This month’s article is a departure from my usual focus on DRIPs. Not as simple as this but I often have the sense that many DRIPpers become involved because they see the potential value of ownership but are wary of their own skills as analytical investors. It’s a lot easier to pick Coca-Cola (NYSE:KO) and only risk $10 US a month than it is to pick the right start up bio-tech.
That doesn’t mean DRIPper’s investments stop there. One cautious toe into the cold pool of investing is often followed by a whole foot into the local library or bookstore. DRIPpers like to learn. My own journey started with a na've entry with mutual funds, off to a broker, on to DRIPs and presently making informed choices of non-DRIP equities.
Am I an expert investor? The resounding answer is, “No!” However, I am a more successful investor because I am better informed. The very best investment a DRIPper can make is a library card. No matter what your gain (loss) is on an investment with the zero cost of a library card in the denominator the return is always infinity.
Recently, our ShareClub group leader, Ken Lockley, came up with a brilliant idea that I encourage all the other ShareClubs to consider. Ken suggested we start visiting local publicly traded companies. What a magnificent opportunity to take everything I’d read and learned and be an investor in action. Let the adventure begin!
Our first victim was Carmanah Technologies (TSV:CMH). All most of us knew at the beginning was that Carmanah was a rare hi-tech company because it actually was profitable. We also knew it made marine lighting.
Our motley crew of barbers, bankers and retired teachers arrived at Carmanah at 2 PM. The company is situated in a heritage warehouse in an old section of Victoria’s inner harbour.' The parking lot was mud and gravel. We were taken upstairs to a fiber board walled open beamed ceiling office and made to sign a non-disclosure statement. I felt like I was in a barn. I was not impressed.
A company official came to begin taking us on our tour. The first stop was a small display of products. There I learn Carmanah began by manufacturing marine lighting that makes use of the low power consumption of LEDs (light emitting diodes) powered by photocells.' Apparently the motivation for this came about after the founder was stranded in his boat and began to worry about the longevity of his high power consumption emergency signal lights. Carmanah’s lights, smaller than a toaster, can last 15 to 30 days on a single day’s photocell charge. The entire unit is encased in polyurethane to keep out sea water. The lights are guaranteed for 3 years but are expected to last a minimum of 5 years.
There are also lighted number and small advertising signs that look neon but are actually LED. Carmanah is exploring other areas including lighting beer tab pulls for pubs. One of our group points out that many US communities are enacting bylaws requiring lit address numbers. Carmanah is already headed that way.
The 8 or 10 products look interesting but I’m cautious. After a comment from one of our group the official enthusiastically blurts out, “We’re the Wal-Mart of lighting.” This was unrehearsed. My ears have perked up. We head down into the plant.
While being led around I start to fixate on a wing off to one side. A quick inspection shows a lot of trade people, carpenters, painters and electricians, remodeling offices. I ask about it. It seems the present plant is 20,000 square feet but they are in the process of adding 8,000 square feet. That’s expansion. I’m beginning to get impressed. They’ve also made application to the City to move into the warehouse across from them. This doubles the floor space needs but only sees them through to the end of next year.
Now the questions pick up momentum.
Our lease with the City is long term and generous. From 1998 through 2002 we’ve averaged 74% growth rate per year. We’re hiring like mad. $9 million last year, $18 million this year, we’re projecting $25 million next year. Our gross margins are 59% to 55% which is 17% to 20% better than our competitors because over 50% of our sales come from our direct sales staff. Research and development receives 20% of revenues.
Customers include the Canadian CoastGuard, Brown Traffic (the largest traffic control company in the US ), the London Transit Authority and the US Military. They’ve developed multidirectional landing lights. Because the units do not need hard wiring the US military is using them to light airstrips in Iraq while the US Coast Guard recently placed an emergency order for 40 lights for harbours in Haiti . Carmanah is now at a point where they can pick and choose their distributors.
I’m becoming more impressed. We head to the plant and meet Tim the manufacturing manager. There are more questions followed by more answers:
We own several patents including on the operating software. We completely encase our units in polyurethane while our competitors have to seal their units with gaskets which are less effective against sea water. We maintain multiple back up parts suppliers, one big and one small, to protect against shortages.
We’ve gone from 8 employees in 1998 to 65 today and are hiring 10 more.
Switches on older models were activated by an externally held magnet. Newer models are programmable by a hand-held remote control and have replaceable batteries. These units have a life expectancy of 20 years.
Someone asks about durability. Tim bounces a unit off the floor. It still works. I immediately think of Cameron Swayze: Takes a licking but keeps on ticking! Poor Tim was set up. Someone tells me later Carmanah was featured on CBC’s Venture where they bounced a unit off the floor that didn’t work.
Turnover has increased from 4 times a year in 1998 to 9 times a year today.
"I'm having a tough time keeping things on the shelf," says Tim.
Now I’m impressed.
We’re taken outside to see a new product line. Carmanah recently won a contract with the London Transit Authority to supply lighted bus stops. They beat out a competitor that had had several years development lead time on the product. Now they’re developing a line of lighted bus shelters. The solar cells are encased in the shelters structure out of view to deter theft. They are called “stealth panels”.
As we leave through that dirty, muddy, gravel filled parking lot I notice the nicest most expensive looking BMW I’ve ever seen. You know the type, one of those cars that the owner takes up two stalls in the mall parking lot to keep people from parking next to them. I’m wondering why the owners aren’t worried about damaging this car in the mud and gravel. I’m fantasizing that down the road the owners think Carmanah will make them so rich BMWs become disposable.
I’m impressed. I think I’ll probably buy a small amount but decide the smart thing to do is wait until the next ShareClub meeting so our group can discuss whether they feel Carmanah is a good investment or not. One of our group decides to buy immediately and gets in at $1.85 the very next day. Over the next three weeks I sit inert in front of my computer waiting for the meeting and watch Carmanah rise to $2.95. I remember the “Wal-Mart of lighting” comment.
For the sake of disclosure, I do not at this moment own Carmanah shares. This article is not a recommendation for or against CMH. Rather, it should be viewed as a recommendation of a process. Individuals in our group had differing concerns that helped each of us deepen our understanding of this company. We can learn from the library but we can also learn from each other.
Next visit we are off to ACD Systems (TSX:ASA). Many off us were surprised to learn a lot of the software for our digital cameras is manufactured right here in Victoria, BC. After that we’ve placed PRT Forest Regeneration Income Fund (TSX:PRT.UN) a producer of seedlings for reforestation on our radar screen.
Finally, at our recent ShareClub meeting we were visited by Tedd Ireland from Winnipeg. Tedd was planning to be in our area and phoned ahead to see if he could coordinate his time here with a meeting. I’m used to doing this at Lodge but it’s a great idea for ShareClubs too.
Robert Gibb, 401-2910 Cook Street, Victoria, BC, V8T 3S7 (250) 383-7075 firstname.lastname@example.org. Robert Gibb is a retired school teacher. He gives seminars on dividend reinvestment plans. Mr. Gibb is a frequent contributor to Internet DRIP boards under the nickname OperaBob.