6) It’s okay to reach out to management.
If you invest in Walmart, GE, or American Express, they’ll have a professional investor relations team that will field your calls and answer your questions. It’s pretty much worthless in my opinion. They can clarify questions but they’ll never really be able to provide you with anything of value.
Investor relations is really there to keep small investors from bothering management and conveying big mutual funds' and hedge funds' concerns to management. Small companies, on the other hand, don’t have IR teams; they can’t afford them. And management is often happy to talk to a shareholder who actually shows interest in their business. Feel free to reach out, express concerns and talk shop. Be careful here though: Management can be very persuasive and are often perma-bulls on their stock. Don’t ask for insider information, and don’t become “emotionally” attached to the company. Stay rational, and keep questions relatively broad based.
7) Dividends aren’t a bad thing.
In most cases, I prefer stock buybacks (done at rational prices and for the right reasons) to dividends as a way of returning excess cash to shareholders. But the smaller the company, the more problematic stock buybacks are. Volume restrictions on buybacks can place extreme limitations on how many shares can repurchased, basically rendering the buyback useless (this is what a current holding of mine, Asta Funding, claims is limiting them), and the large spread could cause most of the value to go to brokers, not remaining shareholders.
A share tender can be an interesting way to return cash, but again, limited volume and floating shares can limit their usefulness. A small company paying a dividend means it gives away precious cash that it likely cannot raise if it needs it again in the future (unlike a large company, which could likely tap the capital markets if it needs cash later), so the dividend often shows confidence in the business and indicates management’s interests may be aligned with shareholders instead of building empires (playing off point 3).
8) It could get boring!
When you invest in large caps, it seems like there’s something new every week. Between investor presentations, quarterly and annual reports, analyst reports, appearances on CNBC, rants by Jim Cramer, etc., it’s going to seem like there’s something new to research your company every day.
With microcaps, not so much. For example, I’m invested in about 15 microcaps right now. Outside of quarterly reports, there might be one “real” news item for every other company each quarter — probably less. That’s about 20-25 relevant items per quarter, or basically one a week. And because quarterly reports tend to be grouped together, my portfolio can go three weeks at a time without anything new happening. Additionally, many of my holdings trade only once or twice per week, so they’re not constantly moving and creating excitement through paper gains and losses.
It’s tough to sit patiently and wait for the market to revalue your holdings. It’s actually against human nature! You’ll find yourself checking eTrade four or five times a day and wishing something, anything, would happen! You’ll be tempted to make a trade to generate some excitement. Just remember- excitement is the enemy of long term success. You’ll rack up commissions and make sub-optimal decisions. When you find yourself getting anxious, do something productive. Research a new company. Revalue your top holding and make sure you haven’t made a mistake. One of my favorite tricks is to re-research my smallest holding and ask myself why I don’t sell out of it and add to my largest / favorite idea.
9) Look for comparable companies.
One of the best ways to tell if a company is over or undervalued is to compare its valuation to similar companies. If Walmart (WMT) trades for an EV / EBITDA of 3x and Target (TGT) trades for an EV / EBITDA of 7x, the market is heavily discounting WMT. While it doesn’t necessarily mean WMT is undervalued, such a large spread would be a sign that WMT (in this example) could be undervalued. When investing in micro-caps, it’s difficult to find comp companies to value- but if you can, do it! Try to figure out whether the company you’re researching is under or overvalued compared to the company you’re comparing it to, and then try to figure out why. Often times, you’ll find the comparable company is even cheaper than the company you were considering. If you miss this step, you could miss out on some big winners or find yourself investing in companies that seem cheap on an absolute basis but are expensive compared to their peers. For example, I invested in BDMS but neglected to value their competitor, ADPI. ADPI was much cheaper than BDMS and got bought out at a huge premium about two months later. This sin of omission cost me a 125% gain in under two months or so. In addition, researching the comps will give you a much better understanding of the industry you’re investing in. A lot of these small companies operate in tiny niches with only four or five small competitors- the more you know about the industry, the better investor you will be.
10) Keep turning over the rocks.
Forget using screens. Data on micro-cap companies can be completely unreliable. The only way to find and successfully investi n good microcaps is to search them out yourself. If you’re trying to figure out how, I posted a guide to finding stocks when I first started the website, but it basically comes down to one thing- read, read, read!!! Read value based blogs. Read the 10-Ks. Read the competitors 10-Ks. Start with the A’s and research every company you can find. After you’ve turned over 20 rocks that are busts, you’ll probably find one that’s pretty interesting. And maybe after you find five interesting companies, one of them will be worth an investment. It will get frustrating to strike out so many times- but there’s nothing like finding a hugely undervalued company, buying them, and watching the price double.
Good luck!
If you invest in Walmart, GE, or American Express, they’ll have a professional investor relations team that will field your calls and answer your questions. It’s pretty much worthless in my opinion. They can clarify questions but they’ll never really be able to provide you with anything of value.
Investor relations is really there to keep small investors from bothering management and conveying big mutual funds' and hedge funds' concerns to management. Small companies, on the other hand, don’t have IR teams; they can’t afford them. And management is often happy to talk to a shareholder who actually shows interest in their business. Feel free to reach out, express concerns and talk shop. Be careful here though: Management can be very persuasive and are often perma-bulls on their stock. Don’t ask for insider information, and don’t become “emotionally” attached to the company. Stay rational, and keep questions relatively broad based.
7) Dividends aren’t a bad thing.
In most cases, I prefer stock buybacks (done at rational prices and for the right reasons) to dividends as a way of returning excess cash to shareholders. But the smaller the company, the more problematic stock buybacks are. Volume restrictions on buybacks can place extreme limitations on how many shares can repurchased, basically rendering the buyback useless (this is what a current holding of mine, Asta Funding, claims is limiting them), and the large spread could cause most of the value to go to brokers, not remaining shareholders.
A share tender can be an interesting way to return cash, but again, limited volume and floating shares can limit their usefulness. A small company paying a dividend means it gives away precious cash that it likely cannot raise if it needs it again in the future (unlike a large company, which could likely tap the capital markets if it needs cash later), so the dividend often shows confidence in the business and indicates management’s interests may be aligned with shareholders instead of building empires (playing off point 3).
8) It could get boring!
When you invest in large caps, it seems like there’s something new every week. Between investor presentations, quarterly and annual reports, analyst reports, appearances on CNBC, rants by Jim Cramer, etc., it’s going to seem like there’s something new to research your company every day.
With microcaps, not so much. For example, I’m invested in about 15 microcaps right now. Outside of quarterly reports, there might be one “real” news item for every other company each quarter — probably less. That’s about 20-25 relevant items per quarter, or basically one a week. And because quarterly reports tend to be grouped together, my portfolio can go three weeks at a time without anything new happening. Additionally, many of my holdings trade only once or twice per week, so they’re not constantly moving and creating excitement through paper gains and losses.
It’s tough to sit patiently and wait for the market to revalue your holdings. It’s actually against human nature! You’ll find yourself checking eTrade four or five times a day and wishing something, anything, would happen! You’ll be tempted to make a trade to generate some excitement. Just remember- excitement is the enemy of long term success. You’ll rack up commissions and make sub-optimal decisions. When you find yourself getting anxious, do something productive. Research a new company. Revalue your top holding and make sure you haven’t made a mistake. One of my favorite tricks is to re-research my smallest holding and ask myself why I don’t sell out of it and add to my largest / favorite idea.
9) Look for comparable companies.
One of the best ways to tell if a company is over or undervalued is to compare its valuation to similar companies. If Walmart (WMT) trades for an EV / EBITDA of 3x and Target (TGT) trades for an EV / EBITDA of 7x, the market is heavily discounting WMT. While it doesn’t necessarily mean WMT is undervalued, such a large spread would be a sign that WMT (in this example) could be undervalued. When investing in micro-caps, it’s difficult to find comp companies to value- but if you can, do it! Try to figure out whether the company you’re researching is under or overvalued compared to the company you’re comparing it to, and then try to figure out why. Often times, you’ll find the comparable company is even cheaper than the company you were considering. If you miss this step, you could miss out on some big winners or find yourself investing in companies that seem cheap on an absolute basis but are expensive compared to their peers. For example, I invested in BDMS but neglected to value their competitor, ADPI. ADPI was much cheaper than BDMS and got bought out at a huge premium about two months later. This sin of omission cost me a 125% gain in under two months or so. In addition, researching the comps will give you a much better understanding of the industry you’re investing in. A lot of these small companies operate in tiny niches with only four or five small competitors- the more you know about the industry, the better investor you will be.
10) Keep turning over the rocks.
Forget using screens. Data on micro-cap companies can be completely unreliable. The only way to find and successfully investi n good microcaps is to search them out yourself. If you’re trying to figure out how, I posted a guide to finding stocks when I first started the website, but it basically comes down to one thing- read, read, read!!! Read value based blogs. Read the 10-Ks. Read the competitors 10-Ks. Start with the A’s and research every company you can find. After you’ve turned over 20 rocks that are busts, you’ll probably find one that’s pretty interesting. And maybe after you find five interesting companies, one of them will be worth an investment. It will get frustrating to strike out so many times- but there’s nothing like finding a hugely undervalued company, buying them, and watching the price double.
Good luck!
