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Ignore the TSX Venture Exchange at Your Own Peril

It doesn’t happen that often, but when it does, you can’t match the feeling of beating the markets.

On September 20, Scientific Games Corp. (NASDAQ:SGMS)announced that it would acquire NYX Gaming Group Ltd. (TSXV:NYX). Scientific Games’s gaming brands include Bally and Shuffle Master; NYX Gaming is a Las Vegas-based digital gaming company that’s best known for its OpenBet Sportsbook — a product that allows sportsbooks to deliver for their betting customers.

Scientific Games is paying $2.40 per share for NYX stock, a company with an enterprise value of $775 million. If you just happened to buy the small cap on September 19, one day later, if you’d sold, you’d have doubled your money — in a single day.

Here at the Fool, we tend to look at larger stocks with a minimum market cap around $500 million.

However, it’s not the market cap that matters, but rather the enterprise value — the price someone must pay to buy a business. That’s because the new owner assumes any debt it carries as well as cash in the bank.

So, if you set an arbitrary minimum number such as $500 million on a stock screen based solely on market cap, you would have missed out on a mighty fine payday.

You also would have missed out if you’d limited your screen to the TSX and ignored the oft-maligned TSX Venture Exchange.

Ignore at your peril

A quick screen of the TSX Venture lists 78 stocks with market caps between $100 million and $500 million, 13 of which have an actual price-to-sales ratio, suggesting they’re currently making money.

Now, 13 isn’t a whole lot to consider, but, remember, I’ve only included those that have a P/E ratio. NYX is among the 78 stocks, but it doesn’t have one, so it got screened out.

However, if you look at NYX Gaming’s second-quarter profits, you’ll see that it does make money on an adjusted EBITDA basis. In Q2 2017, it grew revenues and adjusted EBITDA 73% and 67% year over year to $61 million and $18 million, respectively.

As I look through the company’s management discussion from the second quarter, it’s easy to see why Scientific Games is acquiring NYX Gaming; it’s a company on the rise. Openbet is the product Scientific Games wants to get its hands on.

Scientific Games will now be perfectly positioned to capitalize on future regulatory developments in real-money wagering and sports betting by adding NYX’s industry-leading OpenBet Sportsbook,” stated its press release. “NYX’s digital Sportsbook can be seamlessly delivered throughout Scientific Games’ global gaming and lottery networks in existing and future regulated U.S. and global markets.”

Not only that, but it’s accretive to earnings and cash flow in year one.

As someone who spends a lot of time rummaging through company websites looking for information about the businesses I’m writing about, I see a lot of crappy sites with terrible presentation and access to information.

NYX Gaming’s site isn’t one of those. In fact, considering its a TSX Venture stock, I’d say it compares very favourably with the company that’s buying it.

Good things do come in small packages.

The moral of the story

Stocks worth owning don’t come in one neat little package. Ignoring businesses whose shares are listed on Canada’s junior exchange, albeit an exchange with a lot of flaws, in my opinion, is a mistake.

Certainly, the people who are benefiting from owning NYX Gaming before Scientific Games’s announcement, are thankful they didn’t ignore the TSX Venture.

Winning investors spread their net wide looking under the greatest number of rocks humanly possible. It’s how you find the NYX Gamings of the world.

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Fool contributor Will Ashworth has no position in any stocks mentioned.

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