“The Under-$3.00 Restaurant Stock that Could Be the Next MCD or SBUX”

By Travis Johnson, Stock Gumshoe, December 22, 2015

Yes, that’s not my headline — I borrowed it from the ad I was asked to look at, the “special presentation for fast-moving readers” from Agora Financial’s Microcap Millionaires.

The other possible headline would have been, also from the ad, “This Tiny Company Could Be The Next Household-Name Mega-Brand.” So you see, that’s not much less inflammatory.

But you get the point: Thompson Clark of Microcap Millionaires is fishing for new subscribers, and he’s using the “$3 could be a distant memory” pitch as bait. So we thought we’d try to identify the stock for you (without, you know, actually subscribing — that would be cheating, and it would also cost $2,500).

And I have to warn you: This probably isn’t going to be a 100% certain match — Clark was a little parsimonious with the clues, so our Thinkolator came up with a solid match… but maybe not the right one. Most of the time, we have 100% certainty of our teaser solutions, so it’s always a bit frustrating when we can’t get there…. but, well, sometimes perfection is elusive.

Here’s the pitch that got our readers’ attention:

“As we speak a tiny Canada-based company is rapidly becoming what could be one of the biggest wealth creation opportunities since McDonald’s or Starbucks.

“The company has only been public for a few years but already has over 300 stores spread all across Canada. But growth is just the tip of the iceberg…

“The company also has a new, hard-charging CEO and an ingenious strategy for more expansion… but the market hasn’t caught up yet.

“That’s the heart of your opportunity.”

So… “over 300 stores” … “restaurant stock” … “under $3” … “new, hard-charging CEO” … anything else for the Thinkolator?

Well, not really… but here’s a wee bit more from the pitch that might help a little:

“By my conservative estimates, I calculate this company could easily rise from the sub-$3 level it’s at right now, to at least $7.50 a share as early as the next earnings report.

“That’s because even a reasonable multiple of predicted earnings puts the value of the company at well north of $7.00 a share… making today’s price an absolute steal, even if it doesn’t rise to the extraordinary McDonalds and Starbucks level gains just yet.”

So who is it? Well, as noted the Thinkolator does not have a 100% match… but the best answer we’ve got so far is: Second Cup Coffee (SCU.TO, SCUPF OTC in the US)

There are other possible matches for those clues, which is why we’re not 100% — Imvescor Restaurant Group (IRG in Toronto, IRGIF OTC in the US), for example, ticks most of those boxes as well, but Second Cup is a better match… and it also had a spike in volume on Friday after Clark’s reported release of this info to his subscribers, and a further climb Monday after those subscribers had a chance to digest it over the weekend.

Clark said he’d be releasing this to his subscribers during the day on Friday, and as of now the stock is up 18% since the Thursday close without any actual news… which is about what you’d expect to have happen to a microcap stock that gets picked by a newsletter. The shares also had a big spike up in trading volume right at Noon on Friday, which is when Clark said his “alert” would “go live.” Still, there are many days when only a few thousand dollars worth of SCU shares exchange hands, and some days it doesn’t trade at all, so there remains a chance that it could have been something else bumping up the shares over the last couple days. Doesn’t take much with a company this small.

The Second Cup is not a new company, it was started as a single specialty coffee store about 40 years ago, and expanded pretty rapidly in the 1980s and 1990s… 20 years ago, they were of comparable size to Starbucks (between 100-200 stores each), and they’ve been through several transitions over the past decade but have stayed fairly steady with about 300-350 stores for most of the past several years and, from what I can tell, have been fairly moribund as a no-growth or low-growth chain for years.

They’ve been bounced around to different owners, spent a few years as an income trust and as a subsidiary of Cara (CAO.TO, they franchise a bunch of different Canadian restaurants), and then again became a publicly traded corporation when they did their trust conversion back in 2011, which could fit under a liberal interpretations of “only been public for a few years.”

Now they’re the decided underdog, of course, since everyone is the underdog compared to Starbucks (there are almost 1,400 Starbucks locations just in Canada now).

They are not growing rapidly, and they are not profitable at the moment… but they are being pushed to reinvent themselves by their new(ish) CEO, Alix Box, who was interviewed by the Star about the process back in August. It’s an interesting story, trying to revamp a fairly tired chain and get your franchisees to reinvest in a big upgrade to become a higher-end coffee shop instead of competing with the high-volume Starbucks, McCafe or Tim Horton’s… and I can’t say that I have any idea how the story will play out, but I’m fairly confident that this is the stock being pitched by Thompson Clark.

I haven’t seen any analyst estimates for Second Cup earnings, nor have I seen forecasts from the company about what their earnings might be. I don’t know where Clark is getting his $7+ valuation target from, but the stock last traded in that neighborhood a little over three years ago, before they cut the dividend (they did away with the dividend entirely a year and a half ago, which also didn’t help the shares much).

The company is almost absurdly tiny, with a market cap of just $40 million (and that’s Canadian — so it’s about US$30 million), the stock is most likely very illiquid, and it certainly qualifies under Clark’s “Microcap” moniker. They’ve posted big revenue growth recently, for the first time in a long time, but that’s not necessarily good news just yet — it seems like they mostly increased revenue because they bought stores back from their franchisees (which means that they book the whole revenue from the cafe, and all the costs of the cafe, instead of just booking the high-margin royalty fees like they do for franchised stores).