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January 19, 2020
The Boole Microcap Fund follows a quantitative investment process. This year (2020), I am going to give examples of Boole’s investment process in action.
The first example is Macro Enterprises Inc. (Canada: MCR.V). Macro Enterprises builds oil and natural gas pipelines, constructs energy-related infrastructure facilities, and performs maintenance and integrity work on existing pipelines. The company operates primarily in western Canada and is headquartered in Fort St. John, British Columbia.
Macro Enterprises comes out near the top of the quantitative screen employed by the Boole Microcap Fund. This results from four steps.
Note: All values in Canadian dollars unless otherwise noted.
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First we screen for cheapness based on five metrics. Here are the numbers for Macro Enterprises:
- EV/EBITDA = 1.37
- P/E = 3.72
- P/B = 1.08
- P/CF = 3.51
- P/S = 0.26
These figures—especially EV/EBITDA, P/E, and P/S—make Macro Enterprises one of the top ten cheapest companies out of over two thousand that we ranked.
Next we calculate the Piotroski F-Score, which is a measure of the fundamental strength of the company. For more on the Piostroski F-Score, see my blog post here: http://boolefund.com/piotroski-f-score/
Macro Enterprises has a Piotroski F-Score of 7. (The best score possible is 9, while the worst score is 0.) This is a very good score.
Then we rank the company based on low debt, high insider ownership, and shareholder yield.
Warren Buffett, arguably the greatest investor of all time, explains why low debt is important:
At rare and unpredictable intervals… credit vanishes and debt becomes financially fatal.
We measure debt levels by looking at total liabilities (TL) to total assets (TA). Macro Enterprises has TL/TA of 27.17%, which is fairly low.
Insider ownership is important because that means that the people running the company have interests that are aligned with the interests of other shareholders. Macro’s founder and CEO, Frank Miles, owns approximately 30%+ of the shares outstanding. Other insiders own about 3%. This puts Macro Enterprises in the top 7% of the more than two thousand companies we ranked according to insider ownership.
Shareholder yield is the dividend yield plus the buyback yield. The company has no dividend. Also, while it has bought back a modest number of shares, this has been offset by the issuance and exercise of stock options. Thus overall, the shareholder yield is zero.
Each component of the ranking has a different weight. The overall combined ranking of Macro Enterprises places it in the top 5 stocks on our screen, or the top 0.2% of the more than two thousand companies we ranked.
The final step is to study the company’s financial statements, presentations, and quarterly conference calls to (i) check for non-recurring items, hidden liabilities, and bad accounting; (ii) estimate intrinsic value—how much the business is worth—using scenarios for low, mid, and high cases.
Macro Enterprises has been in operation for 25 years. Over that time, it has earned a reputation for safety and reliability while becoming one of the largest pipeline construction companies in western Canada. The company has a market cap of $121 million and an enterprise value of $98 million.
Macro has built a record backlog of $870+ million in net revenue over the next few years. That is more than 7x the company’s current market cap. Presently the company has at least a 16% EBITDA margin. This translates into a net profit margin of at least 11%. That means the company will earn at least 80% of its current market cap over the next few years. (Peak net profit margins were around 15%—at these levels, the company would earn more than 100% of its market cap over the next few years.)
If you look at the $870+ million backlog, there are two large projects. There’s the $375 million Trans Mountain Project, of which Macro’s interest is 50%. And there’s the $900 million Coastal GasLink Project, of which Macro’s interest is 40%. Importantly, both of these projects are largely cost-plus—as opposed to fixed price—which greatly reduces the company’s execution risk. Macro can be expected to add new profitable projects to its backlog.
Furthermore, Macro performs maintenance and integrity work on existing pipelines. The company has four master service agreements with large pipeline operators to conduct such work, which is a source of recurring, higher-margin revenue.
Intrinsic value scenarios:
- Low case: Macro is probably not worth less than book value, which is $3.61 per share. That’s about 7% lower than today’s share price of $3.89.
- Mid case: The company is probably worth at least EV/EBITDA of 5.0. That translates into a share price of $10.39, which is 167% higher than today’s $3.89.
- High case: Macro may easily be worth at least EV/EBITDA of 8.0. That translates into a share price of $16.17, which is about 316% higher than today’s $3.89.
Macro Enterprises is one of the top 5 most attractive stocks out of more than two thousand microcap stocks that we ranked using our quantitative screen. Moreover, the mid case and high case intrinsic value estimates are far above the current stock price. As a result, we are “trembling with greed” to buy this stock for the Boole Microcap Fund.
In addition to company financial statements and presentations, I used information from the following three analyses of Macro Enterprises:
(Note: If you have trouble accessing the www.valueinvestorsclub.com analyses, you can create a guest account, which is free.)
BOOLE MICROCAP FUND
An equal weighted group of micro caps generally far outperforms an equal weighted (or cap-weighted) group of larger stocks over time. See the historical chart here: http://boolefund.com/best-performers-microcap-stocks/
This outperformance increases significantly by focusing on cheap micro caps. Performance can be further boosted by isolating cheap microcap companies that show improving fundamentals. We rank microcap stocks based on these and similar criteria.
There are roughly 10-20 positions in the portfolio. The size of each position is determined by its rank. Typically the largest position is 15-20% (at cost), while the average position is 8-10% (at cost). Positions are held for 3 to 5 years unless a stock approaches intrinsic value sooner or an error has been discovered.
The mission of the Boole Fund is to outperform the S&P 500 Index by at least 5% per year (net of fees) over 5-year periods. We also aim to outpace the Russell Microcap Index by at least 2% per year (net). The Boole Fund has low fees.
If you are interested in finding out more, please e-mail me or leave a comment.
My e-mail: firstname.lastname@example.org
Disclosures: Past performance is not a guarantee or a reliable indicator of future results. All investments contain risk and may lose value. This material is distributed for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. No part of this article may be reproduced in any form, or referred to in any other publication, without express written permission of Boole Capital, LLC.