Understanding Information Arbitrage with Government Contracts

I’ve noticed there is usually quite a bit of information arbitrage to be found with companies that contract with the government.

If you’re diligent and track this closely, you can find some excellent opportunities for short term trades, and in this case, a 250% gain in a day for the company below.

Here’s a quick lesson on how it works.

Finding Government Contracts & Bids – A Quick Case Study

When you work with the government, the majority of contracts for goods and services go through a public competitive bidding process. The government usually has a website where they’ll post what they need and companies will bid on the job.

More importantly, the government also tends to release the winner of these bids and the value of the contracts. That’s where you’ll find your information arbitrage.

Meet JEMTEC (ticker: JTC.v), a very, very small Canadian company that provides monitoring solutions to prisons.

Recently, JEMTEC put up a press release announcing they won a new contract with the Ontario MCSCS:

But unfortunately, there was no dollar amount specified.

Luckily for us, all of this public knowledge. If you head over to the Ontario Tenders website (https://ontariotenders.bravosolution.com) and started searching through, you’d eventually stumble upon the contract Jemtec was awarded:

That’s a $6 million contract for a company valued at $950k (literally).

Valuation After the New Contract

The big question now?

How much is this thing worth?

We can make some educated assumptions by looking at the financials:

On the revenue side, we first add in the expected revenue of the contract: ~$6 million over 6 years or $1 million per year. We can expect the Ontario revenues to start coming through late in the third quarter.

Although the company has been growing, let’s assume no other growth beyond the Ontario contract.

Now onto expenses:

To be conservative, I assume a 50% gross margin on the Ontario contract, although they have historically earned higher.

SG&A should remain pretty much the same, as all the work needed for this work is contracted out up in COGS.

That leaves us with almost $500k in profit in 2017, and $0.20 in EPS, on a stock trading around $0.40 prior to this announcement.

We can throw on a few multiples of earnings to see that the stock is easily worth over $2 a share, likely closer to $3 share.

Summing It Up

If you follow companies that often work with the government and bid on various contracts, you’d be very wise to keep a close eye on various contracts they might be bidding for.

Technically, JEMTEC’s contract was awarded on March 14th, so this information was public almost two weeks before the PR.

As you can see, it pays to be diligent.