presumably if they manage to scale up their sales in other locations they can actually start to make money, but I haven’t bothered doing the breakeven calculations. This is investing in an industry that is already well established.

That concludes my investment research for the day – little to show for it.

The information in this article was current at 06 Dec 2011


Other products and services from Divestor

09-12-2011

Equity | Divestor

This is increasingly looking like a binary situation, with either the preferred shareholders going to zero, or seeing the company slowly trudge their way back up to credit-worthy status over the process of a few years. Certainly not common shareholders at this point, but right now the marginal question is whether the preferred shareholders will come out of this looking like geniuses or will they be burnt as well.


09-12-2011

Finance | Divestor

The analogy is not appropriate to this case but what is salient is that low prices give high risk, high reward type situations – there are many scenarios where it is likely that the preferreds of YLO will go to zero, but there are plausible cases where they will rise again.