YouSaid · the spoken record

Paul Andreola

lines on the record: 50
first: 2024-02-11
most recent: 2024-02-11
sittings or episodes: 1
sources: podcast

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“Well, first off, Kyle, thank you. It's always fun to talk to you. I love this stuff. And you can see I can talk for hours and hours. But anybody interested, they can find our service at smallcapdiscoveries.com. If anybody's interested, we'll give them a free trial if they mention you and your service. Also, you can find me on Twitter. I'm crazy Twitter poster. So I'm there at PaulAndriola. And yeah, and if they reach out and they've got any questions regarding anything around this sort of stuff that we talked about, I'd be happy to answer and help how I can.”
2024-02-11 · We Study Billionaires · TIP607: Small But Mighty: Uncovering Smallcap Value w/ Paul Andreola · IDENTIFIED FROM THE TRANSCRIPT
“Small cap funds in Canada than there were companies that they're qualified to buy. So you have this weird dynamic that as soon as a company hit a certain inflection point and was doing the right thing, you had like 20 of these funds would jump in all at once. And of course, that would drive the share price like crazy. I think we're about to see that again.”
2024-02-11 · We Study Billionaires · TIP607: Small But Mighty: Uncovering Smallcap Value w/ Paul Andreola · IDENTIFIED FROM THE TRANSCRIPT
“There's a number of things that impact it, right? So we've had a rough market in Canada and a rough market for small caps in Canada in general. So there's not been a lot of capital going into these institutional small cap investors. So they're kind of playing with a certain amount of cash. Now there are issues around what they can and can't do in this environment. If a small company is not liquid enough for these institutions to buy them, they can't buy them. Now, you get a bull market. You get two things happening. There's more capital that goes into their portfolios and more of these companies become liquid. So you get those two effects starting to impact and all of a sudden they're playing ball. So that is yet to happen. That's what I'm talking about. When those two things happen, you have this bloated amount of cash that has to squeeze into a small supply of companies because that's all there is. They're just not enough. I remember there was a time when we did a little bit of a study and there were more.”
2024-02-11 · We Study Billionaires · TIP607: Small But Mighty: Uncovering Smallcap Value w/ Paul Andreola · IDENTIFIED FROM THE TRANSCRIPT
“From here. So now they actually go in and they price it even higher. So we have not really seen that take effect yet. These stocks that even though we're not finding as many great opportunities, they're still good opportunities. When that institutional capital comes down, you're going to see another, we call it another discovery point in the discovery cycle. And that institutional discovery cycle is the most impactful and the fastest driver of change in share price that you can imagine. So yes, we sort of complain that we're not seeing as many good opportunities, but the opportunities we have, we're still highly convicted that that institutional capital when it comes down, it's going to have a material impact on share price.”
2024-02-11 · We Study Billionaires · TIP607: Small But Mighty: Uncovering Smallcap Value w/ Paul Andreola · IDENTIFIED FROM THE TRANSCRIPT
“Thankfully, I've been around this business for a long time, and what I recognize is as much as they've gone up, they haven't gone up to what they typically trade up. We look at these businesses and yes, they've done well. In some cases, they've doubled or tripled in the span of the last year, but they're still not close to where their valuation should be in a normal market. The other thing I learned very early on in my career is that especially in Canada, the institutional capital that's out there really drives the markets. It's not the retail market, it's the institutional capital. And there's a massive amount of institutional capital out there. Now, when they really come to play, it has a dramatic effect on share price. So this stock that might have been trading at 10 times earnings, that it doubles in price because it's grown and multiple is expanded to 20 times. You're sitting there going, my God, I've tripled my money. But then alone comes an institution and sits there and says, oh boy, if this keeps doing this for five years, this thing is a 10-band.”
2024-02-11 · We Study Billionaires · TIP607: Small But Mighty: Uncovering Smallcap Value w/ Paul Andreola · IDENTIFIED FROM THE TRANSCRIPT
“If the sentiment starts to change. And like I said, we're starting to see the sediment change right now. So we actually think we're going to get that lift that has not really shown up over the last two, three years other than just these companies we're growing.”
2024-02-11 · We Study Billionaires · TIP607: Small But Mighty: Uncovering Smallcap Value w/ Paul Andreola · IDENTIFIED FROM THE TRANSCRIPT
“So, a couple things to unwind, right? Institutional investors, typically in Canada, they look at companies at the earliest stage, usually about $50 million market cap. You really have to get to about a hundred million dollar market cap before the real institution money starts to play. So what you want is you want to find a company that maybe it's a $40 million, maybe $50 million market, or whatever. But if it's growing and it continues to grow, sooner or later it's going to get to that size and it's going to show up on the radar screen to these institutional players. So that's the beauty is if you can find those companies that are doing the right thing sooner or later. It's just a function of time. Now, sometimes what happens is it's not a function of time. It's a function of the sentiment in the market and it improves. And all of a sudden, these guys, instead of, you know, using $50 million as their cutoff point, they start coming down to 20 and 30 million dollars. They come to the market and they generate it. So it's just a function of time. It can happen over a couple years or it can happen very quickly.”
2024-02-11 · We Study Billionaires · TIP607: Small But Mighty: Uncovering Smallcap Value w/ Paul Andreola · IDENTIFIED FROM THE TRANSCRIPT
“Whole market. If I were a hedge trader and I could hedge the big markets, I'd be selling the big markets and going along the small markets because I think there's a huge historical mispricing of those two assets right now. Historically, small stocks always traded a premium to big stocks and now we're seeing the opposite.”
2024-02-11 · We Study Billionaires · TIP607: Small But Mighty: Uncovering Smallcap Value w/ Paul Andreola · IDENTIFIED FROM THE TRANSCRIPT
“For small companies. So I think there's a tremendous upside for these small and growing microcap companies because that institutional capital is just starting to trickle down market right now. And when it does, you get a really euphoric bull market. Now, the other market that money losing market. Now, I know the industry, you know, institutional players and investment bankers need to eat. And they have to go and generate revenue for themselves. And the way they do that is through financings. So I do think you're going to start to see, you know, the last two years there's been absolutely almost zero IPOs and financings, but you're going to start to see that research, in my opinion. I think you're going to start to see the whole smaller market is actually doing significantly better than the last two years. I think the profitable and growing companies are going to continue to do very well because of that capital coming down market. But I think some of that capital is going to go into that sort of the more speculative area as well. And I think that's going to boy.”
2024-02-11 · We Study Billionaires · TIP607: Small But Mighty: Uncovering Smallcap Value w/ Paul Andreola · IDENTIFIED FROM THE TRANSCRIPT
“Three different kinds of markets to look at. If you look at the whole thing, you go, okay, well, mark kind of looks okay, it doesn't look too bad. If you're just playing in these sort of money losing small companies, you're going, oh my God, it's been terrible for the last two, three years, right? But then if you're that other sandbox that I love to play in, you know, we've had a fantastic year last year. As a matter of fact, we've had two fantastic years when everybody else has been complaining about the small company. Now, going forward, what I think is interesting is that more and more people are starting to figure it out. We're starting to see a little bit more bigger capital come down market and they're starting to distinguish between those two sort of smaller markets. The small companies that we look at that are profitable and growing, they're not as cheap as they used to be, right? So we're not finding as many no-brainer opportunities as we did two years ago. So that means capital is coming in, but it's nowhere near the kind of capital we've seen in prior sort of bull markets.”
2024-02-11 · We Study Billionaires · TIP607: Small But Mighty: Uncovering Smallcap Value w/ Paul Andreola · IDENTIFIED FROM THE TRANSCRIPT
“Market is made up of all different stocks, right? So I'm a believer that value always does well. And when I say value, mispricing. So if something is growing and it's not properly priced, over time that'll perform and do well. I've seen sort of over the last two years, I'd almost call it two different markets. You can even say three different markets. The big stocks for sure and the indexes and the stocks that everybody knows, they've done exceedingly well. Then you get the rest of the market, right? And I'll call it the smaller companies. Within the component, I break it into two different pieces. One is the profitable and growing smaller companies and then everybody else. If you look at the small companies as a group, yes, that's performed quite poorly over the last two years, especially in comparison to the big guys. But if you look at the small and growing profitable companies, they've actually done really, really well, like really well.”
2024-02-11 · We Study Billionaires · TIP607: Small But Mighty: Uncovering Smallcap Value w/ Paul Andreola · IDENTIFIED FROM THE TRANSCRIPT
“Immense amount of time to save by having the right people. And look, I mean, it's impossible to know everything. So, you know, real world examples, there's companies that we've looked at, the life science space, so pharmaceutical space. And we know people in the industry now through our relationships in the past. And when we have a tough question or something we need to understand, we'll reach out. And sure enough, they know what we're all about and they'll gladly help when they can. That's the beauty of this sort of stuff is that nobody in this on this planet knows all the information and you reach out and you have people that are willing to doubt.”
2024-02-11 · We Study Billionaires · TIP607: Small But Mighty: Uncovering Smallcap Value w/ Paul Andreola · IDENTIFIED FROM THE TRANSCRIPT
“Anchor caps are the type of companies where if you pick up the phone and try to talk the CEO, you're likely going to be able to talk to them. You're not going to be able to pick up the phone and talk to the CEO of Google. Or I think your odds are pretty low. So get out there and start that. And then after a while, you'll find that your network starts to actually work for you. Ideas will be shared, different bits of information come back and forth. And then that's what this business is all about.”
2024-02-11 · We Study Billionaires · TIP607: Small But Mighty: Uncovering Smallcap Value w/ Paul Andreola · IDENTIFIED FROM THE TRANSCRIPT
“I find a lot of people, especially in the microcap space, well, quite frankly, even in investing in general, there's a lot of people that are willing to give back and help people who are starting out and answer questions. And in some cases, mentor, young people who are trying to build their network, those things are really, really important. And you can fast-track your learning by getting in front of as many people as you can and ask them, right? Yeah, sure. Some are going to say no, but get out there and talk to people. Ask them. Ask them what their experiences were. Ask them for help. You'd be shocked. Know what people's motivation is as well, right? This is an industry that, you know, typically people get paid for either information, they get paid for doing things, understand that. Help when you can understand that some are looking for payment for things and just get out there. Get out to conferences. Ask questions, phone companies.”
2024-02-11 · We Study Billionaires · TIP607: Small But Mighty: Uncovering Smallcap Value w/ Paul Andreola · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, a great question. I think, you know, like I've been at this now for about 30 plus years. So a lot of it's just accumulating experiences, both good and bad. I think it's really vital, especially when you're in investing in microcap spaces, is to get to know the players, right? I understand the system too, right? We talked about financing in the past and how important it is to understand how that works and who the players are. you know what can go wrong what can't go wrong you know accumulating a network investors is really important because you know you can't expect to know everything you can't expect to know everyone right so a lot of times i'll phone up somebody who may know you know the the management team over here or in this other business and all these little clues are things that are going to help build your conviction build your understanding of the business so it's important you reach out it's important that you ask questions and i think the other thing is”
2024-02-11 · We Study Billionaires · TIP607: Small But Mighty: Uncovering Smallcap Value w/ Paul Andreola · IDENTIFIED FROM THE TRANSCRIPT
“You should always ask yourself is when you're holding that stock, ask yourself if you truly believe this is the best investment opportunity that you have access to. And if the answer is no, well, the answer should, you know, the result should be, I'm going to sell it and go find that better opportunity, right? That's what we do day in, day out, is just constantly assume that there's something better out there. And we look for it.”
2024-02-11 · We Study Billionaires · TIP607: Small But Mighty: Uncovering Smallcap Value w/ Paul Andreola · IDENTIFIED FROM THE TRANSCRIPT
“Go give Bert to some other opportunity. That's my motto now. But still, I've got to put it a lot more in practice than I have.”
2024-02-11 · We Study Billionaires · TIP607: Small But Mighty: Uncovering Smallcap Value w/ Paul Andreola · IDENTIFIED FROM THE TRANSCRIPT
“Usually, if you decide to sell, you sell. I think everybody has that one stock or maybe a handful of stocks where you sit there and go, yeah, but, you know, it still has that chance, right? What if I just wait a little bit longer? Experience should have taught me better that once you sort of started the process, it's almost impossible to stop. And the best thing to do is to sell and use not just that physical currency, but the mental currency. This business is so much about psychology and sort of mental applications that why have something that's not working for you and is an eyesore and makes you cry every time you think of it. Why haven't your portfolio get rid of as fast as you can? Move on to something else. There's an old adage that an old broker used to work with us to give me. It's easier to give birth than it is to raise the dead. So if you've got a stock that is dead, get rid of it. Go find something else.”
2024-02-11 · We Study Billionaires · TIP607: Small But Mighty: Uncovering Smallcap Value w/ Paul Andreola · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, so it depends on how much it's changed, right? If it's gone from 60% growth to 30%, we may not sell it at all. It might still justify owning it. If it's gone from 50% down to 5%, then it's a function of selling it when you can. Now, some of the issues around microcaps is that liquidity becomes a consideration. So if it's not very liquid, you're limited in terms of how fast you can sell at a reasonable price anyway. But let's assume you've got liquidity and you can sell. Again, the driver is going to be, what are you going to do with that cash? Is there still a margin of safety in owning it right now? Probably or probably not. And that's going to be the other thing that's going to decide. If the stock still looks real cheap, even though the growth rate has come down as much, then I'm not as anxious to sell unless I've got that other opportunity. So so much goes back to what can I do with the resulting cash. And that'll determine.”
2024-02-11 · We Study Billionaires · TIP607: Small But Mighty: Uncovering Smallcap Value w/ Paul Andreola · IDENTIFIED FROM THE TRANSCRIPT
“Deploy all that capital all at once, anyway. So you're better off sort of slowly selling off. Look, I mean, it's like, oh, if it's like children or your wife or something like that, you don't never, you never want to give up on them. They've done the right thing. You don't necessarily want to give up on them. That conviction is important. You come to understand that business. Therefore, the new opportunity has to be very, very compelling to be willing to give up all that sort of comfort and that need.”
2024-02-11 · We Study Billionaires · TIP607: Small But Mighty: Uncovering Smallcap Value w/ Paul Andreola · IDENTIFIED FROM THE TRANSCRIPT
“It's pretty rare that we fully exit. Like, again, if something goes wrong, right? Yeah, we're looking at fully exit as fast as we can. But if they're still sort of executing, they're still creating value. All the right things are still there. And it's just a function of evaluation, then we're less sort of urgent. It's less urgent to sell, right? We're a little bit more patient. The thing you have to factor in too is the whole idea of taxes, right? Because if you're going to turn over, then you get tax consequences. And that actually mitigates your gain. So holding a good long-term winner that gives you confidence you have conviction in, it pays to hold on a longer time there, even if it's fairly valued. So those are all considerations that we have to use. But we rarely sell our whole position on when something goes wrong, partly because if it's grown to a sizable amount, it may be very difficult to sell that and read.”
2024-02-11 · We Study Billionaires · TIP607: Small But Mighty: Uncovering Smallcap Value w/ Paul Andreola · IDENTIFIED FROM THE TRANSCRIPT
“Things that we look for, then it becomes a situation where we say, okay, we're going to start allocating capital from here and start moving it over here. So that tends to be the biggest driver of ourselves. Again, it's handy to be able to look at everything because everything in investing is really a function of opportunity cost. And that's a big function right there.”
2024-02-11 · We Study Billionaires · TIP607: Small But Mighty: Uncovering Smallcap Value w/ Paul Andreola · IDENTIFIED FROM THE TRANSCRIPT
“I mean, we talked about the pay ratio before, right? So that's usually when we look at a company in isolation, it becomes, there's two reasons to sell. One is the valuation actually has exceeded sort of that pay ratio, you know, that one. Then it becomes almost becomes an automatic sell. Or if the business itself is broken down. So let's say all of a sudden it stops growing or there's a material event that we think is destroying value or impeding value. That automatically makes us a seller. But quite honestly, the biggest reason we tend to sell something is because there's something else that's much more compelling. So yes, this stock maybe is trading at 0.9 of peg ratio. It's not perfectly valued. It's gone up and we're happy and all that sort of stuff. But now we're finding another one that's trading at 0.2 times peg ratio and it's less discovered in a whole host of”
2024-02-11 · We Study Billionaires · TIP607: Small But Mighty: Uncovering Smallcap Value w/ Paul Andreola · IDENTIFIED FROM THE TRANSCRIPT
“Circumstances that not reflect in the business. That's one we'll look at something like that. But if it's just down on price and we can't substantiate the value, if the value has gone down as well along with the price, then quite frankly, we actually started looking at selling rather than looking at adding to a position. We can go and buy something else, right? That's always the driver. We're going to go and find something that just gives us more confidence and gives us what we're looking for.”
2024-02-11 · We Study Billionaires · TIP607: Small But Mighty: Uncovering Smallcap Value w/ Paul Andreola · IDENTIFIED FROM THE TRANSCRIPT
“You're right. We rarely average down. Now, we do try to get to know these companies as well as we can. And there's really two distinctions, right? There's a value and then there's a price. So the value, we try to understand the value as much as we can. So if for some arbitrary reason the price goes down yet, the value has not changed. You know, we see that from time to time for different reasons. You know, an institution has to sell or some investor has to sell, maybe even an insider has to exercise options or self or whatever personal reasons. When we see that, sometimes there's a negative sort of sentiment towards the company. And we try to balance or understand, does it make sense? And if it doesn't, then that's a case where we might look at it a little bit differently and say, okay, yeah, share price is down. It does make sense by here. The value hasn't changed. In some cases, the value has improved. And yet we're seeing downturn because of.”
2024-02-11 · We Study Billionaires · TIP607: Small But Mighty: Uncovering Smallcap Value w/ Paul Andreola · IDENTIFIED FROM THE TRANSCRIPT
“You own 5% of that company or 5% in your portfolio, if all of a sudden it's the most obvious opportunity for you, you have to go and increase your position in material way. You can't sit there and say, no, I already own my 5%. I can't buy anymore based on that rule. It's just like the best investors in the world don't do that. I mean, again, Warren Buffett, I mean, there's so many examples of him in that adage, you know, when it brings gold, you don't put out the thimble, you take out a wheelbarrow or a bucket or whatever you want.”
2024-02-11 · We Study Billionaires · TIP607: Small But Mighty: Uncovering Smallcap Value w/ Paul Andreola · IDENTIFIED FROM THE TRANSCRIPT
“Know what? There's no set like what I find that the best investors out there don't have sort of preset parameters around that sort of stuff. What they do is they look at every case on a case-by-case basis, right? So if all of a sudden some company has doubled its value based on some material event, that shouldn't prevent you from dramatically increasing your percentage ownership. Now, especially if you have the confidence that that's the best opportunity for you out there, right? Again, the exercise that we go through of looking at so many companies gives us comfort that we're ideally buying the best four or five opportunities that we think we can get our hands on. And if there's a change in the value of that business, it shouldn't have, well, based on my experience, it shouldn't have that much of a difference in terms of what you decide to do with it in your portfolio. What's it called? A recency bias or agency bias. No, that's not a usage bias.”
2024-02-11 · We Study Billionaires · TIP607: Small But Mighty: Uncovering Smallcap Value w/ Paul Andreola · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, usually when we get heavily involved in a company, we're going to really understand it well enough. So in some cases, we've seen it recently with another company, the allowance of contract, for example. And we'll be able to really understand quickly how much that contract is going to impact the value. And if we think the market hasn't properly responded to that, that's going to drive us to be buyers again. So it doesn't necessarily have to be that they're all trade every quarter is showing up and it's higher and we're waiting for that. We'll see other potential value drivers that we're going to jump on. And a big part of it is because we understand the business so much and we know that, look, if they land a $2 million contract, what kind of impact should that have on value? That's what we do. We really get under the hood and understand what's driving it and buy when we think it makes sense.”
2024-02-11 · We Study Billionaires · TIP607: Small But Mighty: Uncovering Smallcap Value w/ Paul Andreola · IDENTIFIED FROM THE TRANSCRIPT
“Have to measure that against all the other opportunity costs that we have, right? So we're going to look at that opportunity. And if it's looking fantastic and still better than anything else we can find, then that's the impetus to continue to add to that position. If it's growing and the share price is going up, but we're finding something that's better, then we're unlikely to add to that position.”
2024-02-11 · We Study Billionaires · TIP607: Small But Mighty: Uncovering Smallcap Value w/ Paul Andreola · IDENTIFIED FROM THE TRANSCRIPT
“Exactly. I've got the experience of doing it the wrong way to work from. Really what you're trying to do is you're trying to always have an understanding of what you think the value of the business is and trying to buy it below what that value is. Now, if it's a growing company, that value theoretically should continue to increase ideally along with the price. But sometimes the price doesn't properly match it. So what you're doing is you're trying to make sure you still have that margin of safety as that value is growing and that share price is either growing with it or perhaps not growing fast enough to meet value. So we're constantly measuring that. Like we don't blindly buy just because it's going higher, but if the value is increased significantly and we feel there's still that margin of safety, we're in there to continue to buy. Now, the thing to be careful too is that like.”
2024-02-11 · We Study Billionaires · TIP607: Small But Mighty: Uncovering Smallcap Value w/ Paul Andreola · IDENTIFIED FROM THE TRANSCRIPT
“Exactly, exactly. That's exactly what we look for is that companies that were sort of wrongly put in the penalty box, we try to identify when they're coming out and we jump on it as soon as we can.”
2024-02-11 · We Study Billionaires · TIP607: Small But Mighty: Uncovering Smallcap Value w/ Paul Andreola · IDENTIFIED FROM THE TRANSCRIPT
“Have a balance sheet that looks ugly because of some of the legacy issues, but their income statement is fantastic. Maybe they've had to change management and now this new management has righted the ship. Those are things that they're all great, but they show up in the financials. They show up in that sort of criteria that we look for. And yeah, you might say they've basically already gone through their turnaround. And now we're just able to. A friend of mine's got Malaj Sudan has got this term he uses. It's information arbitrage. We just found that information before somebody else did, and we can put it in place and put a value to it.”
2024-02-11 · We Study Billionaires · TIP607: Small But Mighty: Uncovering Smallcap Value w/ Paul Andreola · IDENTIFIED FROM THE TRANSCRIPT
“I'd never like to say I'm disagreeing with Warren Buffett. But actually, I think so we don't actually buy a lot of turnarounds, right? We buy companies that have something wrong with them, but typically it's something wrong with the optics or maybe even the capital market side of things, right? I'm not a huge fan of turnarounds. I'm a huge fan of companies that have hit, you know, maybe they've struggled over time, but they've actually fixed that thing and now they've hit that inflection point. Most of my swans were companies that had to really, really struggle for a period of time and then somehow found something and it clicked and things started to go. I can go back and all my major wins. I know they had some struggles, right? So we're actually looking for things that are more optics, right? So why is this company not trading properly? Why is it not trading the valuation it should? And it's usually maybe they have extremely poor IR.”
2024-02-11 · We Study Billionaires · TIP607: Small But Mighty: Uncovering Smallcap Value w/ Paul Andreola · IDENTIFIED FROM THE TRANSCRIPT
“Go and get bank debt because it's there. And sometimes you don't want to just go get equity because it's there. You got to know how to work a calculator, right? You got to know how the results will be if you take on that type of that kind of capital.”
2024-02-11 · We Study Billionaires · TIP607: Small But Mighty: Uncovering Smallcap Value w/ Paul Andreola · IDENTIFIED FROM THE TRANSCRIPT
“There's nothing left to go and chase, right? Whereas if it's a company that produces hard goods or needs machinery or things like that, there typically is an asset they can collateralize. So you've got, let's say you've got this piece of machinery that's generating revenue and something goes wrong, you know, that revenue disappears. The bank or the lender can go after that asset. It kind of depends on the type of company. If you're a company that has hard goods that you can use as collateral, then you're more likely to get debt even before your cash flowing. Whereas a software company, you're unlikely to get debt until your cash flow. So those are the things to look for. Now, you still have to have proper capital allocation. Somebody in the business has to sit there and say, okay, yes, we can get bank debt, but our share price is so high that it makes more sense to actually do equity or vice versa. So you don't want to just.”
2024-02-11 · We Study Billionaires · TIP607: Small But Mighty: Uncovering Smallcap Value w/ Paul Andreola · IDENTIFIED FROM THE TRANSCRIPT
“Nice thing is when you're a public company, you've actually gone public likely to go and raise money, right? Equity capital. What you want, though, is you want as many options as possible to go and raise money when you need it. And the problem is until you're able to prove to the bank that you can actually pay that money back, they're not likely to give you any debt. So you're stuck with this situation that I can't go talk to the bank until I'm cash flowing and making money because otherwise they're just either going to charge me an arm and a leg or they just won't give me the money. So you need to see companies that actually have the wherewithal to pay back that cash. Then the other key thing to remember is, okay, now what is the bank actually lending against? I've been involved in situations where if it's a software company, it's very difficult to get a bank to lend money because there's no hard assets, right? You're basically the collateral is an income or revenue stream that if it disappears,”
2024-02-11 · We Study Billionaires · TIP607: Small But Mighty: Uncovering Smallcap Value w/ Paul Andreola · IDENTIFIED FROM THE TRANSCRIPT
“So, all of these things are factors that come in. And all of a sudden, when you sort of kind of do the math from a shareholder standpoint, yeah, okay, they're raising a million bucks. Yeah, maybe they paid 7% in cash commission. So theoretically, you're getting 93 cents on the dollar, but it's being done at a 20% discount to where your shares are. And the management team's taking their eye off the ball and they may have lost the customer because they were spending their time getting this stuff done. You also get If anybody sniffs a financing coming, you tend to see the stock price get hit. And usually when a company is going out to raise money, they've got to go and test the waters. So the minute they test the waters, the potential for that sort of news to leak is out there. And that's when you start to see the real pain as a shareholder that they're going to have to suffer because of these financing. So it's never black and white, right? There's always way more.”
2024-02-11 · We Study Billionaires · TIP607: Small But Mighty: Uncovering Smallcap Value w/ Paul Andreola · IDENTIFIED FROM THE TRANSCRIPT
“Typically, there's a discount to the trading price. It can be upwards of 20 to 25 percent. A lot of times I have to add sweeteners like warrants and broper options. And there's a number of other things. And yes, it's costly for management to have to go out, especially if they have to do this on a regular basis.”
2024-02-11 · We Study Billionaires · TIP607: Small But Mighty: Uncovering Smallcap Value w/ Paul Andreola · IDENTIFIED FROM THE TRANSCRIPT
“One thing that we look for and we think is vital to any company that's, well, I'd say any company period, but more importantly to small companies and especially companies that are likely to have to go and finance, is you want to see somebody ideally on the board of directors that has capital markets experience. And ideally they have a vested interest in that company, meaning they've got a lot of shares in that company. And why that is is because the capital markets are the financing part of this industry is cutthroat and it's deadly, right? If you don't know what you're doing and you're going out there raising money, you will get scalped like you wouldn't believe. So you need to have somebody on that board that understands the dynamics of the industry and knows what a good deal looks like and what a bad deal looks like and how to go and get a good deal when you're going to raise money. So having that helps out quite a bit because you're right. The cost of going out and getting money is not just the commission that gets charged.”
2024-02-11 · We Study Billionaires · TIP607: Small But Mighty: Uncovering Smallcap Value w/ Paul Andreola · IDENTIFIED FROM THE TRANSCRIPT
“Sheet that call it healthy. Debt is a four letter word. You got to watch out for debt. And if a company has taken on too much debt, that clearly increases the risk. But so if we're happy with the balance sheet, then it really becomes a function of if it's profitable, what are we paying for? And the bigger the margin of safety, the more risk we've taken out of the equation.”
2024-02-11 · We Study Billionaires · TIP607: Small But Mighty: Uncovering Smallcap Value w/ Paul Andreola · IDENTIFIED FROM THE TRANSCRIPT
“To that the company's going to go to zero, but it completely dilutes your ability to see a significant gain, right? So if you're constantly getting diluted, it almost prevents the upside from materializing, right? So I've seen a lot of, and this happens a lot in the mining space where you see these companies, you know, they go from a $20 million market cap to a billion dollar market cap, but the prices never move. Like if you were a shareholder, you've never made any money, even though the value of business has grown. And that's because they've issued millions and millions of shares. So for us, what we want to do, it's like anything. You want to de-risk everything you participate in and still maintain upside. So for us, we look for profitable companies. That takes away that risk that something could materially go wrong quickly. And all of a sudden they're out of the business. You know, we watch for the balance sheet. You know, obviously have to, you know, you want to see a balance.”
2024-02-11 · We Study Billionaires · TIP607: Small But Mighty: Uncovering Smallcap Value w/ Paul Andreola · IDENTIFIED FROM THE TRANSCRIPT
“Regulatory change or something that you can't really foresee, that's sort of a standard business risk that it's very hard to prevent. The biggest thing you can do to sort of mitigate that is buy with a big margin of safety, right? So if you're buying it cheap enough, you're kind of mitigating that business risk that's so hard to predict. But if you're buying a company that likely has to finance, especially if it has to finance to keep the operations going, that's where you add a high degree of risk. And we call it dilution risk or financing risk. And we try to avoid that at almost all costs. Now, if markets are good, if capital markets are healthy, then yeah, they can keep going back and raising money. And as long as that opportunity is still there, they're fine, right? Or at least the business is fine. The problem you have with that, though, is it's diluting your ownership of the business. It's not necessarily risk.”
2024-02-11 · We Study Billionaires · TIP607: Small But Mighty: Uncovering Smallcap Value w/ Paul Andreola · IDENTIFIED FROM THE TRANSCRIPT
“That's probably the most important question an investor has to ask themselves really what's the downside and what's the risk. I can talk about how we mitigate our risk when we're buying these small companies. First off, look, if you're buying a profitable company, you've really, really significantly de-risked that investment opportunity, right? I'd almost go back and say almost every major mistake I've made was in expecting too much of a company that wasn't profitable. And so if you're looking at de-risking yourself as much as possible, stick with profitable companies, that it also sort of, it mitigates the financing risk that's possible as well. And there are kind of two different things you got to watch out for. One is risk of failure to the business. So that means, yes, of course, a proper company will still have risks and you may end up with, you know, a competitor that comes in and just kills them or.”
2024-02-11 · We Study Billionaires · TIP607: Small But Mighty: Uncovering Smallcap Value w/ Paul Andreola · IDENTIFIED FROM THE TRANSCRIPT
“Roughly the same. It's been an interesting market over the last several years. Typically, what happens is when the market gets healthy and frothy, you get a whole bunch of new companies that come in, right? Companies that are a little bit more speculative, they're looking for capital. They're newer businesses. And they're not as likely to be profitable. So you start to get that number ballooning and the percentage of profitable companies actually goes down. Now, the flip side too, and kind of what we're seeing right now is some of the really good profitable companies are actually getting bought out. So that's slightly driving the number down as well. But historically, the number doesn't vary too much. So yeah, it's roughly the same as what we saw mid last year. Around the, well, it's 13 to 15 percent of all the companies list in Canada are profitable and that we take a subset of that because we want to find profitable companies that are growing as well.”
2024-02-11 · We Study Billionaires · TIP607: Small But Mighty: Uncovering Smallcap Value w/ Paul Andreola · IDENTIFIED FROM THE TRANSCRIPT
“And then we add in the fact that if we can find something that's sub 50 million dollar market cap, we know that it's even likely more mispriced or more or call it less discovered. So that's what we do. And you just described the cheapest with a chance.”
2024-02-11 · We Study Billionaires · TIP607: Small But Mighty: Uncovering Smallcap Value w/ Paul Andreola · IDENTIFIED FROM THE TRANSCRIPT
“100% a year. It's doubling its earnings every year. And the stock is trading at 20 times earnings. You have a 0.2 peg ratio. And that would be considered cheap. Now, what we do is we actually take a little bit even more conservative approach. We take the revenue rate of growth and then use that as the factor. So if we do that, what tends to happen is your earnings growth rate is usually leveraged. So it grows even faster than that. So if we can find something that's growing its revenues at 60% a year and trading at 20 times earnings, then we know we've got an extra buffer because likely that earnings is growing at 100, 150% a year. So that's what we look for. And because we go through all the companies out there, we can sort of rank all the different companies against each other. And what we're trying to do, and this is what we do with the cheapie piece of the chance, is we're trying to find the best or the”
2024-02-11 · We Study Billionaires · TIP607: Small But Mighty: Uncovering Smallcap Value w/ Paul Andreola · IDENTIFIED FROM THE TRANSCRIPT
“Sure, I'll give you a real world example of a company that we found called mid last year in thermal energy. I think you might even know it. So here's a company that was growing at about 70, 80% a year. And when you looked at its earnings, you could model up pretty quickly to see it was trading at about 10 to 12 times earnings. Some might think 10 to 12 times earnings is not super cheap, but when you sort of layer in the fact that it was growing that fast, you've got a peg ratio that is sub one, like significantly sub one. Anything below one is typically viewed as inexpensive and anything above one is considered expensive. So what you do with the peg ratio, and there's two variations of it. You take the rate of revenue growth. Okay, the actual, the real version is you take the rate of earnings growth on a per share basis. So if a company's earnings is growing, it's, let's say,”
2024-02-11 · We Study Billionaires · TIP607: Small But Mighty: Uncovering Smallcap Value w/ Paul Andreola · IDENTIFIED FROM THE TRANSCRIPT
“Well, not really. Like, look, a faster growing company deserves a higher multiple. So what we're really looking for is less sort of a defined number in terms of price to earnings. We're looking for what we call a peg ratio. So a lot of people would know what that is. A price earnings over growth ratio. So the faster growing company deserves a higher multiple, right? So I've done very well buying stocks that are trading at 30, 40 times earnings if those companies are growing at 100% or more, then you can justify that. And then there's companies that you could buy at eight times earnings that are declining in revenue. And I wouldn't touch those because that's a melting ice cube as far as I'm concerned. So you have to be a little bit more flexible. And quite frankly, the good ones, you know, the hyper growing companies tend to get a higher valuation anyway if people are properly paying attention. So yeah, I use a peg ratio, which I can.”
2024-02-11 · We Study Billionaires · TIP607: Small But Mighty: Uncovering Smallcap Value w/ Paul Andreola · IDENTIFIED FROM THE TRANSCRIPT
“Cannot participate in even if they recognize it, right? So we're trying to find those characteristics that I'd almost describe it, that a fund manager will buy but can't because it's too small. And that's growth, that's profitability. There's some other factors or capital structure and things like that. But the big driver is growth and profitability. If you can just find those type of companies, you've really, well, A, you've gotten rid of about 85 other 85% of the rest of the market, but you're finding those companies that have that potential to really turn into major, major wins.”
2024-02-11 · We Study Billionaires · TIP607: Small But Mighty: Uncovering Smallcap Value w/ Paul Andreola · IDENTIFIED FROM THE TRANSCRIPT
“Okay, well, first off, we start by flipping over as many rocks as we can, the old Peter Lynch adage. And what that means is we go through CEDAR filings up here in Canada. And there's 2,700, roughly 2,700 public companies. And we have a certain criteria we look for. And predominantly the criteria really fits best for call the small caps or even nano caps. We're looking for companies that are profitable, right, which will distinguish themselves significantly from a lot of the other small companies that are out there. But then there's other factors that we look for. And typically we're looking for things that are sort of growth in nature, right? We want to see small companies grow into big companies. That's where, you know, historically, or at least my experience, I found the biggest value is in finding these mispriced growth opportunities at a small scale that the institutional investor or sort of the bigger investor.”
2024-02-11 · We Study Billionaires · TIP607: Small But Mighty: Uncovering Smallcap Value w/ Paul Andreola · IDENTIFIED FROM THE TRANSCRIPT