Importance of your own due diligence

Outsourcing is alluring.  Let someone else do the research and ride to success with little to no effort.  The problem is when everyone relies on everyone else leaving no one to do the primary research.

There is a term "hedge fund hotel" that's used to describe a stock with a shareholder register littered with well known hedge fund names.  Funds all pile into the same names because they like the characteristics of the stock, but also because other popular funds are in the name.  The cycle is self perpetuating, as more funds enter a name it attracts even more funds.  Many of these funds do their due diligence before investing, but it wouldn't be a stretch to say that some have outsourced their thinking to others in the group.  The thought is if there are a number of great investors in a name it makes sense that they've all done their research, and if these popular investors have all researched and determined an idea is great that little additional due diligence is necessary.

The spectrum of due diligence extends from "Bill Ackman is invested so I will too" all the way down to examining invoices and receipts before investing (in a private company, but also possible in a small public company).

There is a natural tension between doing enough research to determine an investment is worthy of a portfolio position, and doing too much.  Research and due diligence experience diminishing returns.  In my view the determining factor on how much due diligence an investor needs to undertake is determined by the size of the position in the portfolio as well as the absolute size of the position.

For smaller positions it's reasonable to research a stock without ever leaving your easy chair.  This includes reading quarterly and annual reports, reading conference call transcripts and Googling the company.  A lot of investors, especially value investors get caught up in reviewing the notes for a company.  I think it's important to read annual reports and notes, but I've never seen an investing situation where minutia in the notes was the determining factor for investing or not.  Additionally I've found many cases where Googling can turn up information about a company that's much more impactful than a note about how the company computes their pension or handles inventory accounting.

It's helpful to think outside the box.  Companies release periodic financials, but that doesn't have to be the only source of research.  Consider reading employee reviews on Glassdoor or contacting current and former employees directly on LinkedIn.  Glassdoor is perfect for the armchair analyst.  Glassdoor has salaries and reviews for most companies in the US.  The site is anonymous and employees tell the world what they'd never tell HR in an exit interview.

Employee salaries and management perception is important.  You cannot have an average or above average company if employees universally hate management and are underpaid relative to peers.  If you are looking to avoid duds in your portfolio you need to invest in companies that have at least an average workforce. If a company has a below average workforce the company will need to work that much harder to produce results on par with peers.

Beyond Glassdoor there is a lot of information available online in non-traditional places.  On CompleteBankData.com we have hundreds of financial details that never appear in a bank's financial statements.  Many of these can be pivotal pieces of information that could make or break an investment.  We also have a lot of information that highlights banks that have the potential to torpedo a portfolio.

Another treasure trove of information is the court system.  I've referenced the Horsehead Holding (ZINC) investment in the past, but it's worth mentioning again.  A friend pointed out that the company was involved in multiple lawsuits in Allegheny County on the public record a year before their bankruptcy filing.  This information would have tipped off investors to their imminent failure almost a year ahead of time.  Courts require companies to disclose details they wouldn't otherwise disclose.  Horsehead Holdings was suing their suppliers and contractors for not knowing what they were doing.  They were also involved in a lawsuit with a competitor for poaching the designer of their manufacturing plant.  A PACER subscription to scan for lawsuits can be incredibly valuable.

The last and at times most valuable source of information regarding a company is management itself. Without management there is no company.  Managers hold the pieces of a company together and push employees towards a singular goal.

Bad management can destroy shareholder wealth in a few quarters.  Benjamin Graham believed that the quality of a company's management was reflected in their financial statements.  This is something I agree with, but it has limitations.  A company with continual losses and perpetual secondary offerings does not have a star management team.  Likewise a company with a seemingly high ROE might not have a great management team either.  Sometimes it's worth peeking behind the financials to see who's really running the show.

The best way to gauge management is by talking to them.  Either picking up the phone or talking in person.  For large cap companies management is inaccessible to individual investors, but that's not the case with smaller companies.  It's very easy to pick up the phone and talk directly to the CEO or CFO of a microcap company.

A lot of investors shun talking to management because they feel they'll be fed a rose colored view of the world.  Or that management is biased towards their own company, or that a CEO is just a sales person.  All of these things are true, and they should be, and if they aren't don't invest.  If a CEO isn't out selling their company I don't have much confidence in them.  Likewise senior management should believe in what they're doing and believe they're the best at it, if not they need to find another job.

The job of the investor isn't to hear management's narrative and invest based on it.  But rather to use management to fill the gaps in their investment thesis.  Sometimes financial statements don't describe a situation accurately.  For example Kopp Glass (KOGL) appeared to have a large pension problem based on their financials.  The company's CFO had a much different view on the situation.  When I spoke with him he said the pension was the last thing he worried about, the payments were fixed and he had a model capturing all scenarios.  He had other issues he was worried about, and I would have never understood that if I just relied on the company's financial statements.

Talking to a company's management on the phone is valuable, but it's even more valuable to talking to them in person.  Body language is an important element of communication.  Sometimes people will give two answers to the same question, the verbal answer, and the body language answer.  If you're on the phone you only hear the verbal answer, but in person you get both.  And both is important when the answers don't agree.

The problem is it's hard to find the time to fly around the country visiting companies.  I try to attend as many annual meetings as I can in person.  At these meetings management makes themselves available to discuss issues with investors.  And meetings are a chance to observe the body language as well as the verbal language of management.

Another solution is to attend an investment conference like our Microcap Conference in Toronto at the Hilton April 11th and 12th.  At this conference there will be 40-50 companies presenting to investors and taking questions.  But beyond that we also set aside time for one on one meetings allowing investors to sit face to face and ask management questions or offer suggestions directly.  If you've ever sat and thought "I wish management would do this.." a one on one session is the perfect opportunity to suggest a change to management in a non-hostile setting.  If you're interested in registering you can do so here.

The key to any investment is doing your own due diligence.  Don't invest in a company just because someone else has, regardless of how great of an investor they are.  We never know exactly why someone else invested in a position, or what their goal is with the position.  Conducting your own due diligence gives you the information and confidence needed to investor your own money in a stock.  Also consider the size of your position, and then conduct the appropriate level of diligence for that position.  If you have a $100,000 portfolio and are investing in 20 stocks it probably doesn't make sense to fly to Wichita to tour a plant.  But if you are putting $15,000 or more into a position it's worth the time to go beyond the financials if possible.  In the end you are responsible for the money you invest, and conducting an appropriate level of due diligence can result in gains and protects against losses.

Temple Hotels: potential distressed debt opportunity

I came across this name while looking for what I call two pillar stocks.  That is stocks where both earnings and book value support the same valuation.  The following company appeared on the screener and as I dove in to research I found what might be interesting from a debt but not equity perspective.  I found this fascinating enough to write it up, although I should mention a caveat.  I'm not a distressed debt expert by any means, and I was searching for equity bargains and found this.  In the world of distressed opportunities there might be better investments.

The slogan for Fort McMurray, Alberta is "We Have the Energy".  They still do have the energy, the problem is it's captured inside sand pits and no one is willing to dig it out.  This is of course a result of the global oil slump.  The term "oil slump" what what talking heads use to describe the terrible predicament where it costs less to heat a home, less to gas up a car, and less for anything made with oil.  Consumers aren't complaining unless they are shareholders in an energy or energy related company.  The energy companies themselves have been hit hard, but the trouble doesn't stop there.  Companies that rely on energy business, or the business of energy workers have taken a toll as well.

Temple Hotels (TPH.Canada) is one of those companies whose operating results and stock price graph are mirror the drop in oil prices.  The company owns 29 hotel properties across Canada that have a slight over 4,000 rooms.  The company's largest presence is in Fort McMurray, Alberta with 891 rooms there.

Fort McMurray was a relatively obscure backwater town in Northern Alberta until the late 1960s when the sand natives used to waterproof canoes was able to be refined into oil.  An oil boom began and continued into 1981 with the city's population peaking at 31,000.  As oil prices fell so did the fortunes of Fort McMurray.  The town lay near dormant until oil started to climb again in the 2000s.  And like the California Gold Rush the Alberta Oil Rush was on, only instead of wagons and settlers it was F-150s, Silverados and unattached men living in hotels and RVs working in the oil fields.  The population boomed from 38,000 in 2001 to 61,000 in 2011, the good times were back indeed.

Temple Hotels took advantage of the boom by purchasing multiple hotels in the Fort McMurray area.  Their hotels had high occupancy in the boom years from workers traveling in and out of the area.  Their portfolio of hotels included both extended stay locations and short term locations.

A potential problem for hotel companies is they have high levels of operating leverage, and for Temple Hotels they piled on significant financial leverage as well.  As occupancy rates fell with oil prices the company's profits fell too.  The company paid $.48 per share in dividends in 2013 and 2014.  They have since suspended that dividend and shares trade for less than $1.

A traditional investment thesis might be as follows: eventually oil will recover and so will Temple's profits.  Shares can be purchased at a giant discount and shareholders just need to be patient enough to wait for an oil recovery.

The problem is the traditional thesis doesn't work in Temple's case.  They operated with a boom time mentality and didn't save up for rainy days.  The company's leverage, the tool that allowed them to build their empire has now begun to work against them.

The company's hotels cost a total of $743m to construct and have an appraised value of $751m.  It's worth noting that 40% of the company's rooms are in Alberta, with 22% (891 rooms) in Fort McMurray.  The rest are spread throughout Canada and operate under well known brands such as the Thunder Bay Days Inn, Mississauga Hilton Garden Inn, TownPlace Suites Sudbury and others.

Outside of Alberta the company has a very diversified portfolio of brand name hotel properties.  The problem is with excessive leverage even a small downturn in revenue can lead to catastrophic results for the company.

In the latest financial report the company stated that they are in breach of multiple covenants on a portion of their debt, but they expect to restructure the terms or pay off the offending debt.

For equity holders the company does not appear to be a sound investment.  They have a market cap of $74m and shareholder equity of $87m.  Equity is being quickly eroded by portfolio impairments, and the company is in breach of their covenants.  I have no doubt the company's hotels will continue

So where is the opportunity?  In the company's near term traded convertable debt.  The majority of Temple Hotel's debt is in mortgages related to individual hotels, but they do have $138m of convertable debt outstanding.  There are four series of convertible debt outstanding, C, D, E and F.

The company's C series has an outstanding value of $22m and matures in December of 2016.  Management notes that it will be a challenge to find funding to pay off all of their convertable debt issues.

In the most recent quarter the company earned $13m in operating income against $8m in interest payments on their debt.  They have FFO of $.10 per share and AFFO of $.07 per share.  They company also just completed a $39m rights offering with the explicit intent to repurchase their own debt, something they've been doing for quarters now.

The company's one year convertables are trading with a 13% yield and appear to be the safest for a number of reasons.  The first is the company is still able to pay interest on the debt and has been while in a prolonged slump.  With occupancy rates at 62% they are deep into recession level territory.  And yet they still have positive cash flow, cover their interest charges, are investing in remodeling hotel properties and continue to operate.

It will be difficult to find funding to repay all $138m of convertable debt over the next two years, and that's why the Series C is trading for $95 whereas the Series F is trading for $72.

If the company can limp along another year Series C bondholders will receive an 8% coupon, plus a 5.25% gain on redemption.  Not bad for holding a year.

Overall the company has $85m in debt coming due between Sept 2015 and Sept 2016.  Of that $38m is related to three mortgages that have the defaulted covenants.  My guess is the company will use the rights offering proceeds to pay off this debt.  They noted the rest of the debt maturing in the current 12mo period can be refinanced at existing terms.  That leaves the issue of retiring or refinancing the Series C debt.  The company currently has $11m in cash on hand and should generate close to $20m in cash for 2015.  Additionally management has shown that they're willing to sell properties to fund near term needs.  Ultimately this is terrible for shareholders, but not bad for bondholders.

Are there easier ways to make 13%?  Probably? I'm sure some equity investors are wrinkling their noses at this post, but how many equity investors did 13% last year?  Successful investing isn't swinging for the fences hoping to crack a lucky pitch.  Rather it's looking for opportunities with likely positive outcomes and unlikely negative ones.  The worst case scenario for an investor here is that Temple Hotels declares bankruptcy and bond holders are dragged into court and forced to wait years for a recovery.  Although according to financial statements if the company were to liquidate their portfolio at current values even equity investors would see gains.  Investors with a higher risk appetite might venture further out on the curve, or enhance or protect this position by combining the bond investment with options on the common.

Disclosure: No position


The best research might be no research at all

In sales there is the concept of a "qualifying question."  This is a question that a sales person asks a prospect to determine whether to pursue the prospect further.  A qualifying question might be "Do you have a budget for this project?" If a prospect doesn't have a budget for a dreamed about project why would a sales person continue to pursue said project?  The goal of a qualifying question is to get to "No" quickly and spend time with prospects who meet buying criteria verses chasing dead end leads.

Investors should adopt the qualifying question mindset when looking for new investments.  Our time is limited and we don't have the capacity to cover every investable company. Time spent researching a company not worth investing in means less time spent researching a potentially good investment.  A common investment meme is that knowledge is cumulative and that all that time spent on dead end investment leads will somehow help with good investments.  This is simply not true, time spent on dead end leads is sunk time.

I prefer to research stocks differently in that I take the qualifying question approach in order to save time and focus my efforts.  I prefer to invest in small stocks, so I don't look at larger companies.  This is a personal preference, but that preference eliminates a lot of the investment noise.  Most investment chatter is regarding the largest and most well known companies, the ones I'm not focused on.

I further limit my universe by looking for stocks with a traditional undervaluation on either an earnings or asset basis.  If I come across a stock at 45x earnings at 150x book that's growing at 30% a year I will probably pass.  This might seem crazy, why would I pass up the express train to unlimited profits via growth?  It's because I'm not an expert on valuing growing companies.  I like when companies grow, but I can't tell Crocs from Heelys or Starbucks from Caribou coffee.  I've learned that I'm good at determining a stock's downside, determining the likelihood of a stock trading up to a higher valuation and I stick with what I know.

This isn't to say that growth stocks are bad, or value stocks are better, neither is better than one or the other.  I'm saying that I stick to what I know.  I think all investors should stick with what they know, what style works with their own personality.

My guidelines for an acceptable investment are very broad.  There are many types of strategies that work in certain market environments, but no strategy that always works all the time.  What I mean is this, an investor needs to be flexible.  In some markets net-nets are attractive investments, other times low P/B value stocks, and at times companies that trade at earnings discounts to their peers.  There isn't a golden strategy, and it pays (literally) to be flexible.

The criticism to this approach could be that by being too restrictive I'm missing great opportunities.  The criticism is correct, I'm missing plenty of opportunities, many of them good!  The nature of investing is that unless you're buying the entire market you will always miss great opportunities.  The converse is that by being more restrictive I'm always forcing myself to pass on bad investments.  Or investments that might be fascinating reading, but that ultimately don't have an attractive valuation.

Some investors like to research companies with the hope that one day the company will suddenly trade with a lower valuation.  It's an interesting approach, but why not find companies that right now meet your valuation criteria?  If the answer is "there are none" then it's time to reconsider your criteria.  Of the 60,000 stocks worldwide I would expect that at any given time there would be at least 15-20 investable companies at the desired valuation with desired characteristics.

Spending time on what you own, or what you want to own that is qualified is much more valuable than spending time on something that isn't qualified.  If the ultimate goal of investing is to find undervalued investments and invest in them then wouldn't it stand to reason that any time devoted to research should be spent looking for those undervalued investments now?

Investors are usually afraid to pass on a company because it might do well in the future.  The truth is there will be many companies that do well that we never own.  The fear of missing out is a real fear, but it has no place in investing.  Rather focus on what can be controlled, the time spent researching and what you research.  Stay up to date on current holdings and look for new holdings in a qualified pool of investments.  The best research might be deciding an investment isn't worth further research and moving on.

Is a sum of the parts valuation worthless?

In the aftermath of catastrophic losses on Horsehead Holdings (ZINC) a number of value investors have been asking themselves what went wrong.  Some have said the culprit has been the use of a sum of the parts valuation.

Horsehead Holdings is a Pittsburgh, PA based company that specializes in zinc oxide processing.  Famed value investor Monish Pabrai found the investment during the depths of the financial crisis trading for less than net current asset value.  As the economy, and the company's shares recovered Pabrai continued to talk about the investment, and it transformed from a deep value playt to one with a great management team and an attractive story.  The company supposedly had a best in class processing system that allowed them to process zinc cheaper than peers and as a result once their factory was operational they'd mop the floor with their competition.

Unfortunately the company hit a perfect storm.  Zinc prices declined and at the same time the company's next generation system experienced continual failures and needed of costly repairs.  To make matters worse the company had a risky balance sheet loaded with debt expiring in the near term.  These factors collided and the company now trades for mere pennies down from $15.18 earlier this year.  They missed a debt payment and will most likely be entering bankruptcy soon.

One narrative I've heard a few times out of the investment is that a sum of the parts valuation methodology is dead, or worthless.  A sum of the parts is where an investment is valued on individual pieces of the company rather than the company as a whole.  For Horsehead their next generation plant had a market value, along with two other ancillary businesses they owned.  Investors looked at this situation as good downside protection because in theory management could sell the side businesses to fund the construction issues.

I don't believe the sum of the parts valuation methodology is worthless, but I do believe it's misapplied.  I want to explore applications and uses in this article.

Let's consider a very simple example.  Imagine you had a bike, a shoulder bag, a cell phone, and nice rain coat.  What is it worth?  This is a simple question, you could find the value for each item separately online.  With eBay or Craigslist you could probably find each exact item in the same condition and determine within a few dollars the true market value for this entire collection.  If you were to go through this exercise and determine the collection is worth $1,500 and someone offered you $1,000 to buy the ensemble you'd probably think "that's crazy, I can sell each item individually for more than $1,000."  That is the essence of a sum of the parts valuation.

But take a step back, if you have all of those items you also have all of the pieces needed to be a bicycle messenger.  And maybe that's why you do have all of those pieces, it's because you make deliveries on your bike.  Now the situation is different, by using all of these items you might earn $10/hr, or $1,600 per month.  If someone were to offer you $1,000 for the ensemble you'd laugh because by putting the pieces together and using them to generate an income would result in $1,600 per month until you decide to stop riding.

The second example is why in most cases a sum of the parts makes no sense.  A company's parts, their factories, their land holdings, their machinery, any other assets are much more valuable as an operating entity as opposed to being parceled off.  And the reason all of those assets are together in the first place is because at some point someone tried to make a go of being an operating entity.  The mandate for those assets is to work together and to create something, that is their purpose.

A sum of the parts makes sense in two situations, the first is if the company has excess assets that on their own are extremely valuable.  Consider our messenger example, what if I said you also owned a set of rare historic bikes in addition to the messenger setup?  These bikes are stored in your garage and never used for deliveries.  If you were not emotionally attached to those bikes you could potentially sell them for thousands apiece without affecting your messenger job.

The second situation when a sum of the parts could be appropriate is when management has made it clear they are willing to part with significant portions of their operations in an effort to streamline/refocus/monetize their company.

If management views their assets as available for sale, and actually sells them when given an attractive offer then it's reasonable for investors to view them as the same.

The key to a sum of the parts analysis is that management needs to be willing to monetize their assets.  A company with an extremely valuable piece of land that they are unwilling to sell because it was purchased by the CEO's great grandfather has a value thats determined by the company's use of it.  Management is the key to unlocking value at companies with valuable assets.

In an issue of the Oddball Stocks Newsletter I wrote about Du Art Films, a film processing company located in New York.  The company owns an extremely valuable plot of land in Manhattan that is underutilized.  They could sell their land to a developer to build a skyscraper for many times their market cap.  They own other valuable assets as well.  The reason shares trade so cheaply is that management has been unwilling to monetize those assets.  But there are indications this could be changing as management is quite advanced in age, and shareholders are agitating for change.  But without management being willing to do anything it's likely these assets will remain undervalued for a while.  Du Art is a typical sum of the parts situation, a set of valuable assets that are at the whim of management.

If a company has excess salable assets and a management that appears willing to sell them then a sum of the parts could be appropriate.  If a company is simply a collection of unrelated assets and there is a management team willing to monetize them then a sum of the parts could be appropriate.  If a company has entrenched management that has a "down with the ship" mentality a sum of the parts valuation definitely isn't appropriate.

In general it's best to look at a potential investment through a number of different valuation lenses.  If a company comes up cheap when using multiple investment approaches then there's a very strong chance that it's truly cheap overall.  But if a company appears expensive using every approach except one, and that one approach says it's blindingly cheap it's probably best to look deeper or look elsewhere.

Like anything, a sum of the parts valuation methodology is appropriate in some situations, but no appropriate in all situations across the board.

Recent podcasts

I have been podcasting with Fred Rockwell for a while now on the topic of micro cap stocks.  If you haven't subscribed to the podcast I'd recommend you do so on iTunes, Android, or RSS.

Here are a series of links to some recent episodes.  We are always looking for new guests, if you want to be on the show please get in touch!

Andrew Walker: Rangeley Capital

Thompson Clark: Microcap Millionaires

Tim Eriksen: Eriksen Capital

Lenny Grover: Screener.co

Christian Ryther: Cureen Capital

Myself on banks and free cash flow

Chris DeMuth: Rangeley Capital






Maui Land and Pineapple, a case of cheap assets depending on where you sit in the capital structure.

Whether or not a company is cheap can change depending on where an investor sits in the capital structure.  A company with enviable assets out of reach to investors is just a dream, not a great investment.

Maui Land and Pineapple (MLP.NYSE) is the type of company investors dream of owning.  Imagine being able to say you own a bit of land in Hawaii in the form of a nature preserve, resort, utilities and commercial real estate.  That's what Maui Land and Pineapple investors can claim.  The company owns 23,000 acres of land on Maui, a magnificent island paradise sitting in the middle of the Pacific.  The company also owns and operates the Kapalua Resort, and manages a private nature preserve.

The company specializes in property management, and real estate sales.  They are focused on selling real estate parcels at the resort, not hotel rooms for weekend vacationers.  Beyond their resort real estate the company owns and operates two public water utilities.  They also own and lease commercial property to businesses on the island.  The company has their fingers in everything related to real estate, sales, leasing, development, preservation, agriculture, and extraction.

A familiar theme in the investing community is "undervalued real estate."  The theme is often that the market doesn't appreciate the true value of a company's real estate.  Sometimes this is because the real estate is held on the books at historical cost and no one noticed.  But more often it's because the real estate is being utilized by the company in a sub-optimal manner and investors don't have faith it's true value will be realized.

Maui Land and Pineapple fits both descriptions.  The majority of their 23,000 acres are held on their balance sheet at historical cost.  The stated value for their 23,000 acres is $5.15m, or approximately $221 per acre.  This is because the majority of the company's land was purchased between 1911 and 1932 and held at those values.  The value for investors is if management is willing to sell off their excess holdings.

Selling real estate is the modus operandi of Maui Land and Pineapple.  The majority of the company's revenue is due to their real estate sales.  From parcels as small as an acre to larger tracts the company is continually selling it's holdings.

In the trailing nine months the company generated $20m in revenue, $12m from outright land sales, $4m from leasing activity, $2.4m from their utilities, and $1.1m from resort amenity sales.  They have a market cap of $94m and are selling for slightly more than 10x trailing nine months net income.

The company's book value is negative due to an accumulated deficit, but is likely grossly understated.  I haven't done a deep dive into the value of the land (you'll see why below), but a recent sale took place at $480k per acre.  If one were to estimate the land was worth 1/3rd of that price, and that only 12,000 acres were salable the company should be worth $1.9b, yes, billion with a "b".

There are good assets, good recent earnings, so what's the issue?  This should be a screaming buy.  A company that is selling for hundreds of book value if they sold off half their land.

The problem is that the storyline might be true, but it is unlikely that equity investors will be the ones recovering the value.

The nature of real estate is that if it isn't levered it's very hard to make a return, or at least that's what real estate management companies tend to believe.  Secondly it's hard to extract the value from real estate without selling it.  One route to extract value is to borrow against real estate holdings and finance whatever ventures one believes are more worthwhile.  And finance they have, Maui Land and Pineapple is no stranger to the world of debt.  They have $40m of revolving debt that is due this year including a $25m loan to Wells Fargo, a $14m AgCredit loan and $400k headed to First Hawaiian Bank.

Unlike equity investors lenders don't get to share in the upside when they make a loan to a company, they are primarily concerned with receiving their money back.  There is no doubt that Wells Fargo, AgCredit and First Hawaiian Bank made prudent loans to Maui Land and Pineapple, even if the company ends up on shaky footing.  Those three lenders have liens against all of the company's assets, the utilities, the land, the resort, and the commercial space.  If Maui Land and Pineapple were to declare bankruptcy the lenders would be the new owners of valuable real estate among other things.

It's uncertain as to how the company will pay their $40m in debt coming due this year.  In their most recent filing the company states that "Absent the sale of some of its real estate holdings or refinancing, the Company does not expect to be able to repay the outstanding balance of the revolving line of credit on the maturity date."  The company will either need to refinance their loans or sell a considerable amount of real estate, or do both to meet their debt maturity this year.

At the Microcap Conference in Philadelphia in November Chris DeMuth spoke about looking for investments with constrained counter parties.  When a counter party is constrained they're often forced into making uneconomic decisions.  A savvy investor can take advantage of a situation like that and purchase assets or earnings at considerable discounts.  The issue with an investment in Maui Land and Pineapple is an equity investor is buying into a company that is a constrained counter party.  The clock is ticking for the company to either refinance their debt or be forced into real estate sales by the summer.

On the surface Maui Land and Pineapple appears like it could be an attractive investment with valuable land and cheap earnings.  But a deeper dive reveals a company that is a constrained counter party.  The real investment opportunity is for anyone looking to buy Hawaiian real estate on Maui at attractive prices, or anyone in the position to make a secured loan to the company in the next few months.

Announcing the Toronto Microcap Conference

Sometimes the best bargains in the market are the easiest to overlook.  While everyone is searching for value in esoteric places there is a developed market within driving distance from the US that speaks English (mostly) and does business with the US that's hitting new lows.  Yet investors write off Canada because the perception is the Canadian market is 100% gold mining and resource companies.

For example, did you know there are 798 non-resource, non-oil and gas companies in Canada trading for less than book value?  All of these are micro cap companies, off the radar and un-investable for some of the largest and best known Canadian funds.  Canada is a hot bed of value,  22% of their market trades for less than book value.  Compare that to the US where only 11% of the market trades for less than book value.

Maybe you aren't as interested in absolutely cheap companies and want growth, there are plenty of cheap growing companies in Canada.  There are a number of companies with 25% year over year revenue growth trading for less than 5x EV/EBITDA.  In the US there are only nine, and a few of them are China based US listed companies with dubious financials.

It can be hard work to comb through dozens or hundreds of companies looking for a diamond in the rough of potential investment candidates.  There has to be a better way, and there is.

Imagine a setting with 40 hand selected companies that offer excellent investment potential where you can speak directly to management in an one on one setting.  Combine that with dozens of well known speakers and hundreds of like minded investors, all gathered in the same place, all with the same goal, find the best opportunities.  We did just that in Philadelphia in November 2015 and now we're bringing the same format to Canada.

In April 2016 we will be hosting The Microcap Conference at the Hilton in downtown Toronto.

The conference starts Monday, April 11th at 1pm with speakers and company presentations.  The afternoon is completed with a happy hour, dinner, and keynote presentation.  Tuesday is packed full of presentations by well known investors, fund managers, and companies as well as one on one sessions with company management.  We end the conference with another happy hour giving you time to network and share ideas with fellow investors.  We'll have plenty of time to network throughout the conference.

You can find more information as well as sign up to attend here.

I'm looking forward to seeing you in Toronto!