Boole Microcap Fund

August 20, 2023

From the company’s website:

“Delta Apparel, Inc., along with its operating subsidiaries, DTG2Go, LLC, Salt Life, LLC, and M.J. Soffe, LLC, is a vertically-integrated, international apparel company that designs, manufactures, sources, and markets a diverse portfolio of core activewear and lifestyle apparel products under the primary brands of Salt Life®, Soffe®, and Delta… The Company specializes in selling casual and athletic products through a variety of distribution channels and tiers, including outdoor and sporting goods retailers, independent and specialty stores, better department stores and mid-tier retailers, mass merchants and e-retailers, the U.S. military, and through its business-to-business e-commerce sites. The Company’s products are also made available direct-to-consumer on its websites… as well as through its branded retail stores.”

I first wrote about Delta Apparel (DLA) here: https://boolefund.com/case-study-delta-apparel-dla/

At the time, the stock was at $30.01. We ended up selling most of our position at $28-29 (after having bought at $15.26).

Since then, the stock has declined over 75% to today’s $7.40. The company is in the process of reducing its inventory to pay off debt. This means the recent results have been poor and the next couple of quarters will also be rough.

Delta Apparel has two segments: Salt Life and the Delta Group.

Salt Life is a very popular brand in the Southeast U.S. Many people who love the outdoors, including the ocean, love the Salt Life brand. In 2022, Salt Life had sales of $60 million with operating income of $8.2 million. Also, the brand grew its number of stores at a healthy clip. There is much room for the Salt Life brand to grow. According to a writeup on Value Investors Club, the Salt Life brand could reach $500 million in sales, like Tommy Bahama.

Here is the writeup on Value Investors Club: https://valueinvestorsclub.com/idea/Delta_Apparel_/1415242928

The Delta Group includes two different businesses: a commoditized active wear business and a specialized digital printing business, DTG2GO. In a normal year, the active wear business generates $320 million in sales with an operating margin of 6-7%.

DTG2GO is a market leader in the direct-to-garment digital print and fulfillment industry, bringing technology to the supply chain of its customers. DTG2GO uses proprietary software to deliver on-demand, digitally printed apparel direct to consumers on behalf of the customer. DTG2GO has sales of $60 million with an operating margin of around 15%. DTG2GO does digital printing for companies including Fanatics and Redbubble. Fanatics, a $30 billion private company, stopped in-house printing and fulfillment, and has outsourced them to DTG2GO.

Important Note: Digital impressions are about 2% of total graphic impressions on clothing. There is huge room for growth here. Digital printing will allow almost any retailer to lower costs, reduce inventory, increase selection, and speed up delivery times.

Here are the normalized figures for Delta Apparel: EBITDA is $60 million, net income is $30 million, cash flow is $95 million, and revenue is $440 million.

The market cap is $51.9 million, while the enterprise value (EV) is $273.7 million.

Here are the multiples for Delta Apparel:

• • EV/EBITDA = 4.56
  • P/E = 1.73
  • P/B = 0.31
  • P/CF = 0.55
  • P/S = 0.12

Delta Apparel has a Piotroski F-Score of 6, which is decent. This will likely begin to improve some time next year, after the company has reduced its inventory and debt.

We measure debt levels by looking at total liabilities (TL) to total assets (TA). DLA has TL/TA of 64.7%, which is OK. The company is in the process of paying down its debt.

Insider ownership is important because that means that the people running the company have interests that are aligned with the interests of other shareholders. At DLA, insider ownership is approximately 16%. This is good.

• • Low case: The stock could decline 50% during a bear market or recession.
  • Mid case: The company should trade for a P/E of at least 10 based on normalized earnings of $30 million. That would be a market cap of $300 million, or a stock price of $42.86. That is 480% higher than today’s $7.40.
  • High case: Normalized earnings could reach $40 million. With a P/E of 12, that would be a market cap of $480 million, or a stock price of $68.57. That is over 825% higher than today’s $7.40.

 

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.

 

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.

August 6, 2023

I first wrote up the idea of GNK in June 2020 here: https://boolefund.com/genco-shipping-gnk/

At the time, the stock at $6.94 a share was very cheap based on our five measures of cheapness:

• • EV/EBITDA = 4.60
  • P/E = 6.52
  • P/B = 0.34
  • P/CF = 2.07
  • P/S = 0.70

Now the stock is up to $13.94, but the stock is still very cheap.

The market cap is $610.8 million. Cash is $47.9 million, while debt is $153.5 million.

The company has a barbell approach to fleet composition: The minor bulk fleet provides stable cash flows, while the Capesize vessels provide meaningful upside and operating leverage if rates move higher.

The company’s strategy is to have net debt of zero, to pay regular dividends, and to make acquisitions at low prices using its stock.

The company continues to voluntarily pay down debt. The company has reduced its debt by $295.7 million since the start of 2021, a 66% reduction in debt.

As a result, the company’s cash breakeven rate has been reduced from $13,050 to $9,715, the lowest in the drybulk industry. This compares well to the $12,300 Q3 2023 TCE estimate to date based on fixtures for 61% of the quarter’s available days.

Meanwhile, the company has paid 16 consecutive quarterly dividends totaling $4.60 per share, which is 33% of its current stock price of $3.94.

Here are the current multiples:

• • EV/EBITDA = 3.78
  • P/E = 7.11
  • P/B = 0.62
  • P/CF = 4.73
  • P/S = 1.34

Insiders own 1.3% of the shares outstanding, which is worth about $7.9 million (at today’s stock price of $13.94). Insiders will obviously do well if they successfully lead the company forward.

Genco Shipping has a Piotroski F_Score of 7, which is decent.

TL/TA is 15.6%, which is excellent. This is a function of the company’s ongoing strategy to reach net debt of zero.

ROE is 8.9%, which is low. This is because rates are fairly low. When rates improve, ROE will improve.

Intrinsic value scenarios:

• • Low case: GNK could fall 50%, from today’s $13.94 to $6.97, if there’s a bear market and/or a recession.
  • Mid case: The company is worth an EV/EBITDA of at least 6. That would put fair value for the stock at $26.79, which is over 90% higher than today’s $13.94.
  • High case: The company may be worth an EV/EBITDA of 8. That would put fair value for the stock at $33.51, which is 140% higher than today’s $13.94.
  • Very high case: If rates improve significantly, EBITDA could increase at least 50%. If the company is worth an EV/EBITDA of at least 6, then the fair value for the stock would be $38.04, which is over 170% higher than today’s $13.94.

Risks

If there is a bear market and/or a recession, rates could collapse and the stock could drop 50% or more.

 

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.

 

 

 

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.

July 30, 2023

Our investment in Global Ship Lease (GSL) has been one of our best ideas thus far.

Shipping is a terrible business. It is asset-intensive, with low returns on capital. There are short-lived booms and sustained busts. Also, the booms are impossible to predict with any precision.

However, if you can buy shipping stocks when they are significantly undervalued, you have good odds of earning high returns.

I first wrote up the idea of GSL in June 2020 here: https://boolefund.com/global-ship-lease-gsl/

At the time, the stock at $4.62 a share was extremely cheap based on our five measures of cheapness:

• • EV/EBITDA = 5.28
  • P/E = 1.93
  • P/NAV = 0.20
  • P/CF = 0.81
  • P/S = 0.29

These figures made Global Ship Lease one of the top ten cheapest companies out of over two thousand that we ranked.

We bought GSL stock in June 2020 at $4.57. Today the stock is at $21.58. The position is up over 370% so far, which makes it our best-performing idea.

But there still appears to be substantial upside for GSL.

Demand

70% of global containerized trade volume is in non-mainline routes–and these routes are growing faster than mainline routes. These routes are served by mid-sized and smaller containerships. This is where GSL focuses.

Supply

The supply of mid-sized and smaller container ships is constrained. The orderbook-to-fleet ratio for these ships is at 14.5%. It takes two to three years for shipyards to make a new ship. If all 25+ year-old ships were scrapped, then the annual growth rate for mid-sized and smaller ships would be about 1.1%.

GSL today

As of the end of Q1 2023, the total charter backlog is $2.1 billion, which is 2.5 years of contract coverage. GSL’s revenues, cash flows, and earnings are already set at high levels for the next 2.5 years.

Here are the current multiples for GSL:

• • EV/EBITDA = 3.23
  • P/E = 2.64
  • P/NAV = 0.35
  • P/CF = 1.88
  • P/S = 1.21

George Youroukos, Executive Chairman of the Board, recently acquired approximately $10 million of GSL’s stock. Youroukos clearly believes GSL’s stock is cheap. This brings Youroukos’ total position to 6.4% of GSL’s outstanding shares, worth over $50 million.

The Piotroski F_Score is 7, which is decent.

Cash is $162.2 million, while debt is $882.8 million. The company continues to pay down its debt and expects to have $757 million in debt by the end of 2023 and $588 million in debt by the end of 2024. Moreover, GSL has reduced its cost of debt from 7.56% in Q4 2018 to 4.53% in Q1 2023.

TL/TA (total liabilities/total assets) is 51.8%, which is pretty good.

ROE is 33.0%. The high ROE is due in large part to leverage. ROA is 13.7%, which is still decent.

The current dividend yield is 7.0%. Also, the company has bought back $33.8 million shares and has $6.2 million left to spend on buybacks. Because the stock is quite undervalued, the buybacks are very accretive for shareholders.

Here is GSL’s Q1 2023 earnings presentation: https://www.globalshiplease.com/static-files/a226750c-bb27-45e2-8017-a0183e07ad26

Intrinsic value scenarios:

• • Low case: If there is a bear market or recession, GSL could fall 50%, from today’s $21.58 to $10.79. This would be a major buying opportunity.
  • Mid case: Global Ship Lease has a P/E of 2.64, but should have a P/E of at least 6. That means the stock is worth approximately $49.05, which is about 127% higher than today’s $21.58.
  • High case: GSL should have a P/E of 8. That means the stock is worth about $65.40, which is over 200% higher than today’s $21.58.

Bottom Line

GSL is one of our best-performing stocks, up over 370% since we bought it in June of 2020. The Boole Microcap Fund continues to hold much of the position because GSL is still undervalued. If GSL hits $49.05, it will be up over 970% since we bought it. If GSL hits $65.40, it will be 1,330% since we bought it.

 

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.

 

 

 

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.

July 23, 2023

Karora Resources (KRRGF) is a gold miner in Western Australia. I wrote up the idea of Karora Resources on November 21, 2021: https://boolefund.com/case-study-karora-resources-krrgf/

Since then, the company has increased its gold production, having just achieved a record 40,823 ounces in Q2 2023.

The market cap is $645.5 million, while enterprise value (EV) is $632.0 million.

Some time between 2024 and 2025, Karora will produce over 200,000 ounces of gold on an annual basis. Karora will also produce over 800 tons of nickel.

Revenue based on 200k ounces of gold and a gold price of $2,250 per ounce is $450 million. All-in sustaining cost (AISC) can be assumed to be $1,200 per ounce. So EBITDA for gold production would be approximately $210 million.

Revenue based on 800 tons of nickel production and a price per ton of nickel of $21,970 is $17.6 million. EBITDA for nickel production would be about $7 million.

Total revenue would be approximately $467.6 million. Total EBITDA would be $217 million. (Cash flow would be close to EBITDA.) And assuming the normalized profit margin is 17.4 percent, earnings would be about $81.4 million.

Here are the multiples based on these assumptions:

• • EV/EBITDA = 2.91
  • P/E = 7.93
  • P/NAV = 0.20
  • P/CF = 2.97
  • P/S = 1.38

• Karora Resources is exceptionally well-managed, led by CEO Paul Andre Huet and managing director of Australia Leigh Junk. The Karora team–despite numerous external headwinds–has met or exceeded every target it has set since its acquisition of HGO Mill in mid-2019.

Also, management owns 2% of the shares outstanding, which is worth about $13 million. That $13 million could become $26 million (or more) if Karora keeps executing.

Karora Resources has a Piotroski F_Score of 7, which is good.

Net debt is low: Cash is $68.9 million. Debt is $51.2 million. TL/TA is 37.2%, which is good.

Very importantly, Karora’s growth is internally funded by existing cash and cash flow. Karora is not relying on debt for growth.

Furthermore, Karora has massive exploration potential.

Intrinsic value scenarios:

• • Low case: Gold prices could fall. Also, there could be a market correction or a recession during which the stock could temporarily fall by 50% or more (from today’s $3.50 to $1.75). This would be a major buying opportunity.
  • Mid case: The P/E = 7.9 relative to 2024 production, assuming the gold price is around $2,250 per ounce. But the P/E should be at least 16 for a mid-tier, multi-asset gold producer in a top tier jurisdiction (Western Australia). This implies over 100% upside from today’s $3.50, or an intrinsic value of $7.09 per share. This does not factor in the company’s huge exploration potential.
  • High case: Gold prices could be much higher in an inflationary scenario. If gold prices reach $2,750, then with a net profit margin of 25%, earnings would reach $141.9 million. With a P/E of 16, KRRGF would be worth at least $12.98 per share. That is over 270% higher than today’s $3.50.

Note that Karora’s operations are in Western Australia, so there is very little political risk.

 

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.

 

 

 

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.

July 16, 2023

I first wrote about In-Play Oil (IPOOF) on April 24, 2022 here: https://boolefund.com/case-study-inplay-oil-ipoof/

Since then, the stock has gone from $3.03 to $1.95, a decrease of 35%.  IPOOF is clearly cheaper now than it was then, and that’s reflected in the multiples (see below).

 

OIL PRICES

See here: https://boolefund.com/case-study-update-journey-energy-jrngf/

 

IN-PLAY OIL (IPOOF)

Here is the company’s most recent investor presentation: https://www.inplayoil.com/sites/2/files/documents/inplay_june_2023_presentation_website_final.pdf

In-Play Oil appears very cheap.  Here are the multiples:

• • EV/EBITDA = 1.50
  • P/E = 3.17
  • P/B = 0.81
  • P/CF = 1.40
  • P/S = 1.01

The Piotroski F_Score is 8, which is very good.

The market cap is $174 million.  The enterprise value (EV) is $199.1 million.

TL/TA is 38.6%, which is good.

Insider ownership is 6.1%.  That is worth a bit more than $10.6 million.  If the stock at least doubles, insiders can make at least $10.6 million.

ROE is 30.4%, which is very good.

In-Play Oil continues to buy back shares of its stock, which creates significant value because the stock is very undervalued.  Also, the current dividend yield is 6.9%, which the company says is sustainable even at an oil price of $55 WTI.

Intrinsic value scenarios:

• • Low case: If there is a bear market or recession, IPOOF could temporarily decline 50%.  This would be a major buying opportunity.
  • Mid case: The current P/CF (price-to-cash flow), based on normalized cash flow of $53.2 million, is 3.27.  But In-Play Oil should eventually be at least 8 x cash flow.  That would make the stock worth $4.77, which is 145% higher than today’s $1.95.
  • High case: If the oil price averages $90 WTI, then cash flow would increase at least 50%.  At 8 x cash flow, IPOOF would be worth $7.16, which is over 265% higher than today’s $1.95.

 

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 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.

 

 

 

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.

July 9, 2023

I first wrote about Obsidian Energy on November 14, 2021 here: https://boolefund.com/case-study-obsidian-energy-obelf/

Since then, the stock has gone from $3.74 to $6.18, an increase of 65%. But the company’s cash flows have increased even more, meaning the stock is more undervalued today than it was in November, 2021.

 

OIL PRICES

Here is a superb article on oil prices: https://seekingalpha.com/article/4615799-oil-is-asymmetrically-positioned-to-the-upside

OPEC+ has not only continued to cut production targets, but it has been under-producing its targets simply because it cannot produce more. Meanwhile, oil demand is healthy and increasing about 1% a year.

No one can predict oil prices, especially over shorter periods of time. But demand is likely to exceed supply going forward, and inventories are likely to decline. This probably means higher oil prices in the range of at least $75-90 per barrel (WTI).

But even if oil prices were to stay closer to $65-70, Obsidian Energy would still be very profitable.

If there’s a recession, oil prices could decline temporarily, but would quickly snap back.

Even if car manufacturers started making only all-electric vehicles today, oil demand would keep rising for many years, as Daniel Yergin points out in The New Map.

I am, of course, in favor of the transition to a post-fossil fuel economy. But the global economy needs a lot of oil in order to make that transition over the next several decades.

 

OBSIDIAN ENERGY (OBE)

Obsidian Energy appears very cheap because of the recent increases in oil prices. Here are the multiples:

• • EV/EBITDA = 1.15
  • P/E = 0.79
  • P/B = 0.39
  • P/CF = 1.14
  • P/S = 0.72

The Piotroski F_Score is 8, which is very good.

The market cap is $507.4 million. The company has $67 million in cash and $264.8 million in debt. The enterprise value (EV) is $705.5 million.

TL/TA is 28.8%, which is excellent.

Insider ownership is 7%. That is worth a bit more than $35 million. If the stock at least doubles, insiders can make at least $35 million.

ROE is 68.1%, which is outstanding.

Obsidian Energy continues to buy back shares of its stock, which creates significant value because the stock is very undervalued. If the stock remains undervalued, the company plans to increase buybacks once it has lowered its net debt to $169 million.

We calculate NAV based on 2P reserves (proved plus probable). Intrinsic value scenarios:

• • Low case: If there is a bear market or recession, the stock could temporarily decline 50%. This would be a major buying opportunity.
  • Mid case: If the oil price averages $70 WTI, then NAV per share is $16.24, which is over 160% higher than today’s $6.18.
  • High case: If the oil price averages $80 WTI, then NAV per share is $20.61, which is over 230% higher than today’s $6.18.
  • Very high case: If the oil price averages $90 WTI, then NAV per share is $24.66, which is 300% higher than today’s $6.18

 

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.

 

 

 

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.

July 2, 2023

I first wrote about Journey Energy (JRNGF) on December 21, 2021 here: https://boolefund.com/case-study-journey-energy-jrngf/

Since then, the stock has gone from $1.73 to $4.13, an increase of almost 140%. But the company’s cash flows have also increased significantly, meaning the stock is nearly as undervalued today as it was in December, 2021.

 

OIL PRICES

Here is an excellent article on oil prices and opportunities in oil by Josh Young of Bison Interests: https://seekingalpha.com/article/4606923-recession-fears-mean-opportunity-in-the-oil-market

Here is another excellent article on oil prices: https://seekingalpha.com/article/4609520-the-oil-market-is-at-the-inflection-point-for-2023

OPEC+ has not only continued to cut production targets, but it has been under-producing its targets simply because it cannot produce more. Meanwhile, oil demand is healthy and increasing about 1% a year.

No one can predict oil prices, especially over shorter periods of time. But demand is likely to exceed supply going forward, and inventories are likely to decline. This probably means higher oil prices in the range of at least $75-90 per barrel (WTI).

But even if oil prices were to stay closer to $65-70, Journey Energy would still be very profitable.

If there’s a recession, oil prices could decline temporarily, but would quickly snap back.

The CEO of Journey Energy, Alex Verge, says that after a downtrend in oil prices from 2014 to 2020, oil prices are now in an uptrend that could last five to seven years. Here is an excellent conversation with Alex Verge: https://www.youtube.com/watch?v=3H_VD7rrhTg&t=2s

One final point. Even if car manufacturers started making only all-electric vehicles today, oil demand would keep rising for many years, as Daniel Yergin points out in The New Map.

I am, of course, in favor of the transition to a post-fossil fuel economy. But the global economy needs a lot of oil in order to make that transition over the next several decades.

The oil and gas industry will exist in close to its current form 10 or 20 years from now, as Jeremy Grantham has noted. (As well, most oil companies do not have more than 15-20 years of reserves.) The fact that some investors are no longer investing in oil and gas companies means that oil and gas stocks now have even higher expected returns.

 

JOURNEY ENERGY (JRNGF)

Here is Journey Energy’s most recent investor presentation: https://www.journeyenergy.ca/wp-content/uploads/Reports/Presentations/2023_Corporate_Presentation_March_Final.pdf

The current market cap is $248.7 million, while the current enterprise value (EV) is $295.5 million. The stock price is $4.13.

Here are the multiples:

• • EV/EBITDA = 3.06
  • P/E = 2.10
  • P/NAV = 0.38
  • P/CF = 3.20
  • P/S = 1.28

(We use P/NAV instead of P/B. The NAV is based on total proved plus probable reserves.)

The Piotroski F_Score is 7, which is good.

Currently, TL/TA is 50.3%. This continues to decline as Journey Energy pays down its debt.

Insider ownership is 10%. That is worth $24.9 million. Insiders–especially and deservedly CEO Alex Verge–will make a good deal of money if the company does well going forward.

Very importantly, Journey has a power generation business that will likely be worth at least $150 million by early 2024. See: https://bisoninterests.com/content/f/100mm-power-generation-transaction-implies-upside-for-journey

Note: The Bison article values the power generation business at $196 million in Canadian dollars. That translates into $150 million in U.S. dollars.

Intrinsic value scenarios:

• • Low case: If there is a recession or a bear market, the stock could temporarily decline 50%. This would be a major buying opportunity.
  • Mid case: JRNGF is currently at 3.20 x cash flow, but it should eventually be at least at 8 x cash flow. That would make the stock worth $10.33, which is 150% higher than today’s $4.13.
  • High case: Journey’s power generation business will likely be worth at least $150 million by early 2024. That would make the stock worth $12.79, which is 210% higher than today’s $4.13.
  • Very high case: Journey’s power generation business will likely be worth at least $150 million by early 2024. Moreover, if the oil price averages $95 (WTI), then cash flow from the oil and gas assets would increase at least 50%. At 8 x cash flow, the stock would be worth $17.96, which is over 330% higher than today’s $4.13.

Risks

If there’s a recession, oil prices could decline temporarily but would snap back.

 

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.

 

 

 

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.

June 25, 2023

DDH1 provides a complete range of specialised surface and underground drilling solutions to their mining and exploration clients globally. The company aspires to be the world’s leading driller through innovation and a continued focus on high-quality, reliable services. DDH1 went public on the Australian stock exchange in March 2021.

Over the last five years, EBITDA has grown at a 12.8% CAGR, while EBITDA margins have avreraged 21-22% even during the recent inflationary environment. ROIC is 19%.

The dividend yield is 7.0% and the company is on track to buy back 10% of the shares outstanding.

DDH1 is comprised of four different drillers. The founder of each driller still runs their respective operations and is rewarded accordingly. Also, each founder owns shares of stock. DDH1 overall has 193 drilling rigs and is involved in all the cycles of a mine’s life.

DDH1 is marketed under four distinct brand names:

• • DDH1 focuses on deep section, underground diamond core drilling.
  • Ranger Drilling was acquired in April 2019 and focuses on iron ore drilling.
  • Strike Drilling was acquired in June 2018 and focuses on air core and reverse circulation drilling.
  • Swick Mining Services was acquired in February 2022 and operates mainly underground drilling rigs.

DDH1 has the highest revenue per rig in the industry.

Here is a good writeup on Value Investor’s Club: https://valueinvestorsclub.com/idea/DDH1_Ltd/9486284739#description

Gold mining is cyclical, and it is likely that a long cycle of growth for gold drilling has begun. Gold mine drilling services will be greatly needed going forward. Here is a quote from the LBMA, the London Bullion Market Association:

In order to sustain production at or above current levels, significant capital will need to be deployed by miners in order to develop projects or expand existing operations to offset declining production from aging mines. With current prices, which at time of writing are around $1,850/oz, well in excess of the 90th percentile of the all-in sustaining cost curve, which sits at $1,300/oz, the vast majority of gold mines are making very healthy profits. These margins should allow the industry to deploy capital to develop new projects, with the average capital cost to construct a new gold mine approximately $200/oz over the life of mine.

***

The market cap is $233.5 million. The company has $31.5 million in cash and $57.7 million in debt. Enterprise value is $252.3 million.

Here are the current multiples:

• • EV/EBITDA = 2.79
  • P/E = 7.26
  • P/B = 0.91
  • P/CF = 3.77
  • P/S = 0.61

Total insider ownership is 41.8%. Insiders have recently been buying shares.

TL/TA (total liabilities/total assets) is 28.7%, which is excellent. ROE is 18.1%, which is good.

The Piotroski F_score is 8, which is very good.

Intrinsic value scenarios:

• • Low case: During a recession, the stock could fall 50% from $0.53 to $0.26.
  • Mid case: EV/EBITDA is 2.79, but should be at least 5.0. That would mean the shares are worth at least $0.95, which is 80% higher than today’s $0.53.
  • High case: The stock could easily be worth a 6x EV/EBITDA, which would translate into an intrinsic value of $1.14. That is over 115% higher than today’s $0.53.

Risks

Gold prices could fall significantly. This seems very unlikely but is 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.

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.

June 18, 2023

Geodrill is a drilling company that extracts mineral samples seeking gold and other ores for major, intermediate, and junior mining companies in Africa and South America. (Drilling for gold is 90%+ of revenues and the company operates in Burkina Faso, Cote d’Ivoire, and Mali in West Arica; Egypt in North Africa; and Peru and Chile in South America.) GEODF has highly recurring revenue, produces free cash flow, and is growing at 8-12% a year on both revenues and profits.

Gold mining is cyclical, and it is likely that a long cycle of growth for gold drilling has begun. As Geodrill produces ever more free cash flow, it can increase its dividends and share buybacks. Also, larger drillers are likely to purchase smaller drillers, which makes GEODF a take-over candidate.

Geodrill was founded in 1998 by Dave Harper, its current CEO and largest shareholder, with one rig and one contract. Over the last 24 years, it has grown organically into one of the leading exploration drilling companies in the world with a fleet of 76 drill rigs operating in Africa and South America.

Geodrill provides Reverse Circulation, Diamond Core, Air-Core, Deep Directional Navi Drilling, Geo-Tech, Grade Control, and Water Borehold drilling services. Geodrill’s multi-purpose rigs can provide both Reverse Circulation and Diamond Core drilling and can be switched mid-way through a hole with minimal effort or downtime. This lowers customers’ costs. GEODF also provides Air-core drilling, which is often used by junior exploration companies in early-stage exploration.

Geodrill has built an excellent reputation for reliability and quality in the drilling industry, which has translated into long-term contracts and relationships with major customers such as Kinross Gold (KGC), Newmont Mining (NEM), Barrick (GOLD), and others.

Because it can take decades to fully exploit a mine’s ore beds, these relationships last for long periods of time and are recurring in nature. Geodrill is involved in all the cycles of a mine’s life.

Here is a good writeup on Value Investors Club: https://valueinvestorsclub.com/idea/GEODRILL_LTD/5831765918

Gold mine drilling services will be greatly needed going forward. Here is a quote from the LBMA, the London Bullion Market Association:

In order to sustain production at or above current levels, significant capital will need to be deployed by miners in order to develop projects or expand existing operations to offset declining production from aging mines. With current prices, which at time of writing are around $1,850/oz, well in excess of the 90th percentile of the all-in sustaining cost curve, which sits at $1,300/oz, the vast majority of gold mines are making very healthy profits. These margins should allow the industry to deploy capital to develop new projects, with the average capital cost to construct a new gold mine approximately $200/oz over the life of mine.

***

The market cap is $108.8 million. The company has $17.7 million in cash and $9 million in debt. Enterprise value is $100.1 million.

Here are the current multiples:

• • EV/EBITDA = 2.60
  • P/E = 5.83
  • P/B = 0.98
  • P/CF = 5.34
  • P/S = 0.77

Total insider ownership is 50%+. (Founder and CEO Dave Harper owns 39%.)

TL/TA (total liabilities/total assets) is 24.2%, which is excellent. ROE is 18.7%, which is good.

The Piotroski F_score is 8, which is very good.

Intrinsic value scenarios:

• • Low case: During a recession, the stock could fall 50% from $2.36 to $1.18.
  • Mid case: 2024 EBITDA is approximately $44.8 million. The CEO Dave Harper, who owns 39% of the shares, is looking to sell for an EV/EBITDA of at least 5.0. That would be an EV (enterprise value) of $224.0 million. After subtracting $9.4 million in estimated debt and after adding $42.1 million in estimated cash, the equity would be worth $256.7 million. That translates into $5.58 per share, which is over 135% higher than today’s $2.36.
  • High case: The stock could easily be worth a 6x EV/EBITDA, which would translate into an intrinsic value of $6.55. That is over 175% higher than today’s $2.36.

Risks

GEODF may be trading at a discount to its peers due to its exposure to the West African countries. There are often political upheavals in these countries. However, the groups of people involved in such upheavals still need the hard currency that mines and other commodities produce. So far, there have been no disruptions in Geodrill’s drilling programs due to any of these regime changes.

Also, Geodrill’s newer locations in Egypt, Peru, and Chile are much more stable politically than West Africa.

Finally, if there is a recession or a bear market, the stock could drop. But that would be a buying opportunity.

 

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.

June 11, 2023

Cipher is a specialty pharmaceutical company with a robust and diversified portfolio of commercial and early to late-stage products. Cipher acquires products that fulfill unmet medical needs, manages the required clinical development and regulatory approval process, and markets those products directly in Canada and indirectly through partners in the U.S., and South America.

Here is a good writeup on Value Investors Club: https://valueinvestorsclub.com/idea/CIPHER_PHARMACEUTICALS_INC/1631639401

Epirus

Cipher’s core product is Epuris, a product marketed in Canada for the treatment of severe nodular acne based on the active ingredient isotretinoin. Launched in July 2013, Epirus has grown at a very high rate every year – at 27% per year over the last 6 years – benefiting both from a growing market and consistent market share gains. More importantly, Epuris is the market leader with 43% share in its category. Because it is by far the best product in the market, Epuris should continue growing at high rates for the foreseeable future.

Epuris has high barriers to entry because the target market is not large enough to justify the investment it would take to bring a new competitor to market.

Absorica

Absorica is an isotretinoin product that Cipher has licensed to Sun Pharmaceuticals for the U.S. market. For most of Cipher’s recent existence, Absorica was almost the entire company. But Absorica’s patents expired, driving revenues on the product from $30 million to $6 million.

Many investors mistakenly believe either that (1) Absorica is the entire company, so Cipher must be worthless; or (2) What happened to Absorica will also happen to Epirus.

First, Absorica’s earnings have stabilized around $6 million a year and are unlikely to go much lower.

More importantly, as mentioned above, Epirus is by far the best product in Canada where it is a market leader, but the market is not large enough to justify the investment a competitor would have to make to create a competing product. Note: The price of Epirus is 1/10th that of Absorica and Epirus does not have a patent.

Two phase III product candidates

Cipher has two phase III product candidates. Cipher does not have development risk for either product since it just has the marketing rights in Canada. Cipher has partnered with Moberg Pharmaceuticals to develop MOB-015, which is a topical treatment for a common nail fungus. Cipher has partnered with Can-Fite BioPharma to develop CF101, a treatment for plaque psoriasis and rheumatoid arthritis.

Leadership

John Mull was the founder of CML HealthCare, a diagnostics services provider acquired by LifeLabs in 2013 for $1.22 billion. Cipher was previously spun out of CML HealthCare. John Mull was the former CEO of Cipher and owns 39% of the shares. John’s son Craig is the current CEO and owns 2% of the shares.

But in between the time when John Mull stepped down as CEO and when Craig Mull took over as CEO, there were two bad acquisitions made by other CEOs.

Since taking over as CEO in 2019, Craig Mull has performed well. He has cut costs meaningfully, maintained Epirus’s growth, extended the Absorica license to 2026, and aggressively bought back Cipher’s stock.

***

The market cap is $71.7 million. The company has $33 million in cash and no debt. So the enterprise value is $38.7 million.

The company has over $200 million in NOLs, which means it will not pay cash taxes for a long time.

Here are the current multiples:

• • EV/EBITDA = 3.31
  • P/E = 2.77
  • P/B = 1.10
  • P/CF = 2.66
  • P/S = 3.69

As noted earlier, insider ownership is 40%+. Also, the company has bought back a great deal of stock.

TL/TA (total liabilities/total assets) is 12.7%, which is excellent. ROE is 50.5%, which is outstanding.

The Piotroski F_score is 8, which is very good.

Intrinsic value scenarios:

• • Low case: During a recession, the stock could fall 50% from $2.83 to $1.42.
  • Mid case: The P/E is 2.77, but should be at least 5. That means the stock price should be approximately $5.10, which is 80% higher than today’s $2.83.
  • High case: For a growing pharmaceutical company with a strong competitive position and a promising pipeline, the P/E arguably should be at least 7.5. That would make the intrinsic value of the stock $7.66, which is 170% higher than today’s $2.83.
  • Very high case: With a large cash balance and significant free cash flow, the Mull’s are highly likely to make one or more acquisitions, creating a larger and more diversified pharmaceutical company. The stock could be worth at least $10, which is over 250% higher than today’s $2.83.

Risks

Epuris’s growth could slow significantly for the first time, or a superior product could be developed in Canada. The Mull’s could make a bad acquisition. Revenues from the licensing portfolio could decline faster than anticipated. New product candidates could fail to reach commercialization.

 

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.