SCS: What's Happening on November 3, 2021
Eguana Technologies gets a transformational deal with PowerCenter+, the producer of Duracell Home Energy Storage Products. Jay remembers missing out on Galaxy Digital Holdings.
In 2015, I watched Tesla’s presentation on the Powerwall and thought it made too much sense. The challenge of renewable power has always been that we can’t control when the sun shines or when the wind blows. Energy storage solves this. In fact, some people call energy storage the holy grail of renewables.
Although I really liked the Tesla Powerwall story, I didn’t like the valuation. A car company that would sell around 18,000 cars that year trading at a market capitalization of $27B. I mean, there couldn’t be much room for upside.
Of course, the company five years later has a valuation of over $1 trillion dollars and at the time of writing this story, the stock price is up 2,550% since the day they announced the Powerwall. Although mostly driven by their automotive business, Tesla’s valuation today is clearly in part, thanks to the dream of the Tesla Energy story.
I Missed Tesla, But May Have Found My Torque in Calgary
Peter Lynch famously once said: “The person that turns over the most rocks wins the game.”
When investing in small caps I take every call or introduction, I spend my free hours looking at filings on Sedar, I regularly attend microcap conferences, and I browse social media for stock ideas.
One Saturday afternoon in 2017, when searching the word “backlog” amongst Canadian small cap stocks, I stumbled across the early stages of a company that looked like they were getting into the home energy storage market. I loved this. I found a company with a tiny market cap that provided a massive opportunity for upside.
I emailed the CEO and tried to throw my credentials of being a member of MicroCap Club at him to see if I could get a call and learn more. I even suggested I knew some fund managers and perhaps they could help.
Justin never responded. Which generally didn’t bother me. As an investor, do I want to invest in a CEO who is a full-time IR person? Or a CEO who is trying to operate a business?
So I decided I had to do whatever it took to learn about Eguana and residential storage. I would use whatever was available online.
I engaged with various members of the online community in an attempt to see what others knew. Many of which were both angry and optimistic at the same time. Some of these people had been invested for over a decade, starting with a previous iteration of the company called Sustainable Technologies. For years, they watched a company that only burned cash and showed them negative returns.
There wasn’t much on the internet about the residential storage market. The online community speculated regularly about a deal with Mercedes to take on Tesla, which was based on vague news releases and management discussions in the filings about working with a German Automotive Manufacturer.
In fact, I even reached out to a former Eguana sales guy on Twitter to see if I could get some help to understand the industry. I mean information was sparse, I had to do a Deep Dive.
This sales guy named Livio was passionate about renewable energy and was generous enough with his time to answer high-level questions to teach me about the space. He was one of the few people in North America who got a glimpse into what this tiny market really was. I thought it could be the future of power distribution, but found out it was only the first inning. I learned at that time, most solar installers had never even seen a lithium home battery in person and the key addressable market was preppers in Utah. Not nearly as mainstream as I had thought.
Eventually, the German Automotive deal fell apart for Eguana and I found myself disinterested in the company despite roping various friends and family into the stock based on my enthusiasm. I liked the opportunity but told myself I’d wait for the company to be further de-risked before continuing to support it.
A Couple Years Later
Fast forward to 2019 and I went from an entrepreneur running an online math school approved by the Ministry of Education of Ontario to working with publicly traded companies. What started out with MedMen begging me to teach them about digital marketing later turned into helping a small automotive fintech company make payroll and turn their story around. I started to find a passion for working with small cap companies and was on the lookout for stories I thought made great investments for retail investors.
Along with my partner Jordan (Jay) Lutz, we woke up every single morning grabbed our lunch box and grinded. After 2 years and various success stories we found our phone ringing off the hook with companies that wanted to work with us.
Of course, there was one company I had on my checklist that I thought would be a great reputation builder, Eguana Technologies.
A Run in At a Lunch
My pal Betting Bruiser invited me out for lunch one day and I was introduced to a couple of former Bay Street bankers who wanted to chat about cannabis stocks. We joked about various scams in Colombia and all the bad actors running around the street. I then found out one of the guys at the lunch owned a large position in Eguana and he urged me to meet with Justin.
I responded, “Meet with Justin? I emailed him a few times years ago and he never got back to me. Does he even exist?”
A few weeks later, I sat down to meet with Justin. I had a notepad and lots of questions from years earlier. He stressed the company had finally locked down all the working capital constraints to transition from batch to flow manufacturing and the long-term strategy was to be a large-scale manufacturer who would create white label systems for some of the biggest brands in the world; including their own.
I liked the story and said if there is one thing you guys are lacking, ‘it’s communication with your shareholders!’ We discussed what it’s like to be chasing large corporate partners while dealing with regulators amongst the constant flashlight of a passionate shareholder base. I urged him to turn that flashlight into a spotlight. I told him that most CEOs wish they had this level of engagement from their shareholder base.
I convinced him when the time is right, I’d love to help you with shareholder communications.
Then this thing called COVID-19 happened, small cap stocks got whacked, and I got that call when the stock hit a low of 7c. I told Justin I was happy to work for whatever the company could afford. This was about my reputation.
Again, we rolled up our sleeves, launched coverage, and even bought millions of shares in the open market. We’re crazy I guess.
One Magical Morning in November
Monday morning of this week a news release was put out by a company called Powercenter+. They announced the launch of Duracell Home Energy Storage Products and even had a new website. What was really interesting was that the specs matched the specs of Eguana’s very own Evolve product. Could it be? Could this tiny microcap out of Calgary, Alberta have landed a deal to white-label products indirectly for Duracell?
And of course, two days later we got that answer. Eguana announced they had a deal with PowerCenter+ and Omega EMS. Just like that, Christmas came early for a passionate group of shareholders. Eguana’s products would be behind one of the most famous battery brands in the world.
The order comes with a 10,000 unit minimum commitment, which I figure at $15,000/unit should work out to around $50,000,000 per year. Using 8x to 12x forward multiples for companies like Tesla, Generac, Solar Edge and Enphase, we can get comfortable with a healthy valuation from here. I’ll let you do the math.
Of course, there is still execution risk, supply chain risk, regulatory risk, and industry risk. But at this stage, it looks like the company has finally turned the corner. And the boy who cried wolf, has actually seen a wolf, or in this case a pink bunny.
Justin took the time to answer shareholder questions today, and if you’re interested in the story I suggest you take the time to check it out. This could be the early stages of something special.
Macro: The Macro Themes Surrounding Equities
Fed to start tapering bond purchases later this month as it begins pulling back on pandemic aid (CNBC) (FT)
Global Finite Electricity Supply Could Spell Disaster for Bitcoin (TDD)
China's central bank speaks up as data privacy advocate as it curbs unauthorised and excessive data collection by fintech companies (SCMP)
Large-Cap News We Can’t Ignore
Roku shares drop after streaming company misses revenue estimates (CNBC)
The battle to control the metaverse: Microsoft vs Meta (FT)
Bed Bath & Beyond Stock Surge Recalls Meme Mania (WSJ)
Kirkland Lake Gold Reports Record Net Earnings in Q3 2021 (GNW)
Avis Budget gets two-notch downgrade at JPMorgan after yesterday's moonshot (SA)
Hertz to repurchase $250M-$500M from underwriters of its secondary offering (SA)
Ark Invest’s Cathie Wood buys more Zillow shares as they dive (CNBC)
Small Cap News
Khiron Life Sciences Announces First Medical Cannabis Clinic In Europe (TDD)
DeFi Technologies Joins the Pyth Network (GNW)
BrainCheck brings in another $10M to detect, manage cognitive impairment (TC)
Things to Be Watching Out For:
This afternoon the Federal Reserve announced they will begin tapering their bond purchases. Though still a long way from raising the federal funds target rate, it’s an indication Jerome Powell is ready to begin a game of Chicken with the stock market. The 10Y US yield hit 1.60 percent at the time of writing; increasing from 1.53 percent earlier in the day.
Canadian Small Caps With Jay Lutz
Steve and I are rather fortunate that after having spent a number of years building out our platform (we turned four earlier this week!), and partially due to a relentless producer that doesn’t take no for an answer, we’ve gained access to a number of notable names within the investing space. Recently, we were able to sit down with Rick Rule, whom not long ago retired from running Sprott U.S. Holdings.
Within the interview, which was hosted on SmallCapSteve Live, Rick said something rather significant when it comes to investing.
“Early in terms of moves that could be parabolic, is really not too early.”
While I’m not about to suggest that I’m a better investor than Rule, I will say that the one item this viewpoint omits is the significance of tailwinds. When it comes to the small cap sector in particular, tailwinds can be what makes or breaks an otherwise foolproof business plan. It can also be what leads investors to cloud their judgement in one way or another.
Believe it or not, a few years back Steve and myself found ourselves on multiple calls with a small company called Galaxy Digital Holdings. At the time, the company was struggling to catch a bid and any positive sentiment, trading in the very low single digits, and we were exploring the possibility of providing some marketing services to the firm to lend them a hand.
After multiple calls with management, and many hours trying to understand the complex nature of the firm, we elected to turn down the company as a potential client. The basis at the time for us walking away from discussions was the simple premise that we couldn’t get our pea-sized brains to wrap around the structure of the company, and as a result felt we couldn’t properly articulate the firms story.
Further compounding the issue, was at the time, the blockchain-crypto space was in the dumps. With the company in the low single digits, we had just seen the fall of the sector yet again, and we were certain the tailwinds just weren’t there for the company.
I bring this up, as I was reminded of the story this morning while editing an article from YounggJustin, whom covered the initiation of Galaxy Digital by BMO Capital Markets, who placed a $43 price target on the company.
Maybe I should listen more to Rick after all.
MEMEs of the Day:
Full Disclosure: Eguana Technologies is a client of CanaCom Group. CanaCom Group is also long Eguana Technologies. Steve Hyland owns a minority interest in CanaCom Group. Steve Hyland is also long Eguana Technologies.