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President’s Club investment letter publisher Fabrice Taylor talks about his toughest investing lesson learned, outlines what he thinks makes a small-cap stock successful, and mentions two Canadian names and one U.S. company he believes will outperform.
SmallCapPower: Globe and Mail investment columnist Fabrice Taylor has been writing about markets for 15 years. In 2011 he launched the President’s Club, which is now one of the biggest investment letters in Canada and boasts an excellent track record of value creation.
Fabrice: I started my career at the Globe and Mail as a stock market columnist in 2000. At that time I started building an audience because I was pretty good at picking stocks. I built a following, and I started to attract the attention of smaller companies who had trouble getting attention, had trouble finding funding. It struck me back then that there was a role to be played in this country for somebody who could bring attention to smaller but promising names – good entrepreneurs with good ideas, good work ethic, but who just didn’t have the support or the funding to build their businesses. That’s where I got the idea for the President’s Club, which I launched about four years ago. So far it’s worked out pretty well. I’ve met a lot of great entrepreneurs. We’ve created a lot of value helping them grow their businesses and raise money and raise awareness. I pretty much have the greatest job in the world.
SmallCapPower: What do you make of the recent volatility in global stock markets? How do you think this will affect Canadian small cap stocks?
Fabrice: Well, it already has affected them. As often happens, they take it on the chin first and hardest. I’ve been telling people to raise cash for about a year and a half. I know how market cycles work. You have to treat it like agriculture. In the spring time you plow, you plant seeds, and then you fertilize. You add water, you irrigate, and eventually you have to harvest. I’ve been telling my subscribers for about 18 months to start harvesting. By March of this year I was 75, 80 percent cash. Having said that, my 20% that’s still invested is still getting hurt. Small caps take it on the chin hard in these times, but that’s to be expected. I’m starting to see opportunities right now, so I don’t think the time is to just liquidate and run away. It’s time to buckle down and start looking hard for value.
SmallCapPower: Which factors do you consider before buying a particular stock?
Fabrice: In small caps what you want is obviously very, very good management. Management is everything in a small company. A big bank, the CEO of a big bank might make one decision per year and it’s often a bad one. In his career he’s going to make five or six major decisions. The CEO of a small company is going to make five or six big decisions every week. His attention, his talent, his conduct, his credibility, his integrity all play a very big role in how much money you’re going to make by buying the stock of the company he runs. Management is everything.
Number two is, is it an interesting idea and is it easy to understand? If you don’t understand it, I would advise not investing in it. Because if you don’t understand it, the odds are other people will not understand it. If they don’t buy the stock after you do, it’s tough to make money. So, easy to understand concepts that just make sense, and have confidence in yourself to understand and to figure out what concepts will make sense, will work out. If you don’t understand, again, walk away.
The third thing is, is it a good time in the market? A bad market will crush any good idea or any good manager. It doesn’t matter how much money you raise. It doesn’t matter how good management is. It doesn’t matter how good the idea is. A bad market or a bad economy will wash over everything. It’s got to be the right time.
SmallCapPower: What’s the toughest investment lesson you’ve learned, and how did it make you a better investor?
Fabrice: Easily the toughest investment lesson I ever learned was being cashless or near cashless, being fully invested in other words in the last correction. Here I was knowing that stocks were cheap, writing that stocks were cheap in my column in Globe and Mail in the fall of ’08 and the spring of ’09, and I was maybe 10% cash. It was very frustrating to me to not have the funds to truly take advantage of what I knew to be a great opportunity.
Now I keep that in mind and I’m always fairly liquid. I never go below 15, 20 percent cash. In times like this near the end of what I think is the ballgame, ninth inning, late ninth inning, I’m heavily liquid and I’m ready to pounce should opportunities arise.
You will make most of your money by timing the market. You can’t really time it in the sense that you know exactly when things are going to happen, but if you’re in the cycle early when most people are running away investing in ’09, ’10, ’11, then it’s a lot easier to raise money in ’14, ’15 when everyone’s running into the market. Use your intuition. If people hate stocks, you should like them. If people love stocks, you should start to dislike them.
That’s the way to time the market, to play the cycle. You’ll never be able to predict it to the last minute, day, month, even maybe year, but nonetheless your intuition will guide you. And just watching other people, there’s the old anecdote about the barber giving stock tips, the cab driver. That does happen. When it does happen, run.
SmallCapPower: September is typically the most volatile month of the year. What types of things should investors watch out for, and where can they take advantage of scenarios?
Fabrice: This year, obviously we have to keep our eyes on China. That’s the big wild card right now. The European situation for the moment is calm. I wouldn’t be surprised if we saw Italy becoming the next Greece, maybe Spain. Even France, which is considered the Number Two economy in Europe, could fall victim to the same problems that we’ve seen in Greece and are starting to see in Italy, basically structural problems, too much government debt, not enough policies that favor entrepreneurialism, left-wing socialist government policies that basically stifle and crush entrepreneurial attitudes. I would be careful about that.
China is going to slow down. The China thing might be overblown because people think that they’ve gone from 10% growth to 7%, but every growth rate slows down. If you’re growing at 7% on a much bigger base, you’re still adding a lot of demand. I think that China is going to be a problem in terms of sentiment for the next few months. I expect some form of stimulus. Nonetheless, it’s going to be an issue.
You have to pay attention to sentiment. Sentiment is very important, especially in smaller names. They don’t pay dividends and they don’t necessarily produce cash. Certainly these are two major issues, macro issues that you have to watch out for. It’s also a presidential year and stocks tend to do well in presidential election years. I think that may, if history repeats itself, help us out a little bit. I think that interest rate increases are not in the cards.
SmallCapPower: What are a couple of the companies that you’re closely following right now?
Fabrice: In the large cap space I still like my favorite, American International Group, Inc. (NYSE: AIG), which is a large US$60 billion insurer. Small caps in Canada, I like companies that are cashed up. I like Convalo Health International, Corp. (TSXV: CXV), which has $30 million in cash, a market capital of about $48 million, and $25 million of revenue, which is very, very high margin because they’re in the drug rehabilitation space. That to me was absurdly cheap a week ago when it was 22 cents. Today it’s about 30. It’s still very cheap. It’s not as cheap. I like Patient Home Monitoring (TSXV: PHM) although there’s a financing coming off hold in about a week, so I’d wait for that to happen before.
Basically, what you want to look for in small caps is companies with revenues, with margins. They don’t have to make money yet. If they have good margins and growing revenues and cash in the bank to fund themselves for easily two, three, four years, then most of those are very attractive speculations. Anything with no money, forget about it. Run away. If you own it, sell it, because they’re not getting funded in this environment.
SmallCapPower: Where can viewers go to find out more about your President’s Club investment letter?
Fabrice: They can visit our website at www.thepresidentsclub.ca. It’s very easy to sign up. We have a free version. You can try it out for a while although it’s very limited. We have a monthly version regular version. It’s cheap and you can cancel at any time.
SmallCapPower: Thanks for taking the time for today’s interview.
Fabrice: My pleasure.
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