I love running stock screeners, which is even more proof of how fun I am. You get to find investments with the exact metrics you want. Want to find a company trading at 6.2x P/E, with a market cap between $550 million and $585 million, and debt/equity of less than 1? You can find it. Then you can do the rest of the research to find if it will also make a good investment.
A couple months ago, likely around the start of the year, I was screening stocks. I forget the criteria I used, but I usually use some pretty restrictive parameters. I probably searched for something like Canadian stocks trading under 5x earnings. Then I think I added in that I wanted the companies to have a lot of debt (something I don’t usually search for, don’t ask me why I did it this time).
Unfortunately, when you run screeners for cheap Canadian stocks, the results are absolutely lousy with miners, whether they’re energy or metal miners. This particular time I sifted through the miners and I saw a company called Perlite Canada Inc. I’d seen the word perlite a few times but I never really cared what it meant. This time I saw a company called Perlite Canada was trading at like 2x P/E, with a market cap of ~$1.5 million. I suddenly decided I better find out what perlite is.
Turns out perlite and vermiculite (the other product this company sells) are used for almost everything. It’s used as:
- wall filling
- insulation for both sound and heat
- abrasives in soaps and cleaners
- absorbents for spill clean ups
- fire protection in construction materials
- filtration agents for pools and food/chemical industries
- additions to soil to increase hydration and aeration
Perlite and vermiculite are really quite wondrous. But not really. Either way, I saw this as one of the most boring products I could think of. And I love me a boring company. And it just got more boring as I looked. The website doesn’t have an investor relations page. They have links to two financial statements at the bottom of the page, one from October 2015 and one from April 2016. They have two small plants in Quebec and the whole company has 30 employees. This is all beside the point though. It just goes to show that I had found a small, unloved company, the exact kind of company that disproves the efficient market hypothesis.
When I first read the following quote I got a little worried:
The Company is currently in default of the covenants required by its lenders, has negative working capital and has incurred losses during the past years. As at April 30, 2016 the Company’s cumulated losses amount to $434,132 ($673,167 as at October 31, 2015). However, the Company has never been in default regarding its capital and interest debts repayments. These material uncertainties cast significant doubt regarding the Company’s ability to continue as a going concern.
That said, they had made a little bit of money the past three quarters. And they seemed committed to paying down debt. The next quarter, including a large settlement from a lawsuit, they made 4 cents a share, and that put them at having made 6.2 cents per share over nine months. I saw that commitment to paying down debt, I saw they had returned to operating profitably. Making that 6.2 cents per share meant they were trading at 2.6x P/E, as I recall the stock was trading around 16 cents at the time. The stock had had a big jump after the past three earnings releases, as they were all positive.
But I didn’t invest. I think I was scared off by the size of the company. But I can’t explain it. At the time I was also enamored by Input Capital, and that’s where I ended up putting my capital at that time.
Perlite Canada has once again released a good earnings report. For the full 2016 fiscal year they reported 7.5 cents in net income per share. All the cash flow went to paying down debt, and they have now paid down their entire long term debt. There only remains an operating line of credit with less than $1 million on it. I have reached out to the company to see if paying off this line of credit, or what else the company may be looking to do with profits, but have not heard back at the time of this writing (it’s taking a long time because they have no investor relations team).
Shares of course jumped a lot on the news. When I looked at the company in January it was trading at 16 cents. It jumped to 33 cents after the release. It has settled at 25 cents now. While I missed an opportunity for a big, quick return, the stock is still trading at just 3.3x earnings. I still think the shares are severely undervalued, but the easy money has been made already. Since going public shares have traded up to almost 40 cents once, but the ceiling seems to be trading up to somewhere around 30 cents before plunging down again. If you were to buy shares around this level, I don’t think that even the improvements in the business will lead shares higher. The black marks of being a microcap, being just two small plants in Quebec, selling a product nobody’s really heard of, and the turnaround essentially being already done, means that the shares probably won’t run up much higher.
The end game for Perlite Canada I think is being taken private, or being bought by one of their American peers (of which there are plenty). Really, there is no reason for this company to be public other than making it easy for the company’s largest shareholders to sell their shares. But the company has traded for well over a decade, with seemingly no desire to be bought out or go private, so that catalyst could be a long way off.
For now I’m passing on Perlite shares, even though if someone was looking for a cheap, profitable, penny stock lottery ticket this is where I’d point them. But I can’t help but think what could have been. I’d identified this as a good investment two months ago and should have known it would take off like it did. If I had done a little more digging at the time I could have had almost a double in two short months. Instead I got scared off by the size of the company and didn’t trust my gut. In this case it cost me.
Disclosure: I have no position in PCI and no intention to buy shares in the next 72 hours.