The TSX Venture exchange is filled with stocks designed to enrich insiders and brokers. Interestingly enough, institutional investors own some of these stocks and don’t seem to have figured out the game. Here are some of the patterns:
- Insiders set insider compensation very high.
- The company is constantly raising capital and generating large fees for brokers, underwriters, etc. These constant financings dilute shareholders and have massive fees attached to them (underwriting fees, six figures for legal and accounting costs, filing fees, etc.). Many of these companies continually lose money and have to raise money to pay insiders’ bloated salaries.
- The boards of these companies interlock with each other. Because all the insiders know each other, there is a tendency for directors and CEOs to help each other out by giving each other lucrative jobs and by setting insider compensation high.
- These companies tend start off with a market cap under $100M. Due to the small size, overhead costs are a significant drag on performance. Brokers sell these stocks to their clients anyways.
- The part-time CEO is also the CEO of a few other stocks. The insiders continually increase the number of their stocks so that they have a few different story stocks going on at once. The unnecessary number of stocks hurts shareholders as each additional stock incurs another layer of overhead fees.
- The company is promotional. It constantly puts out investor presentations.
- The website and annual report have beautiful graphic design work.
- If you search the company’s website with Google for “site:companywebsite.com filteype:pdf”, you will find many favorable analyst reports hosted on the company’s website.
- The company is involved in whatever is “hot” at the time. In the past, conglomerates and Internet bubble stocks were hot. Currently, some hot areas are mine exploration, oil and gas, pharma, and cleantech.
- The company occasionally gives away free money by changing the strike price or expiration of options/warrants. (Granted, many TSX Venture companies haven’t done this.)
- The financial statements disclose ridiculous amounts of money spent on travel, entertainment, and/or “investor relations”. (Not all financial statements break out these costs.)
Similarities in techniques exist because these people network and talk to each other. There is a whole industry built around fleecing investors. The brokers know that their clients will lose money as they’ve been around for a long time. I would generally stay away from this network of stocks, brokers, insiders, etc. because these people aren’t serious about making money for shareholders. To be fair, some legitimate companies emerged from this system. For example, MTY Food Group started out on the Vancouver Stock Exchange (which later became the TSX Venture). Despite its dubious origins, MTY currently has very low insider compensation and went up a hundred times since becoming a more shareholder-friendly company. There are some gems among this garbage.
While some small hedge fund managers are fans of certain TSX Venture stocks, I would not replicate their trades. For example, Energold Drilling is a stock written up on Value Investors Club by a small hedge fund manager. I would not invest in Energold as it fits many of the patterns in the list above. I suspect that most people on VIC have not figured out how these microcap scams work.
Bonus! Here’s a TSX Venture Bingo Card
(This section was added 2/2/21/2018.)