Investing in Small

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Investing in Small Micro-Cap Companies for
Superior Returns

• Brent Todd
• Investment Advisor

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TODAYS PRESENTATION

1. Risk Why?
2. Fundamental Analysis Why?
3. Small Micro-cap Strategy Why?
4. Brent Todd Why?

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2005 Recommendations
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Perception of RISK
High
Medium
Low
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ITS ALL ABOUT YOU
Reward
Risk
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Goal For the Next Half Hour
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RISK- WHY?

• Guaranteed returns currently net 3.8
• 100,000 invested will net 3,800

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WHY IS RISK IMPORTANT?
Due to the effect of compounding over time,
the difference in ones ultimate returns can be
dramatically impacted by the over all rate of
return.
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3.8 vs 5.0 vs 15.0
Couple (age 40) - 100,000 to Invest

• No risk
• 3.8 for 15 years 174,969

• Low Med Risk
• 5.0 for 15 years 207,893

• Med. High Risk

15 for 15 years 813,706 !!!
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(3) Fundamental Analysis Why?

• Cornerstone of My Investment Philosophy
• The surest way for a companys share price to
  appreciate is to produce an ever-increasing
  stream of profits that shareholders may
  participate in.

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Fundamental Analysis Why?

• If you were to buy a business, you would want to
  know
• The price.
• The net value of the assets (taking into account
  the debt).
• How much the business made last year, and
  previous years.
• How the company compares to other similar
  businesses and what they are selling for.

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Fundamental Analysis Why?

• We need to use tools that will allow us to
  monitor, not only the assets of a company (what
  are we buying), but also we must be able to
  measure our share of their income, currently, and
  going forward.
• Fundamental Analysis is a set of measurements and
  ratios that allow us to do this.
• By no means the only tool other tools include
  
• technical analysis (not effective with thinly
  traded stocks).
• growth and sector analysis.

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Fundamental Analysis Why?

• Ratios
• Market Capitalization
• Price Earnings Ratio (P/E Ratio)
• Earnings Per Share (EPS)
• Book Value Per Share

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Fundamental Analysis Why?

• Market Capitalization
• share price x shares outstanding
• Examples
• Company A has 20,000,000 shares outstanding and
  is trading at 1.00 per share
• (20,000,000 shares x 1.00)
• Market Capitalization 20 million
• Company B has 5,000,000 shares outstanding and is
  trading at 1.00 per share
• (5,000,000 shares x 1.00)
• Market Capitalization 5 million

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Fundamental Analysis Why?

• Market Capitalization changes with the share
  price
• Example in 36 months Nortels share price
  fluctuated between 124 per share (Cdn) and 0.70
  per share (Cdn).
• Nortel has over 3 billion shares outstanding.
• At their high, their capitalization was
  approximately 372 billion.
• At their low, their capitalization was below 5
  billion.

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Fundamental Analysis Why?

• Earnings Per Share (EPS)
• net earnings number of shares outstanding
• Net earnings is determined after giving effect
  to all taxes and expenses.
• Analysts look at these each quarter and annually.

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Fundamental Analysis Why?

• Earnings Per Share (EPS)
• Example
• Company As net earnings were 20,000,000 and
  they have 10,000,000 shares outstanding
• (20,000,000 10,000,000 shares)
• EPS 2.00
• Company Bs net earning were 20,000,000 and they
  have 20,000,000 shares outstanding
• (20,000,000 20,000,000 shares)
• EPS 1.00

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Fundamental Analysis Why?

• Price Earnings Ratio (P/E Ratio)
• price per share EPS
• Determined by dividing the price of a stock by
  the earnings per share over the past 12 months.
• The P/E for a given stock varies based on changes
  in price (which happen every day) and changes in
  earnings (which happen once per quarter).

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Fundamental Analysis Why?

• Price Earnings Ratio (P/E Ratio)
• Company A has earnings per share of 0.50 and
  trades at a price of 5.00 per share
• 5.00 0.50
• P/E 10 times
• Company A trades at 10 times earnings
• Company B has earnings per share of 0.50 and
  trades at a price of 20.00 per share.
• 20.00 0.50
• P/E 40 times
• Company B trades at 40 times earnings

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Fundamental Analysis Why?

• Price Earnings Ratio (P/E Ratio)
• The P/E need not correspond between stocks.
• Some stocks may be considered under priced at 40
  times earnings whereas others may be grossly
  overpriced at 15 times.
• It is important to determine historical P/E
  averages for each individual company and its
  industry sector.
• Generally, I consider the lower the p/e, the
  better.

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Fundamental Analysis Why?

• Book Value Per Share
• Assets - Liabilities Shareholders Equity
• Shareholders Equity Shares O/S Book Value

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Fundamental Analysis Why?

• Middlefield Bancorp Ltd.
• Shares outstanding 9,000,000
• Cash in treasury 20,000,000
• EPS for the 9 months 0.20/share

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Small Micro-Cap Investment Strategy Why?
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Computer Modelling
Small Micro-Cap Investment Strategy Why?
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Computer Modeling Fundamental Analysis

• Year 2000
• 8 million shares o/s trading at 0.50
• Market Capitalization 4 million
• Book Value 4 million No debt
• 4 million 8 million shares 0.50 per share
  Book Value

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Small Micro-Cap Investment Strategy Why?

• By the end of 2002, the B/V per share was 0.90
• EPS 0.23
• P/E 1.00 0.23 4.34 P/E ratio

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Fundamental Analysis Why?

• Conclusion
• Useful tool in determining underlying values.
• Can give good clues as to a companys growth.
• Limited in that the snapshot in time can be
  stale-dated or provides too brief a period in
  time to tell the whole story.
• Should not be relied on solely.

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Cornerstone of My Investment Philosophy

• The surest way for a companys share price to
  appreciate is to produce an ever-increasing
  stream of profits that shareholders may
  participate in.

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(4) Small Micro-Cap Investment Strategy

• Which Companies Are Considered?
• Ones with proven assets, real businesses, cash
  flow or all of the above.
• Ones that, generally, trade for less than 100
  million in market cap.

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Small Micro-Cap Investment Strategy Why?

• Dont try and time or trade the market.
• Invest in companies that have been ignored or
  fallen under the radar screen of the general
  populace.
• In particular, look for situations where there is
  a positive turn in fundamentals.
• Pick the low hanging fruit and wait for the
  market to unlock their value.

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Philosophy Tenets of Small Micro-Cap
Investing

• (1) Diversification
• Most important tenet of all.
• Mainly due to the illiquidity of small
  micro-cap stocks.
• This also increases your chances of success.
• Ideally, put no more than 10 into any one
  position.

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Philosophy Tenets of Small Micro-Cap
Investing

• (2) Small Micro-cap Stocks Are More Reasonably
  Valued Than Large-caps
• They trade at multiples that are a fraction of
  their large-cap or blue chip counterparts.
• The average P/E multiple on the SP 500 is
  currently 17x.
• We often find companies trading as low as 5 or 6
  x this years estimated earnings.
• Some small-caps trade at a significant discount
  to their book value.

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Philosophy Tenets of Small Micro-Cap
Investing

• (3) Financial Statements are More Transparent and
  Easy to Follow
• Extremely complicated nature of large-cap
  companys financial statements, increase their
  ability to hide important financial information.
• Micro-cap companies generally have, at most, two
  or three revenue streams so their ability to hide
  information is greatly reduced.
• Transparency is critical because it makes it
  easier to invest with confidence if one feels
  they have an accurate barometer of the companys
  business.

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Philosophy Tenets of Small Micro-Cap
Investing

• (4) Individual Equities Offer the Greatest
  Potential for Portfolio Performance
• Within traditional investment products a truly
  portfolio changing experience can only come
  from individual equities.

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KOBEQUID (KQR.T) 1997 2000 Return
1,600
Philosophy Tenets of Small Micro-Cap
Investing
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COMPUTER MODELING (CMG.T) 2000 2005
Return 1,500 (includes dividends)
Philosophy Tenets of Small Micro-Cap
Investing
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TUSK ENERGY(TKE.T) 2001 2004
Return 700
Philosophy Tenets of Small Micro-Cap
Investing
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TUSK ENERGY(TKE.UN.T) 2001 2005
Return 2,100 (includes payouts)
Philosophy Tenets of Small Micro-Cap
Investing
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MDI TECHNOLOGIES (MDD.U.V) 2002 2005
Return 1,400
Philosophy Tenets of Small Micro-Cap
Investing
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Philosophy Tenets of Small Micro-Cap
Investing

• PORTFOLIO EXAMPLE
• 10,000 Investment - One winner, one loser
• Company A - 5,000 invested
• Shares appreciate 1,000
• Total 50,000
• Company B - 5,000 invested
• Goes bankrupt
• Total 0.00
• Portfolio Value 50,000
• Initial Investment 10,000
• Total Return 400 return

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Philosophy Tenets of Small Micro-Cap
Investing

• (5) Invest Large Amounts in Fewer Companies in
  Order to Properly Focus on the Individual
  Companies
• This means monitoring the quarterly updates, news
  releases, talking to the C.E.O. and making site
  visits.
• I research 60 to 70 companies on an ongoing basis
  but invest, or concentrate on, approximately, 20.
• This gives greater insight into their trading
  patterns and, ultimately, this knowledge benefits
  my clients returns.

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Philosophy Tenets of Small Micro-Cap
Investing

• (6) I Rely on Regular Dialogue With C.E.Os to
  Attain Greater Insight Into the North American
  Economy.
• The C.E.Os, whom are current clients, represent
  companies that are doing a combined 600 million
  worth of business in North America.
• Its imperative these head decision makers stay
  on top of their business environment and trends
  in the economy.
• They are not passing on insider information but
  are giving me their insight as to the current
  economic environment.

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Philosophy Tenets of Small Micro-Cap
Investing

• (7) Hang on to Your Winners as Long as Possible!
• and perhaps even add to your position (if they
  are still undervalued).
• If management has been able to position the
  company and its product/services correctly, quite
  often the growth curve is steep and dramatic.
• Experience has taught me that often your winners
  remain your winners.

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Philosophy Tenets of Small Micro-Cap
Investing

• (8) I Invest Alongside My Clients.
• The companies I recommend, I buy myself.
• Naturally, I follow them closely.

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Conclusion

• Buy a basket of businesses.
• Eliminate some of the risk through
  diversification.
• Use fundamental analysis to assist in finding
  undervalued businesses.
• Look for companies that have been in existence
  for over 10 years and ones that provide a great
  deal of data to assess.
• The companies trade at much lower multiples than
  their larger counterparts.
• Focus on their businesses to ensure your
  continued investment is on track.
• Buy companies that are at the steep end of the
  growth curve.

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Conclusion
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(5) Brent Todd Why

• Brent Todd
• Investment Advisor
• Canaccord Capital Inc.
• Email brent_todd_at_canaccord.com
• Tel [phone]
• Toll Free 1-877-643-0200