tsx nex

My rule of thumb is this.

If the glove don’t fit, you must acquit!! 

Topical, Nelson, Real topical.

When it comes to investing, large companies are almost always priced efficiently. There are thousands of analysts spending tens of thousands of collective hours poring over the latest earnings release from Suncor Energy. The chance of you or I discovering something important hidden in a footnote on page 57 is pretty much nil.

The smaller the company, the better chance you have to identify some sort of mispricing. Big investing firms aren’t going to follow some tiny obscure company that only does a few million per year in business. There are countless opportunities hidden among these stocks. I did quite well investing in MRRM, for example, making a little more than 50% in just under a year. When I bought it, it had a market cap of $7 million.

Many of the smaller companies in Canada hang out on the TSX Venture Exchange. The vast majority of stocks on the exchange are either in the energy or mining space, as hopeful entrepreneurs scrounge up enough outside investor cash to get a company worth a few million. They get a listing on the Venture exchange, and hopefully put their dream plans in motion.

There’s a bit of a wild west mentality over on the Venture exchange. Insiders regularly take fat six-figure salaries to be in charge of companies that have no revenue and little hope of ever making money. Many of these companies play fast and hard with accounting rules. And most are constantly raising money to keep afloat.

Trying to find good investments on the Venture exchange is the investor equivalent of turd mining. You’ll find some gems, but you’ll have to wade through a lot of stinky stuff to find it.

Knowing this about the Venture exchange, this chart probably makes a lot of sense.

tsx venture 2011-16

Yes, kids, that is a 78% decline over the last five years for the TSX Venture Composite Index. Gold stocks were riding high in 2011, which didn’t end well. Energy helped give it a little support, but that died off in 2015. The Venture exchange is so out of favor you can’t even buy an ETF that covers it. The two that were in existence quietly went away.

Here’s a list of the top holdings of the index. Yes, at least one is a marijuana grower. See if you can guess which one!

venture top 10

 

Besides the marijuana grower (that’s Canopy), we have a couple of tech companies long on ideas and short on cash, a company trying to mine gold in Peru, and a few energy companies. Storm, the largest of the bunch, has a market cap of $370 million, and apparently no desire to graduate to the TSX.

Basically, to encourage companies to list at all, the TSX Venture Exchange has more relaxed rules. Fees are also less for Venture companies. So as you can imagine, the more, uh, questionable stuff ends up on the Venture exchange, while the actual businesses graduate as quickly as possible to the main exchange.

In a world where Dragon’s Den, Shark Tank, and various other forms of venture capital are a thing, apparently having two exchanges wasn’t good enough for the folks at the TSX. Other alternative exchanges were popping up, as big banks realized they didn’t really need the TSX taking a small cut of every trade.

So the TSX decided to launch a new tier of trading, focused on the stocks that didn’t qualify to trade on the TSX or TSX Venture exchange. It’s called the TSX NEX, and it’s something you should never touch.

Most of the companies on the NEX have been either kicked off or have voluntarily given up their TSX/Venture status. Often this happens because a company doesn’t bother to release earnings results. Because hey, when I’m looking for investment opportunities, I’m attracted to companies that can’t be bothered to tell investors what’s happening.

Most companies end up on the NEX for a period of time and then quietly get suspended or delisted. There are approximately 410 companies listed in the company directory, and approximately 180 are suspended. There are others that have halted trading for whatever reason.

Interestingly enough, I actually own a stock that trades on the NEX Exchange, Automodular. That sucker is up nicely for me, gaining about 50 cents per share all told. I recently tried to sell at $2.70 but couldn’t get anyone to buy. The company looks to be liquidating, we’re just waiting for the results from the a lawsuit it filed against General Motors.

I’d recommend most investors ignore the TSX Venture entirely. It’s filled with crappy mining stocks that will never see the light of day. The amount of effort to find the good stuff in there probably isn’t worth it for the average person.

I’d especially recommend investors stay the hell away from anything trading on the NEX Exchange. Fortunately, they’ve made it easy, requiring every ticker symbol on NEX to end in .h. So if it says .h, that means stay the Hell away.

Tell everyone, yo!