This episode explores Paul Andreola's unique microcap investing system, focusing on undiscovered Canadian businesses. Andreola, a successful investor with diverse backgrounds in construction, investment banking, and startups, details his approach, emphasizing the importance of deep, manual research using Canada's CDAR system, even amidst increasing retail interest in microcaps. More significantly, he highlights his preference for identifying companies at inflection points, often after their IPOs, looking for two consecutive quarters of profitability as a key indicator. For instance, he discusses his successful investment in XPEL, a company initially overlooked by the market. The discussion pivots to his book influences, including "What Works on Wall Street" and "How to Make Money in Stocks," which shaped his strategy of buying at 52-week highs and focusing on small, profitable growth companies. In contrast to typical value investing, Andreola explains his comfort with concentrated positions and averaging up in winners, viewing dilution as a potential opportunity rather than an automatic red flag. This approach, combined with a keen understanding of the discovery process and the Canadian microcap market, has yielded significant returns, with a high hit rate and a portfolio shaped by a few large winners. This means for investors that a concentrated, fundamentally driven approach, coupled with a deep understanding of market dynamics and a willingness to do the necessary research, can unlock significant opportunities in the microcap space.
