New Position

This week I established a new long position in BSquare (BSQR). I want to say right up front that this one is outside my sphere of competence. However I will go over why I decided to establish the position anyways.

BSquare describes itself as a provider of smart, connected, systems software solutions. They do some interesting stuff, for example it says they are the lead systems integrator for those Coca Cola Freestyle machines (the ones where you can create your own custom flavors). Like I said, I’m no expert in this field, so it is best if you just check out their latest investor presentation on their investor relations page.

So why did I establish a position when I felt it was out of my sphere of competence? I felt BSQR had the ‘low risk, high uncertainty’ kind of profile I like to invest in. BSQR is a micro-cap stock with a roughly $80 million market cap. BSQR has roughly $27 million in cash and short term investments, and no debt, so a very strong balance sheet. BSQR has also been profitable on a cash basis the past several years. So all that is why I felt BSQR was relatively low risk.

Now how about the high uncertainty part? BSQR has been working on a new product offering for the internet of things called DataV. Management has been pretty tight lipped about it, not providing much info on revenue potential. However they have said that 1) they expect to start recording revenue from it later in 2015, 2) it has initially been gaining attention among manufacturers and operators of mission critical industrial equipment, and 3) it is a scalable product, which they are exploring offering on either a sale and support basis or on a software as a service basis. The Internet of Things (IoT) has been much hyped by many companies of late. As I said, I have no clue how well BSQR’s offering will compare to everyone else’s. It could fail completely or if it gained traction the potential could be huge. With BSQR’s tiny market cap even modest progress could have a meaningful impact on the share price. So this is why I believe BSQR has high uncertainty.

Although I am unqualified to evaluate BSQR’s products, I do think I see some indications of positive momentum. As I mentioned, BSQR has already been working with some high profile customers, such as Coca Cola. BSQR mentioned a new ‘global 100 customer’. Partly due to this new customer BSQR projected margins in their services segment to increase in the second half of the year. BSQR’s profitability in Q1 reached a high for the past several quarters, and BSQR has said in its filings that Q1 is usually the seasonally weakest. Insiders have been buying shares recently, as high as around $4.80.

So overall I figured I could hold BSQR for 6-12 months, and if their IoT initiative doesn’t gain any traction then maybe I lose $2, whereas if it does the upside could be 10x that. Low risk, high uncertainty.

This is the same reasoning behind my other micro-cap investments, GTIM and RAVE. Tiny market caps with strong balance sheets and at least around break-even profitability meant low risk. New concepts/products in a huge market meant high uncertainty. BSQR also shared the qualities of low analyst coverage, low institutional ownership, low number of shares outstanding that GTIM and RAVE have.

I established a half position this week and would add the other half if BSQR drifted back down to the $5 range.