Boole Microcap Fund

November 24, 2024

BIOREM (BRM.V / BIRMF) has a mission to engineer, design, manufacture, and distribute the most innovative and effective air emissions abatement technologies in the world.

The company was established in 1990.  They are based near Guelph, Ontario (Canada) but they operate in 23 countries around the world.  BIOREM has done over 2,000 installations.  They have 50+ employees with an average tenure of 10-12 years.

BIOREM offers a full range of engineering and technical solutions.  The company is transitioning from being a capital equipment vendor to providing more services, such as upfront engineering, site work, or after sales market.

These are the areas the company works in:

• • Municipal Wastewater: collection system & headworks; liquid phase treatment; solid treatment.
  • Solid Waste Management: compost; anaerobic digestion; transfer stations; recycling facilities.
  • Industrial: pet food; chemical production; petrochemical; food & beverage; agribusiness; semiconductor; surface coatings; wood products.
  • Renewable Energy: biogas desulfurization; biogas conditioning; emissions abatement.

Here are the results from the third quarter of 2024 in Canadian dollars:

BIOREM reported record quarterly revenues for the third quarter of $14.9 million, an increase of 103% over the previous quarter and 170% higher than the same quarter in 2023.  Year to date revenues totalled $28.1 million, a 117% increase over the $13 million reported for the first nine months of 2023.  The increase in revenues is largely attributable to the increase in order bookings and continuing delivery of projects from the Company’s large order backlog.

The company commented:

During the quarter the Company booked $6.6 million in new orders resulting in an order backlog of $48.4 million on September 30, 2024.  This compares to an order backlog of $57 million on June 30, 2024 and $54.5 million as of September 30, 2023.

The Company expects order bookings to continue to grow and delivery of projects from the order backlog to continue generating strong revenue and earnings growth over the next 12 months.

“In the third quarter, delays related to industry-wide issues with construction projects eased somewhat, allowing BIOREM to catch up on orders in the Company’s backlog,” said Derek S. Webb, President and CEO. “Even as project deliveries accelerated, BIOREM’s sales funnel, outstanding bids, and order backlog remain robust with no signs of softening over the near- to medium-term.”

“Population growth and the need for significant increases in housing construction throughout North America is driving demand for municipal and industrial infrastructure projects that require air emission abatement systems.  BIOREM’s experience and performance in delivering both large and small successful air emission abatement projects makes them uniquely positioned to benefit over the long term from this growth cycle.”

Here are figures are in U.S. dollars: BIOREM reported EPS (earnings per share) of $0.12 on a fully diluted basis.  EBITDA is $2.18 million.  Cash flow is $3.17 million.  Revenue is $10.73 million.  The market cap is $31.1 million, while enterprise value is $28.5 million.

And here are the metrics of cheapness based on annualizing the most recent quarter:

• • EV/EBITDA = 3.27
  • P/E = 4.38
  • P/B = 4.36
  • P/CF = 2.45
  • P/S = 0.72

ROE is 59.7%, which is outstanding.

The Piotroski F_Score is 7, which is quite good.

Insider ownership is 16%, which is good.  Cash is $7.3 million while debt is $3.9 million.  TL/TA (total liabilities / total assets) is 59.0%, which is OK.

Intrinsic value scenarios:

• • Low case: If there’s a bear market and/or a recession, the stock could decline.  That would be a buying opportunity.
  • Mid case: BIOREM should have a P/E of at least 10.  That would mean the stock is worth $4.80, which is over 125% higher than today’s $2.10.
  • High case: Arguably, the company should have a P/E of 15.  That would mean the stock is worth $7.20, which is over 240% higher than today’s $2.10.
  • Very high case: If BIOREM can continue to grow its revenues and backlog, while also transitioning towards services instead of just capital equipment, the P/E could reach 20.  That would mean the stock is worth $9.60, which is over 355% higher than today’s $2.10.

 RISKS

• • If there’s a bear market or a recession, the stock would probably decline temporarily.
  • If the company does not continue to win new business, revenue and earnings would decline.

 

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: https://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 approachesintrinsic 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.

November 17, 2024

The Shiller P/E—also called the 10-year P/E or the cyclically adjusted P/E (CAPE)—recently exceeded 38.  This is in the top 0.5% of history.  The CAPE has only been higher one time—December 1999, when it reached 44.

However, according to John Hussman’s most reliable P/E ratio, the S&P 500 index today is at its most overvalued level ever, including December 1999.  John Hussman writes:

MarketCap/GVA is the ratio of the market capitalization of nonfinancial companies to gross value-added, including our estimate of foreign revenues, and is our most reliable gauge of market valuation (based on correlation with actual, subsequent 10-12 year S&P 500 total returns in market cycles across history).  The current level of 3.3 is the highest extreme in history, eclipsing both the 1929 and 2000 bubble peaks.

See: https://www.hussmanfunds.com/comment/mc240923/

The long-term average CAPE for the S&P 500 index is 17.  But even if we assume that the CAPE should be 20, that is still 47% lower than today’s CAPE of 38.

So the CAPE is likely to decline to somewhere in the range of 20 to 22.  This means that the S&P 500 index is likely to decline 40% to 50% over the next 3 to 5 years.

Warren Buffett, arguably the greatest investor of all time, has raised $325 billion in cash at Berkshire Hathaway.  So Buffett clearly thinks that market is overvalued.  In fact, Buffett says that total market cap to GNP is “probably the best single measure of where valuations stand at any given moment.”  Currently, the total market cap to GNP is 201%, one of its highest levels in history, comparable to December 1999.

When did Buffett last have so much cash as a percentage of Berkshire’s portfolio?

• • 2007 before the Great Financial Crisis
  • 1999-2000 before the internet bubble popped

 

INFLATION MAY PICK UP AGAIN

The consumer price index (CPI), which measures price growth across a basket of goods, ticked up to an annual pace of 2.6% in October – from 2.4% in September, which had been the slowest rate in more than three years.

Importantly, the 10-year treasury yield has increased from a recent September low of 3.649% to 4.445%.  The great macro investor Stanley Druckenmiller said just recently he trusts market prices more than he trusts professors.  The 10-year treasury is predicting that inflation will start increasing again, forcing the Fed to stop lowering rates and possibly to start raising rates.

If, in fact, inflation keeps increasing and the Fed has to keep rates high, that would probably be a catalyst for the S&P 500 index to start a 40% to 50% decline over the next 3 to 5 years.

That said, the catalyst for a bear market could be any number of things, including inflation inceasing, a possible recession, or something else the market is not currently considering.

 

BUBBLE HISTORIAN JEREMY GRANTHAM

As bubble historian Jeremy Grantham notes, there has never been a sustained rally starting from a 38 Shiller P/E.  The only bull markets that continued up from levels like this were the last 18 months in Japan 1989 and the U.S. tech bubble of 1998 and 1999.  Both of those great bubbles broke spectacularly.  Separately, there has also never been a sustained rally starting from full employment.

What happened to the 2021 bubble?  It appeared to be bursting conventionally in 2022—in the first half of 2022 the S&P declined more than any first half since 1939 when Europe was entering World War II.  As Grantham points out, previously in 2021, the market displayed all the classic signs of a bubble peaking: extreme investor euphoria; a rush to IPO and SPAC; and highly volatile speculative leaders beginning to fall in early 2021, even as blue chips rose enough to carry the whole market higher—a feature unique to the late-stage major bubbles of 1929, 1972, 2000, and now 2021.  Grantham writes:

But this historically familiar pattern was interrupted in December 2022 by the launch of ChatGPT and consequent public awareness of a new transformative technology—AI, which seems likely to be every bit as powerful and world-changing as the internet, and quite possibly much more so.

See: https://www.gmo.com/americas/research-library/the-great-paradox-of-the-u.s.-market_viewpoints

Grantham continues:

But every technological revolution like this—going back from the internet to telephones, railroads, or canals—has been accompanied by early massive hype and a stock market bubble as investors focus on the ultimate possibilities of the technology, pricing most of the very long-term potential immediately into current market prices.  And many such revolutions are in the end often as transformative as those early investors could see and sometimes even more so—but only after a substantial period of disappointment during which the initial bubble bursts.  Thus, as the most remarkable example of the tech bubble, Amazon led the speculative market, rising 21 times from the beginning of 1998 to its 1999 peak, only to decline by an almost inconceivable 92% from 2000 to 2002, before inheriting half the retail world!

So it is likely to be with the current AI bubble.  But a new bubble within a bubble like this, even one limited to a handful of stocks, is totally unprecedented, so looking at history books may have its limits.  But even though, I admit, there is no clear historical analogy to this strange new beast, the best guess is still that this second investment bubble—in AI—will at least temporarily deflate and probably facilitate a more normal ending to the original bubble, which we paused in December 2022 to admire the AI stocks.  It also seems likely that the after-effects of interest rate rises and the ridiculous speculation of 2020-2021 and now (November 2023 through today) will eventually end in a recession.

Grantham says to beware of FOMO (fear of missing out), which comes along at the end of every great bubble.  It’s incredibly seductive and hard to resist.

This bubble has crossed off all the boxes.  It’s done all the things that a super bubble typically does.

We had a 11-year bull market (2009 to 2020), the longest in history.

It requires crazy behavior—we’ve had some of the great crazy behavior of all time.

It needs to accelerate at something like 3x the average rate of the bull market.  It has done so.

At the end of every super bubble, the speculative stocks start to peel off and go down (even if the broad market goes up).  This has happened.  40% of all NASDAQ stocks are down over 50%.  This is the beginning of the end of the bubble: speculative stocks go down even as the market goes up. It’s a very rare condition that only previously happened in 1929, 1972, 2000.

Grantham concludes by asserting:

It is likely that we are at the beginning of a crash.

It would be unlikely that the market would not come down 50% from its peak.

And it would be unusual if the speculative stocks did not do worse than that.

 

CONCLUSION

Benjamin Graham and David Dodd, in Security Analysis (1934), wrote:

The ‘new era’ doctrine – that ‘good’ stocks were sound investments regardless of how high the price paid for them – was at bottom only a means of rationalizing under the title of ‘investment’ the well-nigh universal capitulation to the gambling fever.  The notion that the desirability of a common stock was entirely independent of its price seems incredibly absurd.  Yet the new-era theory led directly to this thesis… An alluring corollary of this principle was that making money in the stock market was now the easiest thing in the world.  It was only necessary to buy ‘good’ stocks, regardless of price, and then to let nature take her upward course. The results of such a doctrine could not fail to be tragic.

 

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: https://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 approachesintrinsic 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.

November 10, 2024

As a long-term value investor, how does one maximize long-term returns? Being hyper-selective – choosing the top 0.1% of ideas – is essential.

But something else that is essential is bet sizing. There’s actually a simple mathematical formula – the Kelly criterion – that tells you exactly how much to bet in order to maximize your long-term returns.

Both Warren Buffett and Charlie Munger are proponents of the essential logic of the Kelly criterion: bet big when you have the odds, otherwise don’t bet.  Here’s Charlie Munger:

The wise ones bet heavily when the world offers them that opportunity. They bet big when they have the odds. And the rest of the time, they don’t. It’s just that simple.

As for Buffett, he famously invested 40% of his hedge fund into American Express in the late 1960s. Buffett realized a large profit. Later, Buffett invested 25% of Berkshire Hathaway’s portfolio in Coca-Cola. Buffett again enjoyed a large profit of more than 10x (and counting).

Some history of the Kelly criterion:

Claude Shannon was a fascinating character–he often rode a unicycle while juggling, and his house was filled with gadgets.  Shannon’s master’s thesis was arguably the most important and famous master’s thesis of the twentieth century.  In it, he proposed binary digit or bit, as the basic unit of information.  A bit could have only two values–0 or 1, which could mean true or false, yes or no, or on or off.  This allowed Boolean algebra to represent any logical relationship.  This meant that the electrical switch could perform logic functions, which was the practical foundation for all digital circuits and computers.

The mathematician Ed Thorp, a colleague of Shannon’s at MIT, had discovered a way to beat the casinos at blackjack.  But Thorp was trying to figure out how to size his blackjack bets as a function of how favorable the odds were.  Someone suggested to Thorp that he talk to Shannon about it.  Shannon recalled a paper written by a Bell Labs colleague of his, John Kelly, that dealt with this question.

The Kelly criterion can be written as follows:

• • F = p – [q/o]

where

• • F = Kelly criterion fraction of current capital to bet
  • o = Net odds, or dollars won per $1 bet if the bet wins (e.g., the bet may pay 5 to 1, meaning you win $5 per each $1 bet if the bet wins)
  • p = probability of winning
  • q = probability of losing = 1 – p

The Kelly criterion has a unique mathematical property: if you know the probability of winning and the net odds (payoff), then betting exactly the percentage determined by the Kelly criterion leads to the maximum long-term compounding of capital, assuming that you’re going to make a long series of bets. Betting any percentage that is not equal to that given by the Kelly criterion will inevitably lead to lower compound growth over a long period of time.

Thorp proceeded to use the Kelly criterion to win quite a bit of money at blackjack, at least until the casinos began taking countermeasures such as cheating dealers, frequent reshuffling, and outright banning.  But Thorp realized that the stock market was also partly inefficient, and it was a far larger game.

Thorp launched a hedge fund that searched for little arbitrage situations (pricing discrepancies) involving warrants, options, and convertible bonds.  In order to size his positions, Thorp used the Kelly criterion.  Thorp evolved his approach over the years as previously profitable strategies were copied.  His multi-decade track record was terrific.

Ed Thorp examined Buffett’s career and concluded that Buffett has used the essential logic of the Kelly criterion by concentrating his capital into his best ideas.  Buffett’s concentrated value approach has produced an outstanding, unparalleled 66-year track record.

Thorp has made several important points about the Kelly criterion as it applies to long-term value investing. The Kelly criterion was invented to apply to a very long series of bets. Value investing differs because even a concentrated value investing approach will usually have at least 5-8 positions in the portfolio at the same time. Thorp argues that, in this situation, the investor must compare all the current and prospective investments simultaneously on the basis of the Kelly criterion.

In The Dhandho Investor, Mohnish Pabrai gives an example showing how you can use the Kelly criterion on your top 8 ideas, and then normalize the position sizes.

Say you look at your top 8 investment ideas. You use the Kelly criterion on each idea separately to figure out how large the position should be, and this is what you conclude about the ideal bet sizes:

• • Bet 1 – 80%
  • Bet 2 – 70%
  • Bet 3 – 60%
  • Bet 4 – 55%
  • Bet 5 – 45%
  • Bet 6 – 35%
  • Bet 7 – 30%
  • Bet 8 – 25%

Of course, that adds up to 400%.  Yet for a value investor, especially running a concentrated portfolio of 5-8 positions, it virtually never makes sense to buy stocks on margin.  Leverage cannot make a bad investment into a good investment, but it can turn a good investment into a bad investment.  So you don’t need any leverage.  It’s better to compound at a slightly lower rate than to risk turning a good investment into a bad investment because you lack staying power.

So the next step is simply to normalize the position sizes so that they add up to 100%.  Since the original portfolio adds up to 400%, you just divide each position by 4:

• • Bet 1 – 20%
  • Bet 2 – 17%
  • Bet 3 – 15%
  • Bet 4 – 14%
  • Bet 5 – 11%
  • Bet 6 – 9%
  • Bet 7 – 8%
  • Bet 8 – 6%

(These percentages are rounded for simplicity.)

As mentioned earlier, if you truly know the odds of each bet in a long series of bets, the Kelly criterion tells you exactly how much to bet on each bet in order to maximize your long-term compounded rate of return.  Betting any other amount will lead to lower compound returns.  In particular, if you repeatedly bet more than what the Kelly criterion indicates, you eventually will destroy your capital.

It’s nearly always true when investing in a stock that you won’t know the true odds or the true future scenarios.  You usually have to make an estimate.  Because you never want to bet more than what the Kelly criterion says, it is wise to bet one half or one quarter of what the Kelly criterion says.  This is called half-Kelly or quarter-Kelly betting.  What is nice about half-Kelly betting is that you will earn three-quarters of the long-term returns of what full Kelly betting would deliver, but with only half the volatility.

So in practice, if there is any uncertainty in your estimates, you want to bet half-Kelly or quarter-Kelly.  In the case of a concentrated portfolio of 5-8 stocks, you will frequently end up betting half-Kelly or quarter-Kelly because you are making 5-8 bets at the same time.  In Mohnish’s example, you end up betting quarter-Kelly in each position once you’ve normalized the portfolio.

When running the Buffett Partnership, Warren Buffett invested 40% of the partnership in American Express after the stock had been cut in half following the salad oil scandal. American Express had to announce a $60 million loss, a huge hit given its total market capitalization of roughly $150 million at the time. But Buffett determined that the essential business of American Express–travelers’ checks and charge cards–had not been permanently damaged. American Express still had a very valuable moat.

Buffett explained his reasoning in several letters to limited partners:

We might invest up to 40% of our net worth in a single security under conditions coupling an extremely high probability that our facts and reasoning are correct with a very low probability that anything could change the underlying value of the investment.

We are obviously only going to go to 40% in very rare situations–this rarity, of course, is what makes it necessary that we concentrate so heavily, when we see such an opportunity.  We probably have had only five or six situations in the nine-year history of the partnerships where we have exceeded 25%.  Any such situations are going to have to promise very significant superior performance… They are also going to have to possess such superior qualitative and/or quantitative factors that the chance of serious permanent loss is minimal…

There’s virtually no such thing as a sure bet in the stock market. But there are situations where the odds of winning are very high or where the potential upside is substantial.

One final note: In constructing a concentrated portfolio of 5-8 stocks, if at least some of the positions are non-correlated or even negatively correlated, then the volatility of the overall portfolio can be reduced.  Some top investors prefer to have about 15 positions with low correlations.  Ray Dalio does this.

Once you get to at least 25 positions, specific correlations typically tend not to be an issue, although some investors may end up concentrating on specific industries.  In fact, it often may make sense to concentrate on industries that are deeply out-of-favor.

Mohnish concludes:

…It’s all about the odds. Looking out for mispriced betting opportunities and betting heavily when the odds are overwhelmingly in your favor is the ticket to wealth.  It’s all about letting the Kelly Formula dictate the upper bounds of these large bets.  Further, because of multiple favorable betting opportunities available in equity markets, the volatility surrounding the Kelly Formula can be naturally tamed while still running a very concentrated portfolio.

In sum, top value investors like Warren Buffett, Charlie Munger, and Mohnish Pabrai–to name just a few out of many–naturally concentrate on their best 5-8 ideas, at least when they’re managing a small enough amount of money.  (These days, Berkshire’s portfolio is massive, which makes it much more difficult to concentrate, let alone to find hidden gems among microcap stocks.)

You have to take a humble look at your strategy and your ability before deciding on your level of concentration.  The Boole Microcap Fund that I manage is designed to focus on the top 5-8 ideas.  This is concentrated enough so that the best performers–whichever stocks they turn out to be–can make a difference to the portfolio.  But it is not so concentrated that it misses the best performers.  In practice, the best performers very often turn out to be idea #5 or idea #8, rather than idea #1 or idea #2.  Many top value investors–including Peter Cundill, Joel Greenblatt, and Mohnish Pabrai–have found this to be true.

 

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: https://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 approachesintrinsic 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.

November 3, 2024

Perma-Pipe International Holdings (PPIH) makes specialty pipes which have coatings and linings for various harsh-condition transportation of oil, chemicals, and water. End markets are oil & gas, chemical, and infrastructure.  PPIH also makes leak detection systems.

In the company’s most recent quarter, it reported EPS (earnings per share) of $0.40 versus $0.13 in the prior year.  Furthermore, PPIH has a backlog of $75.5 million, which does not include $46 million in additional rewards secured subsequent  to the end of the quarter.

The company is poised to continue increasing its EPS if they can continue increasing their revenues.  This is a real possibility because PPIH provides products and services to Middle East regions that are investing in long-term infrastructure projects.

The market cap is $101.9 million, while enterprise value is $128.0 million.

Here are the metrics of cheapness:

• • EV/EBITDA = 5.42
  • P/E = 6.65
  • P/B = 1.49
  • P/CF = 6.78
  • P/S = 0.65

ROE is 28.3%, which is good.

The Piotroski F_Score is 7, which is quite good.

Insider ownership is 11.1%, which is decent.  Cash is $9.5 million, while debt $35.5 million.  Total liabilities to total assets is 51.9%, which is OK.

Intrinsic value scenarios:

• • Low case: If there’s a bear market and/or a recession, the stock could decline.  That would be a buying opportunity.
  • Mid case: The company should have a P/E of at least 12.  That would mean the stock is worth $23.06, which is about 80% higher than today’s $12.78.
  • High case: Arguably, the company should have a P/E of 15.  That would mean the stock is worth $28.83, which is over 125% higher than today’s $12.78.
  • Very high case: If PPIH can continue to ramp its revenues, the P/E could reach 20.  That would mean the stock is worth $38.44, which is 200% higher than today’s $12.78.

 RISKS

• • If there’s a bear market or a recession, the stock would probably decline.
  • If the company does not continue to win new business, revenue and earnings would decline.

 

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: https://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 approachesintrinsic 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.

October 27, 2024

PCS Edventures! (PCSV) offers a large catalog of STEAM curriculum (Science, Technology, Engineering, Art, and Math) and materials in the United States.  Customers are schools and school districts from kindergarten through the collegiate level.  Customers also include providers of after-school programs, home-school programs,  summer programs, and corporate outreach programs.

PSCV differentiates itself in the very fragmented STEAM education market by being more professional and by providing excellent customer service.  Furthermore, the company has demonstrated an ability to create engaging new courseware for kids.  For instance, in 2016 PCSV quickly developed an education drone kit and curriculum when the company saw the drone market develeoping.  And PCSV was one of the first to create a podcasting for kids curriculum and kit.  This capability to speedily adjust and produce content valued by kids has been central to the company’s ability to win market share.

PSCV has many repeat customers.  They’ve also been able to win larger orders from government programs such as the U.S. Air Force Junior ROTC.

Although PSCV’s quarter-to-quarter results can be lumpy, they continue to add more customers on a yearly basis.

The market cap is $31.55 million.

Metrics of cheapness:

• • EV/EBITDA = 6.16
  • P/E = 6.34
  • P/B = 3.58
  • P/CF = 9.75
  • P/S = 3.28

Normalized ROE is 38%, which is sustainable.

The Piotroski F_Score is 8, which is excellent.

Insider ownership is 61.99%, which is outstanding.  Cash is $2.65 million, while debt is only $259k.  Total liabilities to total assets is 7.65%, which is superb.

Intrinsic value scenarios:

• • Low case: If there’s a bear market and/or a recession, the stock could decline.  That would be a buying opportunity.
  • Mid case: The company should have a P/E of at least 12.  That would mean the stock is worth $0.47, which is about 90% higher than today’s $0.25.
  • High case: Arguably, the company should have a P/E of 15.  That would mean the stock is worth $0.59, which is over 135% higher than today’s $0.25.
  • Very high case: The company could maintain its normalized ROE of 38%, in which case the stock could compound for many years.

 RISKS

• • PSCV may not continue to win customers.  This seems unlikely but it’s possible.

 

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: https://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 approachesintrinsic 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.

October 6, 2024

Zoomd Technologies (ZOMD.V in Canada and ZMDTF over-the-counter) is a marketing technology user-acquisition and engagement platform.  “The company operates a mobile app user-acquisition platform that integrates with various digital media outlets.  Its platform presents a unified view of various media sources to serve as a comprehensive user acquisition control center for advertisers and streamlines campaign management through a single point of contact.  It also offers app marketing services.  The company is based in Toronto, Canada.” Source of quote: https://seekingalpha.com/symbol/ZOMD:CA

Here is the company’s most recent investor presentation: https://tinyurl.com/32wrhas4

Mobile media budgets are rapidly expanding, making mobile media devices the primary screen for advertisers’ media expenditures.  Consumer spending in mobile apps is expected to continue its upward trend.

Zoomd helps companies navigate the complicated ‘outside the walled gardens’ space, where about half the marketing budget is spent.

Zoomd enables brands to expand globally with the least resources and the greatest impact, offering access to a substantial network of both global and local media channels through a single, unified service provider.

Zoomd is entrusted by global brands with customer acquisition.  Zoomd’s top ten clients have been with Zoomd for an average of three years.

Since Q2-2023, under the direction of new CEO Ido Almany, Zoomd has engaged in strategic refocusing and the company’s performance has improved, including net income growth for 5 consecutive quarters and solidly positive net income of $2.27 million in Q2-2024.  Also, revenue grew by 60% from Q1-2024 to Q2-2024.

Furthermore, from Q2-2023 to Q2-2024 under the direction of Almany, operating costs as a percentage of revenues have declined from 42% to 21%.

The market cap is $32.01 million, while enterprise value is $31.24 million.

Metrics of cheapness:

• • EV/EBITDA = 5.86
  • P/E = 11.09
  • P/B = 2.86
  • P/CF = 9.28
  • P/S = 0.94

ROE is 23.49%.  This appears to be sustainable.

The Piotroski F_Score is 6, which is decent.

Insider ownership is 22.95%, which is excellent.  Cash is $4.39 million, while debt is $3.63 million.  Total liabilities to total assets is 47.6%, which is pretty good.

Intrinsic value scenarios:

• • Low case: If there’s a bear market or a recession and/or if demand for the company’s products decreases, the stock could decline.
  • Mid case: Annual EPS could reach at least $0.09 if the most recent quarter’s net income is matched or exceeded.  With a P/E of 10, the stock would be worth $0.90 per share, which is 170% higher than today’s $0.3328 share price.
  • High case: The company’s performance could continue to improve.  Annual EPS could reach $0.12.  With a P/E of 12, the stock would be worth $1.44 per share, which is 330% higher than today’s $03328.

 RISKS

• • Customer concentration: The company’s top 10 customers represent the vast majority of the revenues.
  • Increasing competition and emerging technological changes could challenge Zoomd’s ability to stay relevant and to capture new customers.

 

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: https://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 approachesintrinsic 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.

September 1, 2024

Are you a long-term investor? If so, are you interested in maximizing long-term results without taking undue risk?

Warren Buffett, arguably the best investor ever, has repeatedly said that most people should invest in a low-cost broad market index fund. Such an index fund will allow you to do better than 80% to 90% of all investors, net of costs, after several decades.

Buffett has also said that you can do better than an index fund by investing in microcap stocks – as long as you have a sound method. Take a look at this summary of the CRSP Decile-Based Size and Return Data from 1927 to 2020:

Decile	Market Cap-Weighted Returns	Equal Weighted Returns	Number of Firms (year-end 2020)	Mean Firm Size (in millions)
1	9.67%	9.47%	179	145,103
2	10.68%	10.63%	173	25,405
3	11.38%	11.17%	187	12,600
4	11.53%	11.29%	203	6,807
5	12.12%	12.03%	217	4,199
6	11.75%	11.60%	255	2,771
7	12.01%	11.99%	297	1,706
8	12.03%	12.33%	387	888
9	11.55%	12.51%	471	417
10	12.41%	17.27%	1,023	99
9+10	11.71%	15.77%	1,494	199

(CRSP is the Center for Research in Security Prices at the University of Chicago. You can find the data for various deciles here: http://mba.tuck.dartmouth.edu/pages/faculty/ken.french/data_library.html)

The smallest two deciles – 9+10 – comprise microcap stocks, which typically are stocks with market caps below $500 million. What stands out is the equal weighted returns of the 9^th and 10^th size deciles from 1927 to 2020:

Microcap equal weighted returns = 15.8% per year

Large-cap equal weighted returns = ~10% per year

In practice, the annual returns from microcap stocks will be 1-2% lower because of the difficulty (due to illiquidity) of entering and exiting positions. So we should say that an equal weighted microcap approach has returned 14% per year from 1927 to 2020, versus 10% per year for an equal weighted large-cap approach.

Still, if you can do 4% better per year than the S&P 500 Index (on average) – even with only a part of your total portfolio – that really adds up after a couple of decades.

• Most professional investors ignore micro caps as too small for their portfolios. This causes many micro caps to get very cheap. And that’s why an equal weighted strategy – applied to micro caps – tends to work well.

 

VALUE SCREEN: +2-3%

By systematically implementing a value screen–e.g., low EV/EBITDA or low P/E–to a microcap strategy, you can add 2-3% per year.

 

IMPROVING FUNDAMENTALS: +2-3%

You can further boost performance by screening for improving fundamentals. One excellent way to do this is using the Piotroski F_Score, which works best for cheap micro caps. See: https://boolefund.com/joseph-piotroski-value-investing/

 

BOTTOM LINE

If you invest in microcap stocks, you can get about 14% a year. If you also use a simple screen for value, that adds at least 2% a year. If, in addition, you screen for improving fundamentals, that adds at least another 2% a year. So that takes you to 18% a year, which compares quite well to the 10% a year you could get from an S&P 500 index fund.

What’s the difference between 18% a year and 10% a year? If you invest $50,000 at 10% a year for 30 years, you end up with $872,000, which is good. If you invest $50,000 at 18% a year for 30 years, you end up with $7.17 million, which is much better.

Please contact me if you would like to learn more.

• • My email: [email protected].
  • My cell: 206.518.2519

 

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.

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 approachesintrinsic 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: [email protected]

 

 

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.