This article was republished from a post on the Invest Before the Street blog
Most average investors are lazy. Many don’t want to put in the work, especially when it comes to microcap & penny stock research.
Like we often say at Invest Before the Street, this laziness often presents fantastic opportunities for the investor that works just a little bit harder. Everyone seems to want multi-baggers, but most are too lazy to put in the work to find them.
In this case study, something as simple as signing up for a race in the desert could have led you to a easily predictable gain.
Stop Looking At Charts and Learn About the Underlying Business
Meet Total Telcom, a small Canadian based company that creates rugged tracking devices for races in the desert. (See why there’s often a good deal of mispricing in small Canadian companies here)
For the longest time, Total Telcom only sold its devices to customers. Recently, they introduced an initiative that let’s racers rent the devices on a race by race. You can see the press release below:
As an astute investor, your first thought should be “Hmm, how much extra money will Total Telcom make from this?”. Obviously, the benefits are massive when it comes to doing your microcap and penny stock research. Some of these companies are so small that it’s very simple to project out revenue and earnings after doing a little bit of work.
What else do we see here?
- The device is called RacingTrax
- They have about 250 devices available now, and will increase that 400 for motorcycles and ATVs
- The first race is called Vegas to Reno, and it’s on August 18, 2016
So how would this rental program benefit them?
Breaking Down the Revenue Components
Our first clue is to do a bit of research on the Vegas to Reno race.
After doing a bit of googling, we can find that the Reno to Las Vegas race is part of a series of races called Best in the Desert, which it seems Total Telcom is working with.:
If we do a little bit more reading, we can see that the RacingTrax devices are mandatory for the Vegas to Reno race, and it looks like the others as well.:
So let’s take a step back and think about the components of revenue here:
- The cost to rent
- The number rented per race
- The total number of races
Starting with number one, how could be figure that out?
Well, I guess we’re signing up for the damn race.
How to (Fake) Sign up for a Race in the Desert – A Textbook Example of Deep Microcap and Penny Stock Research
Following the link they gave us, we can head over to the site (www.racingtrax.com) as if we were signing up for the race.
I sure hope were all natural racers.
After putting in some fake info, we’re eventually taken to another page where it shows the cost to rent.
$250 USD per race, plus a $200 fee per week if it’s late.
BINGO BABY! We’re in business. We’ve got our first piece of revenue.
Next up we need to see how many racers participated.
Let’s do a nice little search and see what we can find:
As you can see there were about 343 teams in the race. So we just take $250 x 343 racers to find revenue right?
Not so fast.
If we go back to the PR, it looks like they only had about 250 devices available. Therefore, revenue will likely be $250 x 250 x $1.3 CAD/USD for FX, since this is a Canadian based company getting paid in US dollars.
That gets us to about $81,250 in rental revenue from this race. What about other races?
Rinse and Repeat – Predicting Future Rental Revenues
Unfortunately, if you really want to do a good job when it comes to microcap and penny stock research, it takes a good deal of time. Obviously if you do it well, the end result is worth it. Let’s see what other races were in 2016:
Looks like only two more, and only the Vegas to Reno race fell in the first quarter for Total Telcom (First quarter 2017 ended Sept 30, 2016).
So what did revenue actually look like in Q1?
Rental revenue actually came in higher than the $81k we predicted. Why?
- Maybe they actually had more than 250 devices available
- Late fees could also be included in the rental revenue, and since this was the first time the devices were used, there were probably a good deal of people who were late to return these
Now if we repeated the same process for the last two races of the year which fall in Total Telcom’s Q2 (ends Dec 31, 2016), we can see that revenue is on track to be even higher:
So even after including late fees, you can see that we were pretty close to correctly guessing total rental revenue, based on researching those two additional races.
Because of the high margin nature of the rental business, Total Telcom ended up posting a record $120k of net income in Q2, all pretty much on information we had available to us back in July when the company announced they would start renting.
Sure enough, the market didn’t notice until the result were posted and