Thursday 7 January 2016

Peak Positioning Technologies: A Generational Investment Opportunity?

Welcome to the first post on my site. A friend of mine has said I've been underselling myself, basically writing articles on under-covered Canadian microcap stocks for free. I've never had a problem with that, because if I help to spread the word out on a company like Peak Positioning Technologies (PKK.C, PKKFF), I'll stand to make hundreds of thousands or perhaps over a million dollars. Really why would I care about making a few extra thousand trying to sell my services?

It got me thinking though that this should lead to something eventually. If Peak does succeed even to my conservative estimates of 20 cents per share, that's a lot of smallcap Canadian investors who could be potential followers. I need to capitalize on that opportunity. Perhaps one day this will lead to an investment newsletter or maybe I'll sell my IR services to firms. But until I figure out what that major step is, this site will be a place where I can consolidate and organize my ideas and research on (mostly) Canadian small cap stocks and hopefully pick up a lot of followers and business associates along the way.

At this point I'm going to shamelessly self-promote my other social media outlets while using a compelling title on a hot stock like Peak as clickbait:

Follow me on Twitter
Follow me on Seeking Alpha
Follow me on Stocktwits (I'm new to this one, don't laugh at the pathetic state of the profile)

For those who follow Peak, you're probably familiar with my work on Seeking Alpha, in particular my latest piece outlining the deal with Banlan:

It's been a source of much discussion on Stockhouse, a site that I browse through but I don't participate in...that's my on the record stance anyways. That site has become unusable. The bulk of the trading day it's down for maintenance while the rare time it's up, the content is generally quite poor.  A workable and popular (so Agoracom and SiliconInvestor aren't the solutions either) message board that focuses on Canadian penny stocks might be a decent business plan for those who want to pursue it, but for now I have created a Facebook group where we can have serious discussion on PKK:

Just ask to be added, and as long as the person requesting the add appears to be using their real name, I'll add them. I have no issues with people questioning the investment thesis of a stock or being bearish on it. What I do have a problem with is people hiding behind a screen name and incessantly bashing or pumping with misleading facts or outright lies. That's about 90% of Stockhouse. I figure if people are forced to come out from behind the shadows and use their real name, they will put a lot more thought into the comments they make.

Now with the self-promotion out of the way, I can get to the thesis as outlined in the title of the write-up. Is Peak a generational investment opportunity? Meaning, is it one of those stocks which can see a 1000% to 5000% return in short order, something which an investor will see once in 20 years, if at all? I've made insane price target calls before. My $50 call on Spectra7 by 2020 comes to mind. However, that's several years out and a lot of things have to go right for the company.

Peak is a lot different. First off, the time frame is much shorter for the investment thesis to play out. Peak management either accomplishes everything they set out to do as outlined in my article within the year and the stock price rises substantially, or it doesn't. There's no looking back at a disappointing 2015 like with Spectra7 and saying "well, there's still four more years for the thesis to play out. Virtual reality didn't perform as well as I had hoped for 2015, but that's an industry issue not a company-specific failing". We can't be headed into 2017 still in anticipation of the Peak-Banlan subsidiary. It needs to be set up in the next couple of months and needs to have $10's of millions of revenue flowing in it by the end of this year.

What I believe makes the Peak opportunity the most unique is that the bulk of revenues will come from existing business from Banlan. If one wants to say "I don't believe Peak" or "Banlan is an unknown and untrustworthy Chinese entity", fine. Let them prove those people wrong in a couple of months. But once that subsidiary is up and running and significant revenues have been achieved in Q2, there can be no doubt. The "Plastic Bank" component is a speculative growth business, but when Peak management says that the subsidiary can achieve a $100 million revenue run rate by the end of this year, all the work behind that is going to happen in the next several weeks - setting up the subsidiary, managing the relationship with Banlan, and getting the business transferred into the subsidiary - after that they'll be milking the cash cow that the existing business provides.

I expect that the vast majority of PKK's stock price appreciation to happen in the first half of this year. We've already seen the stock move from 2 cents to as high as 6. So with my target being 20 cents or 900% upside from 2 cents, we've already seen 200% of that. Once Q2 is confirmed, there really should be no shock when Q3 and Q4 come in at similar or slightly better numbers. Even if the Plastic Bank does really well, its revenues are going to be just a small portion of the overall business in 2016. We've seen plenty of stocks rise by 10 times before, but that usually is followed by a significant drop, i.e. a typical pump and dump. While I expect the majority of Peak's gains to occur in the first half of the year upon successful execution, I also expect it to at least maintain that stock price for the rest of the year. Then once 2017 comes around, additional upside drivers like the growth in the Plastic Bank fintech-specific revenues, potential from LongKey and the opportunity for a NASDAQ listing will continue to push the stock up.

So when it comes to being a generational investment, it relates to the timeline as well as the potential return. This is not a penny stock where we say it's got a 5000% return and 4999% of that is some time in 2020. If Peak is going to rise from 2 cents to a buck or more, the hardest part of that gain - from 2 cents to 20+ - is going to happen now in the coming weeks and months, assuming Peak makes good on its promises and timelines as planned.

China has been in turmoil recently. There are fears that the currency will be devalued and the country is on the verge of an economic crisis. I'm seeing the word "pivot" come up a lot and how China is struggling to transform from a manufacturing/export-based economy into a consumption-based one. I think this actually plays well into what Peak and Banlan are trying to do. Banlan is a typical manufacturing middle-man but PKK is trying to promote financial services technologies with the new subsidiary and with LongKey. It's also trying to do things the right way for North American investors, people who have been burned by fraudulent/failing Chinese investments in recent history. Peak is trying to change the way Chinese businesses do things and how they are perceived globally, a necessary step going forward.

The Chinese crisis will impact Banlan and Peak in a few ways, some are positive and some are negative:

  • The entire global economy has been impacted, not the least of which the price of oil. Banlan imports petrochemicals so a weak oil price will bring its costs down. This impact will more than offset any fall in the Yuan (a weaker Yuan will make imports more expensive). Even if the low oil price is a temporary economic shock lasting for a year or 18 months or so before racing back to $100, this is going to have huge short-term benefit on the subsidiary's margins until the fintech revenue grows into a more substantial portion of the business.
  • A domestic Chinese economy in turmoil would have a negative impact on domestic consumption. Think about how much product Alibaba moves in the country and how that will slow down. Any of Banlan's clients who sell domestically will be buying less plastic from Banlan.
  • The credit crunch will make it even harder for businesses to get loans. Part of the reason Banlan is undertaking this initiative is to extend credit terms to its buyers (right now all buyers must pay upfront in cash). So if the buyers find it harder to get a loan from the bank, they will rely more on any credit terms Banlan provides for working capital. In a strange way, this crisis is very well-timed. If China was hot right now, the Plastic Bank might roar out of the gate. If this collapse occurred 1-2 years from now when the Plastic Bank already extended a lot of credit to thousands of clients, who knows how many of them would have been unable to pay. That might cause the collapse of Banlan, the Plastic Bank and Peak. The lesson of survival during weak economic times for the Plastic Bank will occur at the start of its existence, probably the safest time given its circumstance of being a new joint venture promoted by an already mature firm. A lesson in the tortoise versus the hare.
  • The devaluation of the Yuan will make exports cheaper. Banlan's export manufacturing clients will win and order more plastic from Banlan.
So if China's economy struggles over the next year, I am not too worried over the impact it will have on Peak's business. It could have an impact over market perception and put downward pressure on the stock (or temper upward pressure). But like I said before, it won't take long for this investment thesis to play out. If Peak demonstrates large revenues in Q2, the stock is going to go up whether there are issues in the Chinese or global economy or not.

If there's something interesting in the call this afternoon, I'll update this post or create a new one so stay tuned.

1 comment :

  1. Excellent blog Edward. I have been following you for a couple of years now. This blog should be a better way to get your thoughts out without having to play by seeking alpha's rules.