We’ve decided to send out an e-mail this morning to highlight a micro/small cap stock on our Watchlist that we feel has the potential to be a pretty strong play here in Canada and surprisingly, one that pays a near 3% dividend.
If you’re new to Premium, there is typically two reasons a stock goes on our Watchlist instead of one of our Bull Lists. First, Watchlist companies are typically not big enough. We try to target Bull List selections with market caps north of $300M, and develop a 5+ year investment thesis with each selection. This is very hard to do with small/micro caps, as a lack of history and execution can quickly change an investment thesis.
Secondly, a stock could be added to the Watchlist if we’ve got a close eye on it for eventual Bull List addition.
If you’ve been with us a while, you’ve seen stocks like Greenlane Renewables at $0.41, Good Natured Products at $0.35 and Acuity Ad Holdings in the $4 range hit our watchlist. So, it’s certainly a list to pay attention to.
This new company is being placed on the watchlist due to size requirements, as by definition right now it is still a micro-cap. And that stock is Titanium Transportation (TSEV:TTR).
Before we start, remember the Q and A and the Discord are always open to questions!
A “mini” TFI International
Members know we are big fans of TFI International (TSX:TFII) and in general, we think the transportation industry in an excellent place to be. One company that we’ve had our eye on for a while is Titanium Transportation (TSXV:TTR) which trades on the TSX Venture.
We’ve answered a few questions on TTR over the years, but we think now is a good time to take a closer look at the company. The company is sitting on healthy 18.75% gains in 2021 but is down significantly from its 52-week high of $4.34 achieved this past May.
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This drop off isn’t unique to Titanium, many small caps have endured similar downtrends. Unlike most small caps however, TTR is profitable, has an established business model and is growing at an impressive clip. Small caps that are on strong financial footing with excellent growth prospects are those that are likely to outperform over the long-term.
Let’s call TTR a mini-TFII in that it is a transportation and logistics company that provides truckload, cross-border trucking services, freight logistics, warehousing and distribution. It has been consistently opening new Freight Brokerages across the US and early in 2021, made the transformative acquisition of International Truckload Services Group.
It is now one of the 12 largest Canadian transportation companies and at the time of the acquisition had forecasted 2021 revenue of $330M and EBITDA of $33M.
It has since had a strong first half and in August the company raised revenue guidance to $350M. While it maintained EBITDA guidance, TTR is expected to exit the year with 86% and 79% revenue and EBITDA growth.
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For a company with a market cap of only $127M, those are impressive numbers. TTR is only trading at 15 times forward earnings, has an EV/EBITDA ratio of only 5.4 and has a tiny forward P/S ratio of 0.2976. This is vey attractive, especially when one compares to fellow trucking companies TFII and Mullen Group (TSX:MTL) as you can see in the chart above.
The discount at which TTR is trading compared to its two larger peers is significant. It is trading at near half the valuations in terms of forward P/S, EV/EBITDA, EV/Revenue and PEG.
If you look at the company’s PEG ratio – which as a reminder, gives investors an idea if its share price is keeping up with expected growth rates – the discount is beyond compelling. TTR has a PEG ratio of 0.07 and we can’t remember the last time we’ve seen PEG ratios so low.
Actually, yes we can – when we had identified both goeasy (TSX:GSY) and TFI International as Bull List stocks, of which they’re up 500% and 193% respectively.
Since it is a small cap – in fact, it is a microcap – it is likely not appropriate for some members
It will be volatile and because of its size it will be unlikely to trade at TFI-like valuations. However, as it grows into itself, much like we say with goeasy early in its lifecycle, we are likely to see that valuation gap close.
Of course, this assumes the company can meet lofty growth expectations. It has a spotty history of meeting EPS and EBITDA estimates with misses in the last two quarters.
On the flip side, revenue has been more impressive with beats in four consecutive quarters. This all plays into the volatility of the stock.
Also worth noting, Titanium initiated a dividend in late 2020
As of writing, it yields a respectable 2.75%. It is rare that investors can find a microcap that pays a dividend. In fact, there are approximately 2,600 Canadian listed stocks that qualify as a microcap (Market Cap <$300M) and of those, only 95 pay a dividend.
When you combined the double-digit growth rate, attractive valuations and the dividend, we are looking at a stock that qualifies as a triple-threat.
All-in-all, we think the recent downtrend provides investors with an opportunity here.
One that myself Mat and I are likely to take advantage of over the next little while. I won’t be buying immediately. But, if the small cap market can gain some sustained momentum to the upside, that is likely when I would look to enter.
