Big Picture, Small Cap Investing: Jim Letourneau

Examining the macro-economic environment is how Jim Letourneau, publisher of the Big Picture Speculator, likes to begin his stock-picking process. However, his understanding goes beyond headline news to reveal surprising investment themes with profit potential. In this interview with The Energy Report, Letourneau talks about the hype and commodity investment cycles and where to dig for blue-sky stocks.

The Energy Report: You publish the Big Picture Speculator. What does that title imply?

Jim Letourneau: I believe the macro context is often more important than the details about an individual company. I read a broad range of material every day that helps me form my views, and one of my best skills is putting together the big picture and connecting the dots for audiences. A recent example of my method is my coverage of the natural gas sector, which focused on how the abundant supply of natural gas has led to a complete shift in the types of companies that people should be following. Rather than natural gas producers, investors should find companies that are consuming natural gas, like Methanex Corp. (MEOH:NASDAQ; MX:TSX; METHANEX:SSE), Westport Innovations Inc. (WPT:TSX) or Energy Fuels Inc. (EFR:TSX). These companies are in great shape because their costs are significantly lower. That's a huge big-picture shift, but people get bogged down in all of the debates about fracking and other controversies.

The bottom line is the U.S. now has the cheapest natural gas in the world, and that's not a horrible problem to have. When I talk to technical people, we just look at each other and think this is a miracle. No one saw this coming.

TER: As a geologist, how does your technical knowledge shape your investment decisions? What do you look for in potential investment opportunities?

JL: Technical knowledge includes pluses and minuses. In general, the types of companies I look for are usually going to have a market cap of under $100 million (M) and for me to get excited about them, they have to have the potential to surmount that $1 billion (B) market cap. So there's a potential tenbagger upside in them, if everything pans out. That potential could be in the form of a new technology backed by a critical management team or a higher-quality mineral property. Either way, management teams are critical for these types of things to play out.

TER: How far down in market cap do you go when considering investments?

JL: Sometimes I go down too far, but I think $50M is better than $5M. While you can argue that it's easier for a $5M market-cap company to go to $50M, your odds start to dwindle. It's a matter of finding that balance point. Obviously, it's nicer to buy a company cheap and have it grow into something bigger, but the company is usually cheap for a reason. I don't want to have to write about 50 companies a year that didn't quite make it. I'd rather go up the food chain a little bit and follow ones that are going to survive, and whose progress we can track year by year.

TER: You spoke at the Cambridge House Energy and Resource Investment Conference in Calgary on March 30 and 31. What subjects did you cover?

JL: My keynote talk was called "Making Money Using Commodity and Hype Cycles." I overlayed two kinds of cycles: The commodity cycle is a longer cycle that we've been in for over 10 years now. Hype cycles refer to heightened public awareness of a new technology or a particular element on the periodic table that hasn't been speculated on yet. A recent example would be graphite. Uranium is another really good example of a hype cycle; there was a huge amount of interest about eight years ago and hundreds of companies were formed. Investors were making lots of money with uranium stocks. Then it all withered away. There is still opportunity because some of those companies are still around and advancing their businesses.

I also did a workshop called "How to Find Billion-Dollar Companies," where I mentioned some of the companies I like that have market caps near $100M with the blue-sky potential to get up to the $1B level.

TER: What do you think the potential is on a percentage-wise basis of finding billion-dollar companies?

JL: The odds are challenging. This is more speculative and it's much higher risk than a nice dividend-paying stock with cash flow. These companies have lower market caps for a reason; there is either skepticism about the technology or a lot of competition. We don't need 100 new rare earth mines, but maybe we have 100 rare earth companies. So which companies are going to win that race? It's a bit like horse racing; you pick your favorites. The odds are you're not going to win on every one of them.

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