Buying insurance for a market correction
There’s a market correction headed our way, says this Canadian analyst, and you can get some insurance with a small Canadian stock.
It’s not going to last.
The long market rally that began in the spring is a mirage. This is really a bear market disguised in sheep’s clothing, so to speak.
That is the opinion of one Canadian analyst who expects a severe correction later this year.
That doesn’t mean Mr. Mike Kachanovsky is abandoning stocks altogether. But he is being very selective in filling his portfolio, he writes in Investor's Digest of Canada.
And although his specialty is junior mining stocks, the stock he is recommending for the stormy seas ahead is not a mining stock at all.
It’s a stock that has little or no competition in its field. It is called Armada Data (TSX/V-ARD). While its name may bring to mind the huge Spanish fleet that invaded England five hundred years ago, it has much more to do with fleets of cars. More specifically, with car insurance.
Here’s why this analyst thinks this is the right stock at the right time.
Not rocket science
If Mr. Kachanovsky is right about the correction that looms ahead of us, then it would be wise to set some very specific guidelines for stock selection.
He is looking for value, which he defines as a stock that can offer future growth by building on a strong balance sheet. “It is hard to get hurt when you can buy a dollar’s worth of assets and pay less than a dollar,” he says.
“And companies with low debt and the ability to generate recurring income and growth from operations are more stable during difficult markets. None of this is rocket science.”
But when you are looking at microcap stocks, you’d better have a pretty scientific approach to making your selections. And as far as this analyst is concerned, the evidence adds up in favour of Armada Data.
Faster and cheaper
When you file an insurance claim for a banged-up car, chances are that the insurance company will process that claim with information from Armada Data.
“By outsourcing this application to Armada, insurance companies can better determine the fair compensation value for cars written off in accidents,” says this analyst. Armada supplies the information faster and cheaper than the insurance company can manage in-house.
Armada is 10 years old. Its founder and president, Mr. Paul Timoteo, has been in the auto business for 25 years, “and recognized the need for accurate pricing information on the Canada car market to assist insurance companies with claims settlements.”
Eight of the top 10 Canadian insurance companies now use Armada. Still, there is more room to grow. Mr. Timoteo believes that his firm can capture as much as 50 per cent of the entire Canadian market for insurance claim settlements.
And it has grown another arm as well. Armada is now helping car buyers find the wheels they want.
Car buyer’s market
Armada has set up a retail market for car buyers. It allows them to “access auto-pricing information and a network of dealerships to help secure a lower purchase price when buying a new car,” Mr. Kachanovsky informs us.
At new-car dealerships, there is usually a gap between the sticker price on a car and the actual dealer invoice value of the car.
So Armada offers detailed information on factory pricing, dealer invoice pricing, market incentives, rebates, finance programs and the other variables that can be worked into the final price of a car. Thus armed, the buyer can negotiate a lower purchase price.
Armada also offers comparative data — fuel economy, optional equipment, warranties, etc. — that help buyers choose among vehicles.
Nor is it doing this behind the dealers’ backs. A number of dealerships, realizing the value of value pricing, have hooked up with the company. The buyers get a good deal, the dealers get pre-qualified buyers, and Armada gets a sort of finder’s fee.
The company sells memberships on its web site, www.carcost-canada.com, and it has over 100,000 signed up.
A huge head start
“Given the huge head start that Armada has earned in the automotive data space,” the analyst tells us, “it is unlikely that a significant new player will step up to compete.”
With all its services fully automated, the company keeps its operating costs low. It has reported a net profit for eight consecutive quarters, it is debt free, and it recently announced a dividend payout.
Sounds pretty good, but nothing’s perfect. Auto sales are still in decline. Still, says Mr. Kachanovsky, those who are in the market for a car will certainly be motivated to get the best possible price. “This is bullish for Armada.”
The stock has been flying under the radar of most investors, but since this article was published, the stock doubled in price, from $0.20 to $0.41. (You may well wonder whether its appearance in Investor's Digest of Canada has helped the stock along.).
If a market correction is indeed on the way, not all investors will be comfortable with a microcap stock, no matter how attractive it seems.
Nonetheless, Mr. Kachanovsky believes that this stock has just what you want, since it is “one that can sustain growth in a difficult market but still be attractive if the good times roll.”
In short, it could insure you against a big crash in the market.
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