October 4, 2016

- By PJ Pahygiannis

How and why did you get started investing? What is your background?

I started in university when I had some money saved up that was supplemented with an inheritance in 2003. I always liked business and math so the stock market was a natural extension for me.

Describe your investing strategy and portfolio organization. Where do you get your investing ideas from?

I tend to have a fairly concentrated portfolio. Right now three stocks cover about 75% of my total portfolio value and I usually top out at a dozen different holdings at one time. I focus on Canadian small-cap stocks, though I occasionally venture to U.S. small to midcaps and speculative plays on either the long or short side.

What drew you to that specific strategy?

Being a big fish in a small pond. As a Canadian, I started out trading on the Canadian exchanges. Throughout the 2000's I was a major gold bug so naturally I was drawn to what the Torotno Stock Exchange had to offer. After that, I split my time between the U.S. and Canada, but most recently, in the past 2-3 years, I would say about 90% or more of my portfolio value at any given time is in Canadian small caps. What I like about this strategy, especially as a financial commentator, is that CEOs and other members of management are very willing to meet with me. That allows me to do a tremendous amount of due diligence.

Can you go to the CEO of Citibank and ask him "how's business doing?" No. The best you might get is some prepared response from investor relations while you have to rely on financial statements and analyst reports to try to make a buy determination. And we have seen with many blue chips and especially recent IPOs like GoPro (GPRO) and Twitter (TWTR) where that strategy has cost lots of people money.

Contrast that to myself where my largest holding (more on that later), I have had numerous email and phone conversations - probably over 100 combined - since March 2014 with the CEO when I first invested in that stock. While I don't have any insider information, I do get a very good sense of the character and intentions of the management team and have great confidence in that company's ability to build a successful business.

What books or other investors changed the way you think, inspired you or mentored you? What is the most important lesson learned from them? What investors do you follow today?

When I was first interested in gold and silver, I was a follower of Jason Hommel and similar newsletter writers. I made good money on one of his picks - Canadian Zinc (CZN.TO) - way back in 2003 or 2004. Since then I earned the CFA designation and picked up a lot of "on the job" learning, but there's no specific sources. When I became a writer on Seeking Alpha, I was heavily focused on long positions, a lot of them being junior and speculative in nature. Naturally I picked up a lot of bearish/troll comments but a few of them had some very good insights. Coming from a Canadian background, financing for a mine, for instance, is relatively straightforward. Shares at x price with warrants at y strike price and expiry date. It's dilutive, but at least it's not toxic. Some of the better bearish comments really forced me to understand the impact and motivation of toxic financing and the funds that do them, such as the impact of cashless exercise of warrants.

How long will you hold a stock and why? How long does it take to know if you are right or wrong on a stock?

I don't have a specific time frame. It ranges from a few days to well over a year. If management says one thing to me and does another, that's a huge red flag obviously. Time to sell. Insider selling and accounts receivable balances that indicate either aggressive revenue recognition or an inability to collect on balances due are two other big red flags for me for selling or opening a bearish position on a stock.

However, sometimes even I am caught in a loss so deep I might as well hold onto a stock and see what happens. I'm not a technical analysis guy and I don't ever do stop losses. Honestly, my biggest motivation for selling a stock is when I find a shiny new toy and I need cash proceeds to buy into it. That sale can happen at either a gain or a loss. A lot of it is mental. I just become bored with the story or bored waiting on management to make good on their promises.

How has your investing approach changed over the years?

I think I covered this pretty well already. I use to be a gold/silver bug. Now I focus on tech stories or deep value plays, usually small-caps. I still like gold and silver, but I prefer to hold them in physical form.

Name some of the things that you do or believe that other investors do not.

I strongly believe in being an activist investor. That means calling up a CEO and telling them what you think. It means writing articles or getting the word out on your investment. There are too many people that buy a random stock, do nothing and just pray that it goes up. Then when it goes down and they sell at a loss, they whine about it.

If you're confident that a stock is undervalued , do something about it. I once got one of my holdings to undertake a stock buyback. Simply by talking to the CFO over the phone then sending him an email the benefits in detail of doing such a thing.

What are some of your favorite companies, brands or even CEOs? What do you think are some of the most well run companies?

There are three companies which I really like right now. Peak Positioning Technologies (PKKFF), which has grown to comprise over 50% of my portfolio, Keek (KEEKF) and Eurocontrol Technics (EUCTF). Combined, these three companies make up something like 75% of my portfolio.

Peak is an incredible growth story, though right now I think it is undervalued and underappreciated because its main business is in China and its growth projection is so ridiculously high that no one will believe it. Last year they had less than $40,000 in revenue. This year they are projecting $100 million in revenue and that's after having gone live on Aug. 12. Next year they project to do $500 million in revenue. It's low gross margins and the business had some issues getting started in the first half of the year. But since the company has gone live it's been smooth sailing. Peak has already booked over $30 million in revenue in the third quarter, according to a recent news release. Management knows the challenges in China and is working very closely with its auditor Grant Thornton to ensure everything is done to IFRS accounting standards.

Keek has been a massive money-loser for investors in the past, but the old regime responsible for that is gone, and the new CEO has a clear monetization plan for the company. He has a background is payments processing and is looking to transform Keek into "Peeks", a social commerce platform where content providers can get tipped real-time for providing their content. This vision can cover anything from adult entertainment to marketplace structures to crowdfunding. From a technological standpoint I think it is sound so it's just a matter of getting people to pay attention. Peeks plans to leverage Keek's existing 75 million user base to grow quickly and I think it can go viral from there. This is the riskiest of my three large ventures, but if it goes viral the sky is the limit for the investment.

Eurocontrol is in the Petromarking and precision measurement business. The CEO knows this business very well being in it for over a decade and the company signed a deal with a private billion dollar security firm with international reach called SICPA. It sits at less than the present value of the minimum net cash flows guaranteed by this deal and that is excluding its other business objectives. SICPA has openly bought more than 10% of the float on the open market and I think are destined to take the entire company private at some point in time. I don't think Eurocontrol is a stock with a huge upside like the others. I have a target of just over 50 cents on the stock when it trades at 15 cents, but I think it has a rock-solid floor backed by its strong balance sheet and deal with SICPA that eliminates downside risk. I can't guarantee that it won't continue to trade below net cash value for the next year, but eventually it will have to go up. So for people with low tolerance for risk but a long time horizon, this is a rare microcap stock that is appropriate for them.

I have talked extensively about all three companies on my blog at Seeking Alpha so if anyone wants to read more about any of those three companies they can check out my articles there.

Do you use any stock screeners? What are some efficient methods to find undervalued businesses apart from screeners?

Not recently. I find them too easy to use and a way to get yourself into value traps. Blindly using screeners would have been a great way to get into oil companies, which were sinking in late 2014 before a few quarters of negative earnings and reduced dividends knocked them off the value and dividend return screeners, for instance.

The stock market is forward looking, particularly with small caps with no analyst coverage. A stock like Peak is not going to show up on any value screener yet, even though the company projects $500 million in revenue next year, $25 million in EBITDA and has a market cap of only $30 million.

Name some of the traits that a company must have for you to invest in, such as dividends. What does a high quality company look like to you and what does a bad investment look like? Talk about what the ideal company to invest in would look like, even if it does not exist.

I start with the balance sheet. My theory is that a company will either eventually go up in price, or go bankrupt. So I always look out for too much debt and/or a lack of cash. Debt expiry does not matter. I hear way too often investors say "yeah, that company has a lot of debt but it's not due for several years, it's safe". I don't think people realize that debt has covenants attached to it that if they are broken , or if the company misses an interest payment, the creditors can call in the debt at any time and possibly force the company into restructuring. Lightstream Resources is a company that I said was headed for bankruptcy about a year and a half ago. It recently delisted. It didn't really matter that its credit facility didn't come due until 2017 or notes in 2020.

Accounts receivable is another favorite line of mine to analyze. If the receivables are increasing at a faster pace than revenue growth it's a signal that either 1. the company is having a hard time collecting what it is owed or 2. the company is booking revenue too aggressively. Either one of those results in low quality revenue and investors should be wary.

Before making an investment, what kind of research do you do and where do you go for the information? Do you talk to management?

If it's a small-cap stock I always talk to management. Either before or immediately after the investment. Larger caps are more of a gamble, but those usually come in the form of short-term trades based on sector news or something similar. I always get a chuckle out of people who are "long and strong," a certain name because analyst reports have high targets on them. You have to know the motivations of issuing the targets first. For instance, did the broker underwrite the company's IPO?

What kind of bargains are you finding in this market? Do you have any favorite sector or avoid certain areas, and why?

I focus on tech stories and deep value plays. I use to be a gold bug and I invested in junior explorers, but I've gotten away from that. Not that I think that's a bad industry, just that it is not for me because I can't do any good research on it. When investing in a junior resource stock, you're usually investing in a company with some property out in the middle of nowhere. To do any due diligence at all, I would have to visit the site personally. And even then, I'm not a geologist and I'd have very little clue what I'm looking at. Therefore due diligence is 100% reliant on the word of management. Sure, there are technical reports done by independent third parties that can help, but it's not nearly as much of information I can research on my own for something like a tech company.

How do you feel about the market today? Do you see it as overvalued? What concerns you the most?

Low interest rate policy can only last for so long and I think the market is in a bubble. This is another reason why I invest in the specific microcaps that I have previously mentioned. They are story stocks and are poorly correlated with the market. For instance, Peak's strongest performance all year came in January when the market at large was dropping quite heavily.

Any advice to a new value investor? What should they know and what habits should they develop before they start?

Don't blindly rely on any single investment source or analyst report out there. Do your own research.

Describe some of the biggest mistakes you have made value investing. What are your three worst investments? What did you learn and how do you avoid those mistakes today?

I don't recall any mistakes in "value" investing as I have a pretty good nose for value traps, but I've lost enough chasing risky story stocks. My number one lesson from all that is if a company looks like it needs a financing, stay away. All three of the stocks I've mentioned above have either a strong balance sheet or "big money" backing the stock, along with insiders holding a significant stake in the company. So I know they want to build a business and have made concrete steps in building that business.

How do you manage the mental aspect of investing when it comes to the ups, downs, crashes, corrections and fluctuations?

After 2008, nothing phases me anymore. At one point I was down around 85% from my 2007 highs. When the market was nearing the bottom, I put all the paychecks I could into the market and sold stocks that were "only" down 50% or less (and took the tax loss benefit) and bought those that were down 90%. As long as the balance sheet was strong and I knew the stocks weren't going to go bankrupt even in 2008 has last months or years. This strategy worked out quite well as I recovered all my losses by the end of 2009.

The biggest challenge for me is managing boredom. I know stocks such as Peak and Eurocontrol well eventually do well just based on the strength of their financial performance. But waiting for the market to realize it is painfully slow. So I always have a small amount of day trading money to keep me entertained while I wait.

If you'd like to share, how have the last five to ten years been for you investing wise?

I've done quite well on my registered accounts where I tend to invest instead of trade. My RRSP (Registered Retirement Savings Plan) balance rivals my mom's balance and she's had a 20+ year head start on me, having her portfolio managed by an advisor. My non-registered account, where I tend to trade along with invest hasn't faired nearly as well. But overall, I am happy with my performance and where I currently stand with my portfolio. I'm looking forward to next year because since 2008, odd numbered years tend to work out quite well for me while even numbered years are mediocre or negative.

Disclosure: I do not own stock in any companies mentioned in the article.

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This article first appeared on GuruFocus.