Bonal (BONL): An Extremely Tiny, Extremely Illiquid Stock that Earns a Lot But Doesn’t Grow at All

by Geoff Gannon

Bonal isn’t worth my time. It might be worth your time. It depends on the size of your brokerage account and the extent of your patience.

So, why isn’t Bonal worth my time?

I manage accounts that invest in “overlooked” stocks. Bonal is certainly an overlooked stock. It has a market cap under $3 million and a float under $1 million (insiders own the rest of the company). It often trades no shares in a given day. When it does trade, the amounts bought and sold are sometimes in the hundreds of dollars – not the thousands of dollars – for the entire day. It’s also a “dark” stock. It doesn’t file with the SEC. However, it does provide annual reports for the years 2014 through 2018 on the investor relations page of its website. In the past, the stock has also been written up by value investing blogs. Most notable is the write-up by OTC Adventures (the author of that blog runs Alluvial Capital – sort of another “overlooked stock” fund). That post was written back in 2013. So, it includes financial data from 2008-2013. I strongly suggest you read OTC Adventure’s post on Bonal:

Bonal International: Boring Products and Amazing Margins – BONL

The company has also gotten some coverage in a local newspaper. For example, I’ve read articles discussing Bonal’s attempt to sell itself at a below market price. Shareholders rejected this. So, the stock isn’t a complete enigma. You have write-ups like OTC Adventures, you have some old press coverage, and you have annual reports (complete with letters to shareholders) on the company’s investor relations page. At the right price, it’s definitely an analyze-able and presumably invest-able stock.

But, not for me. Because I run managed accounts focused on overlooked stocks, I try never to eliminate a stock simply because it’s very, very small or trades almost no shares on most days. Even stocks that appear to have zero volume are sometimes investable. In my personal experience, I can point to cases where I bought up to 10,000 shares of a stock in a single trade that had a history of trading less than 500 shares on average. And that’s not a one-off fluke. It’s happened to me more than once. So, if the shares are out there – your best bet is to bid for the stock you like best regardless of what the past volume of that stock has been. Often, it may be easier to get into – and even out of a stock – in a few big trades than it appears on the surface. This is due in part to people trading much smaller amounts of the stock than you – and a few other bigger, or simply more concentrated investors – will want.

However, in the case of Bonal – there simply aren’t enough shares held by non-insiders to make it worth my while. The accounts I manage are not big. But, the investment strategy I practice is not one where you go out looking for 1% positions. It’s the kind of strategy where you always want to put 10% or more of the portfolio into any stock you buy. Sometimes, because of illiquidity – or the price moving up on you – the position size you end up with might be far short of 10%. But, to start bidding for something – you have to believe it’s possible to put 10% into this stock. Here, because of the extraordinarily small float, it’s just not possible. Even if everyone but the controlling family was willing to sell me shares – this would still end up being a smaller position than I want.

So, for me Bonal is a pass. But, those are trading concerns that some readers won’t have. Since I did look at the stock – I’m going to go ahead and write it up here without worrying about the fact that it’s “un-investable” for the accounts I manage. It might not be un-investable for your personal account. Maybe because your account is smaller. But, also maybe because you like to be much more diversified than I do. If you don’t mind single-digit percentage position sizes – maybe, Bonal is investable for you.

What jumped out to me about Bonal?

This graph…

From 2008-2018, Bonal’s gross margin was higher than 70% in every single year. Most public companies - and almost all public manufacturing companies - never have a single year with a gross margin over 70%.

Two things. One, the company’s size and the fact it was often profitable. This is unusual. There are very, very few companies with sales of just a couple million dollars that manage to eke out a profit. Yes, there are some private companies – often, more like sole proprietor type businesses – that are consistently profitable on such a small level of sales. But, it’s extremely unusual to find a public company turning a profit at such low sales levels. This has important implications. It means the company must have strong product-level economics – gross profitability has to be amazing here – to allow anything to exceed the SG&A line.  It also means that if the company can ever increase its sales by a few million dollars – the bottom line, the dividends paid, etc. are likely to absolutely explode.

Let’s talk “economies of scale”. The economies of scale gained by going from $2 million of sales to $10 million of sales are greater than the economies of scale gained by going from $2 billion of sales to $10 billion of sales. Investors underestimate this. We’re all used to using ratios, percentages, etc. to analyze the stocks we look at. This puts them on equal footing. It makes it appear that a group of 100 different wineries making 1,000 different wines has as good a chance of improving its operating margins as a company making 1 type of wine at a single vineyard. That’s wrong. The single vineyard has a much, much greater chance of expanding operating margins on even small increases in sales, because true fixed costs are a much greater percentage of the company’s current cost base and what I’ll call “semi-fixed costs” are also big. Semi-fixed costs are things that if the company quadrupled in size would be considered a “variable” cost because you would have to scale them up at the same rate. But, there is no scaling up of the cost – or very little scaling up of the cost – at small incremental sales gains till you hit a certain level of utilization. Basically, you might have a vineyard that could do $5 million in sales, but it is now doing just $2 million in sales. This doesn’t mean you need to more than double assets to get to $5 million in sales. It means you are operating inefficiently at 40% utilization of your current capacity. This is very, very common for very, very tiny companies. Everything about them from the premises they rent, to the sales team that markets their product, to the CEO’s time may be underutilized. The further down the income statement you go – the truer this is. Every company – even a “dark” company – has some “corporate costs” that eat up a lot of profit. It needs a CEO, it needs a board, and it needs an auditor. And every company – no matter how small – needs a location to use. Often, the location being used can handle more volume than a couple million in sales, production, etc. So, the administration of a very small public company and certain other general costs – as well as some costs that might end up in the “gross costs” line – have a ton of operating leverage built into them. Often, if sales go from $2.5 million to $1.25 million – the company goes from solidly profitable to being on the verge of bankruptcy. While a sales increase from $2.5 million to $5 million would make earnings explode.

Is that the case here with Bonal?


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