Converge Technology Solutions Corp. (CTS.V)

I am introducing a Canadian micro cap stock to this board(A little less than 1B cap but huge upside) mainly for Canadians on this board but also those who are interested in buying Canadian stocks from other countries.

I am living in Canada and most of my portfolio is invested in US growth stocks. This is one of the Canadian stocks it’s worth it for me to invest in. There are not that many opportunities in Canada. That’s why I focus in US market. Since this is a micro cap under 1B and volume is very thin, it’s not suitable for those with large dollar size.

Converge Technology Solutions Corp. (CTS.V)

It’s traded on TSX Venture Exchange Under symbol: CTS and German Exchange FRA under symbol: 0ZB

The business model is boring: IT solutions provider but the growth is impressive!

Company Overview:

“Converge Technology Solutions Corp. is a North American Hybrid IT Solution Provider focused on delivering industry leading solutions and services. Converge’s regional sales and services organizations deliver advanced analytics, cloud, cybersecurity, and managed services offerings to clients across various industries.

Converge supports these solutions with talent expertise and digital infrastructure offerings across all major IT vendors in the marketplace. This multi-faceted approach enables Converge to address the unique business and technology requirements for all clients in the public and private sectors.

Our goal is to provide a trusted partner that brings together world-class solutions and services to help reduce costs, increase efficiency, and create competitive advantages.”

It’s an IT solutions providers integrator. Even though it’s a Canadian Company, most of the companies it acquires are in the US and a couple companies in Canada and it plans to expand to Europe this year. So if you buy, you are not just buying into Canadian economy. It’s a global company.

It grows by acquisitions. At the beginning, It planned to buy 5 to 6 companies per year. It seems to walk the talk. It’s been acquiring companies at a rapid rate. It paused during COVID but resumed acquisitions since the last quarter. IIRC, it bought around 16 companies in the last 2 years!

As I am typing this post today. I just saw it just made another acquisition: Vicom Computer Services, Inc.(In US)

"Converge continues to grow with the acquisition of a C$128M revenue business, expanding its array of IT service offerings.
TORONTO and NEW YORK, Jan. 4, 2021 /CNW/ - Converge Technology Solutions Corp. (“Converge” or “the Company”) (TSXV:CTS) (FSE:0ZB) (OTCQX:CTSDF), a national platform of regionally focused Hybrid IT solution providers in the U.S. and Canada, is pleased to announce that it has completed the acquisition of Vicom Computer Services, Inc., a full-service multi-cloud infrastructure provider."

The company I last worked at was acquired by Converge which I quit the job at the end of 2019. When I attended the Converge presentation in 2018. At that time, it didn’t interest me because it seems focused on resellers servicing the governments. I didn’t think there’s much room for growth.And I was not ready for growth stocks. At that time, the stock was trading at $1. I was wrong. In just 2 years, now it’s trading at $5!

Now I have more time, I’ve read three of their 2020 quarterly reports. Government customers represent just around 20% of revenue. The revenue is highly diversified across industries: “By industry, the breakdown for the quarter was approximately 25% health care, 19% banking and financial services companies, 17% technology companies and 15% government.”

So, now I am buying a position in CTS. I put 3.8% weight of my stock portfolio or 2.6% weight of my net worth in Converge stock. It’s not a huge position but decent. I used fresh cash injection into account. I don’t want to trim any of my existing positions in US hyper growth stocks.

-Revenue growth rate: 50% to 100% per year.
-Balance sheet gets stronger: cash account is increasing.
-Gross margin rate is improving
-Continue acquisitions after COVID pause .
-Cheap valuation: Market cap/annual gross profit = 3. Industry average is around 10.
-Recurring subscription revenue is at 20% to 30% of total revenue and is increasing at 70% to 100% per year.
-Stock trading volume increased substantially during the past 6 months due to more institutional ownership.
-Moving to TSX main exchange over the next several months means more exposure to institutional investors such as mutual funds, ETF, pension funds.
-The strategy of buying resellers and turning them into cloud service providers meaning more ARR revenue.
-Expansion to Europe in 2021.

I expect 10x to 20x upside in 5 years with a market cap around 10B to 15B. 60% to 80% annualized return.

Cheap valuation: 70% undervalued.

Market cap vs gross annual profit ratio:

Market cap/ gross annual profit ratio: 685m/ 220 m = 3.1, expected ratio to be at least 10.
Growth rate: 50% to 100% per year
3 times upside. Plus 50% to 100% per year revenue growth rate.
Gross margin: 23%

Constellation Software Inc.
Market cap/ gross annual profit ratio : 35B/3.6B = 9.7
Annual growth rate: 20%
Gross margin: 90%

Enghouse Systems
Market cap / Annual gross profit ratio = 9.5
Annual growth rate: 15%
Gross margin: 70%

CGI Inc.
Market cap / Annual gross profit ratio =13.7
Annual growth rate: 4%
Gross margin: 20%

I bought 2 more small positions in my Canadian dollar account in:
TSX venture: GRN
TSX venture: XBC

Since these two are my tiny positions, I won’t write details about. They are about renewable natural gas and renewable hydrogen gas upgrading/production equipment. Both experienced fast revenue growth and have significant backlog due to world governments shifting to de-carbonize the economy. I also won’t include these three Canadian companies in my portfolio results in the future because of different currency and small positions. It’s just a hassle to combine with my majority of US holdings.


I would urge caution on companies growing by acquisition. I work in a company that was a market darling for quite a while and our revenue growth was pretty nice till one peeled the layers and most of the growth was acquired growth that stretched the balance sheet and left the company over leveraged. Also it is very hard to compete with only people and no products as your key differentiator in the IT industry. Eventually someone else comes along who will be cheaper and unless there is a very large brand equity which a micro cap will have a hard time building up it is difficult to see these stocks as unique wealth generators in the very long run. Eventually our company declared bankruptcy as we were also in the oil industry.

My 2 cents, I do not go near Non product companies regardless of revenue growth as that is just not a good enough formula for long term success



@ GrowthConvert

Resellers are parts of the supply chain. Let’s say a bank wants to get a new computers, or software, they don’t go directly to manufacturers. They go to resellers. It’s especially true for complex products such as VMWARE, EMC server, Amazon AWS cloud infrastructure. Those are complicated products. They need help to design a solution they need. Those resellers have been in business for long time. Many of them have been in business for several decades. After Converge acquired them, Converge remove duplication front and back office and reduced cost. Volume rebate also goes up. In affect, they doubled the profitability of a company they acquired.

Debt are normal for IT service providers. If you check the liabilities for Constellation Software Inc., Open Text ,CGI Inc even IBM . They all carry loads of debt. The products they provide are essential. Revenues are stable. There are regular upgrade cycles due to aging or new innovation such as cloud computing. As long as they can service the debt, it won’t be a problem. You can’t compare IT solutions providers with oil company. Converge has no oil companies as customers. The reason they did so well during the pandemic is their products offering are essential for businesses to operating in a pandemic. The COVID had no negative effect on their growth. It only delayed their acquisition pipeline for a few months.

Since this is a small position, I don’t sweat if it doesn’t go well.
However, many metrics are improving and going in the right direction.
I think the probability of Converge to become a 10 baggers or 20 baggers in 5 years is 90%.
If it doubles in 1 year, then it’ll get closer to a full size position looking from initial allocation.


Author: GrowthConvert

My 2 cents, I do not go near Non product companies regardless of revenue growth as that is just not a good enough formula for long term success

Author: CloudL

Resellers are parts of the supply chain. … It’s especially true for complex products such as VMWARE, EMC server, Amazon AWS cloud infrastructure.

They are called VARs, Value Added Resellers

The difficulty with VARs is that they don’t have much if any leverage. “Product” companies have leverage in that they can ramp up production with minimal added cost and even reduce their cost by increasing volume (learning curve, Wright’s Law). The ideal product companies are software and SaaS. For VARs to expand they need to hire more experts who instead of getting cheaper want raises. In a sense it’s more like being self employed than being in business.

I agree with GrowthConvert, they are not ideal investment vehicles. There are better opportunities out there. I was part of a management consulting firm for ten years. As a personal experience it was truly rewarding but it was not a good business model.

Growth by accretion is not bad investment model provided it’s managed properly but it’s usually not a long term sustainable model. Busts are common, GE in 2008.

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Denny Schlesinger