You didn't think it was me who was buying the Australian rectifier manufacturing company Rectifier Technologies (ASX:RFT) at a price of 0.002, did you?
No -- I'm not that good. But I can vouch for the fact that my good friend who goes by the name of Imran Khan was. And it wouldn't be the first time that I could have blind followed him to a multi bagger, either (not that I recommend blind following anyone, ever). So I'll just get out of the way, and let you read about how he makes a micro-cap multi-bagger investment...
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I first came across Rectifier in 2013 – it wasn’t pretty. Rectifier was trading at two tenths of a cent, had over a billion shares on issue and carried a poor financial track record. Behind the scenes, however, some interesting developments were taking place.
- Rectifier was continuing to migrate its manufacturing operations from high cost Melbourne to low cost Malaysia.
- During 2013, Rectifier announced a significant product distribution arrangement with a Chinese counter-party (who shortly thereafter became Rectifier’s second largest shareholder), and separately, another sales contract in excess of $1m.
- In late 2013, the major shareholder of Rectifier sold down a large portion of its shares at a significant premium (in excess of 100%) to the current share price.
When Rectifier reported their results for the 6 months to 31 December 2013, I was pleasantly surprised to see it report a profit (albeit small) for the first time in a number of periods.
While the market initially welcomed the result, the enthusiasm quickly waned and traders moved on to more exciting targets. Many days, and sometimes weeks, passed without any Rectifier shares trading, and the Rectifier share price continued to languish as a penny dreadful. I continued to place low ball bids, picking up small amounts of Rectifier stock here and there.
If you looked hard enough though, there were signs that, little by little, Rectifier was moving in the right direction.
- In April 2014, the company announced the sale of its non-core UK operations in order to reduce debt and focus its attention on Asia Pacific operations.
- In June 2014, it announced it had won two Victorian awards for the research and development, and sustainability, features of an innovative new rectifier product, and;
- In August 2014, it advised it had secured approval to sell their new rectifier product in China.
This culminated in Rectifier Technologies announcing a positive NPAT result for the 12 months to 30 June 2014 of $576k.
This still wasn’t enough for the market. The poor liquidity saw traders get bored and long term investors lose patience. In January and February 2015 I acquired my final parcels of Rectifier shares at two tenths of a cent – the same price as my initial purchase approximately 18 months earlier.
In late February 2015, leading up to its half-year profit report, all of a sudden stock liquidity began to pick up. Reasonable sized parcels were trading hands and crossings of stock were taking place. After the market closed on Friday 27 February 2015, Rectifier reported a normalised EBITDA for the 6 months to 31 December 2014 of $473k and positive operating cash flows of $633k. Rectifier mentioned that they were continuing to develop new products and increase sales, including in the fast growing and ‘sexy’ electrical vehicle charging market.
The following Monday saw Rectifier open at 0.5 cents and by the following week had reached 1.1 cents. A major re-rating was taking place. Shares most recently closed at 0.007, and have traded as high as 0.011.
The investment case in Rectifier continues to improve. In June 2015, Rectifier announced they had signed a contract to manufacture a customised rectifier for an Australian customer, which was expected to deliver in excess of $3.5m over 3 years.
This was followed by Rectifier, for the second year in a row, receiving an award in the Victorian i-Awards for Rectifier’s new high efficiency electrical vehicle charger rectifier – further evidence of the success of Rectifier’s research and development efforts.
While the Rectifier share price continues to be volatile, the days of Rectifier Technologies at two tenths of a cent would appear to have passed.
The "RFT journey" -- as I think of it -- is a good example of micro-cap investing. Some of my key take-outs from this investment could also apply micro-cap investing more generally. They are:
- There are some genuine diamonds in the rough opportunities on the ASX – one needs to look hard to uncover them. By the time they become popular ‘names’, the easy money has usually been well and truly made.
- Position sizing is always important if you want to sleep well at night. This is particularly the case with illiquid, non-dividend paying, micro-cap stocks with less than stellar track records. The beauty of investing small amounts in a basket of such opportunities, is that it only takes one stock to really come good to generate over-sized portfolio returns.
- Following a stock closely over a long period of time puts you in a very good position to see the incremental steps a company has taken to get where it is today; rather than just viewing a company purely as what it is today (for a growing company, the 'how' is more important that the 'what').
- Illiquidity can work in your favour – poor liquidity can scare away many potential investors who would otherwise be competing with you for stock. As far as selling is concerned, liquidity events do happen - most stocks won’t stay illiquid forever.
Disclosure: Imran Khan (the author) holds Rectifier Technologies shares. Claude Walker (introduction only) also owns (a very small holding) of Rectifier Technologies shares. Nothing on this website is advice ever. It is a place to share stories and discuss investing in ethical companies.