Fool’s “Small-cap ‘Amazon of the North'”

The ad from Hidden Gems Canada says "This Small-Cap Canadian Stock Could Be Like Buying Amazon in 1997..." What is it?

By Travis Johnson, Stock Gumshoe, January 27, 2020

This article was originally published on October 30, 2019 when we first saw the Motley Fool “Amazon of the North” ads — it’s being teased again this week, so we’re re-posting this solution to help answer reader questions. The stock being teased has risen about 15% since we first covered the pitch, but the story has not changed in any meaningful way — what follows has not been updated or revised.

Back to the Motley Fool we go… this week it’s the Motley Fool Canada that caught my attention, hinting at a recommendation they made a few months ago but still like now for their Hidden Gems Canada service.

Here’s the lead-in for the ad, which I received just this morning… we start with the “fear of missing out” greed factor:

“When The Motley Fool first recommended Amazon to its U.S. members in 1997, it was just a small-cap stock trading for roughly $1 a share… but many investors failed to take it seriously.

“Fast-forward to today, Amazon’s stock is up a mind-boggling +32,000% – turning every $5,000 invested into roughly $1.6 MILLION!”

And then move on to the “wait, maybe you’ve got another chance for those gains!” tease…

“Now, a Canadian small-cap stock is being called “The Amazon of the North” by some market insiders.

“Why? It just secured a $600 million investment from none other than Amazon itself.”

So what is this company? We’re told that it’s listed on the Toronto Stock Exchange, and that it “dominates 95% of the market” in Canada (for what, we don’t know). And the ad also says that it’s valued at $1.2 billion today, so it’s certainly small enough to have big long-term growth potential (though I’d say Amazon, too, has plenty of growth potential remaining, and it’s ticking along at almost a $1 trillion valuation).

Any other hints about the focus of this special report? Not really, though they do say that the report is called “”The Small-Cap Amazon of the North Has Arrived.”

And they ladle on the FOMO pretty heavy in the P.S. of the email that I got today:

“Amazon’s stock is up a mind-boggling +32,000% – turning every $5,000 invested into roughly $1.6 MILLION!

“Click here to get the story on this little Canadian company before something similar potentially happens again and you miss out…”

OK, so, before I tell you the Thinkolator’s results I want to make one thing clear: I PROMISE that this stock will NOT be the “next Amazon.” It’s NOT going to go up 32,000% in the next 20 years. I am extremely confident in that assertion.

Which doesn’t mean it’s a bad stock, of course, just that if you start your research with that “next Amazon!” in mind, you’re not going to be careful enough or think about risk or loss potential. Let’s go in clear, shall we?

So now I can tell you: Thinkolator sez this is: Cargojet (CJT.TO in Canada, CGJTF OTC in the US), which is indeed an Amazon supplier and may receive an equity investment from Amazon.

But no, this is not some infinitely scalable breakthrough company — it’s an air leasing and air cargo company. Their primary business is operating a Canadian city-to-city air cargo transport network for rapid overnight deliveries and companies like Amazon are their customers. Here’s how they describe themselves:

“Cargojet is Canada’s leading provider of time sensitive premium overnight air cargo services and carries over 8,000,000 pounds of cargo weekly. Cargojet operates its network across North America each business night serving 15 major cities, and selected international destinations, utilizing a fleet of 26 all-cargo aircraft.”

And it has not “secured a $600 million investment from Amazon” — it has given Amazon warrants to acquire 14.9% of the company (at roughly C$91 a share) over the next 7-1/2 years, and those warrants only vest if Amazon spends $400 million on Cargojet’s services during that time (for the first 9.9%, within 6-1/2 years) and another $200 million by the time 7-1/2 years are up, which would be the winter of 2027-28.

If Amazon earns and exercises those warrants, they would then hold 14.9% of the company, for which they would pay about C$183 million (that’s exercising warrants on 14.9% of their current 13.5 million share count, at $91 a share). I would assume that this deal works out well for Cargojet if it inspires Amazon to use its services more actively or exclusively, which is certainly possible, and if it deters Amazon from building out its own fleet of cargo planes in Canada, but it isn’t creating brand-new business — Amazon was already Cargojet’s customer, and presumably was their largest customer.

Cargojet sees opportunities for growth in a few areas — they aren’t currently planning on significantly increasing their fleet of 22 cargo jets and three passenger jets (the passenger planes are on charter and run by a third party) in the next couple years, but they think they can use them more efficiently by adding daytime or weekend routes and increasing their trans-border shipments, particularly with the US as the new trade agreement (presuming it eventually gets ratified by Congress) increases the allowable cross-border purchasing limit for individual Canadians.

Their planes are pretty old, mostly 20-30 year old Boeing 757 and 767 freighters, and they own about half of them (the other half are leased), their pilots are in a labor agreement through 2023 so labor is pretty settled, and about 75% of their revenue each year is from long-term contracts with major customers which include surcharges for high fuel costs, so the business should be fairly predictable. Here’s how they described the business in the last earnings report:

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