Investing In Early-Stage Stocks On TSXV? Here Are 3 Filters To Narrow Your Options

Summary

• Significant groundwork required to identify potential early-stage stocks with long-term returns
• Best-performing early-stage scrips have benefitted from societal trends and change in consumer patterns
• Analysis of multiple factors such as share price, trading volumes and market capitalization a must before equity purchase.

The TSX Venture Exchange (TSXV), Canada’s public venture market, has long been the testing ground for entrepreneurs and early-stage companies. Till 2019, a total of 679 companies have graduated from the TSXV to the S&P/TSX Composite Index (TSX), accounting for 19 percent of the overall number of companies on the key bourse.

Investors can greatly benefit from buying stocks of the right early-stage companies and make good gains in the long run. But identifying such potential equities is where the challenge lies.

Below, Kalkine Media presents three filters that one can use as a checklist before investing funds in early-stage stocks on the TSXV.

1. Business Ideology

A thorough groundwork is critical before investing in early-stage stocks. One way is to ask about the five Ws. For example:

1. Why does the business exist? Is it solving a real problem like medicines or addressing a supplementary cause such as vitamins?
2. What is the business forecast for next 12 months? Has the management chartered a long-term growth? What are the levers and drivers of growth?
3. Where do the opportunities and potential markets for the products or services lie?
4. Who are the potential consumers or clients for the product?
5. When will the company begin to generate revenue?

These are just a handful of questions an investor could possibly research before reaching a decision.

Also, different sectors have their own challenges and undergo unique market circumstances which must be considered before equity purchase. With the coronavirus pandemic becoming a litmus test for companies to survive, stocks of several traditionally well-performing indexes have slumped. The challenge under the pandemic scenario is to identify evergreen sectors that are resilient to market changes.

2. Capitalizing on Trends

Some of the best early-stage stocks have benefitted from societal trends or change in consumer patterns. Organizations that capitalize the trends are often the ones that end up raking large revenue and profits over a long period of sustained growth, churning massive returns for investors.

Having an exit plan is also important for investors chasing trends. A strategy to cut losses and exiting before a trend ends is crucial.

A great example of this would be the tech market rally of 1990s, when stocks of a series of IT companies turned gold, delivering high returns. But once the bubble burst, some scrips were valued at pennies and investors who chose to wait ended up losing a lot.

3. The TSX Venture 50

Every year, the TSXV picks out a list of 50 top-performing stocks, which is a good parameter to analyze early- and mid-stage companies. The list is generated after analyzing the stock performance on an “equally weighted formula” that takes account of the share price, trading volumes and market capitalization. The 2020 TSX Venture 50 list consists of company stocks from the five sectors: clean technology and life sciences, diversified industries, energy, mining and technology.

A total of 1,681 companies are listed on the TSXV as of December 31, 2019. Out of these, 349 firms qualified for the 2020 Venture 50 ranking. These companies have been on the TSXV listing for at least a year and have a minimum market capitalization of C$ 5 million. They also have a minimum closing share price of C$ 0.25 as of December 31, 2019 and C$ 0.10 as of December 31, 2018.

Let us look at two early-stage stocks listed on the TSXV that have outperformed its peers over the last year:

Bee Vectoring Technologies International Inc (TSXV:BEE)

Sector: Basic Materials

Industry Type: Agriculture

Market Cap: C$ 36.9 million

Stock Price: C$ 0.4 (Aug 7, 2020)

Canadian agriculture technology company Bee Vectoring Technologies International (BEE) has been able to capitalize on the market sentiment of green and clean tech. The firm uses patented bee vectoring technology for pest and disease management solutions – an eco-friendly alternative to current chemical solutions available in the market. BEE calls itself a “market disruptor” and has over 65 granted patents, and 35 more patents pending in other countries. It has presence in the Canada, Mexico, US, and European markets.

Founded in 2011, the company began trading on the TSXV on July 7, 2015. Its shares witnessed a 63.8 percent growth over a two-year period, from June 30, 2018 to June 30, 2020.

European Residential Real Estate Investment Trust (TSXV: ERE.UN)

Sector: Real Estate

Industry Type: REITs

Market Cap: C$ 360 million approx

Stock Price: C$ 4.07 (Aug 7, 2020)

European Residential REIT is an open-ended real estate investment trust with a focus in the European market. It currently owns 131 multi-residential properties in the Netherlands, and one office property in Germany and Belgium each. In June, the REIT announced a monthly cash distribution of € 0.00875 per Unit (€0.105 per Unit annualized), with payment on July 15, 2020. On July 6, ERE.UN graduated to the TSX index.

Conclusion

Seasoned investors and analysts have called investment in early-stage stocks an artistic skill that is honed with time. Almost every scrip has been early stage stock at some point of time. The key is to look for resilient sectors and scrips that have consolidated their position over a year’s time.