I have been doing some equity analysis in a small value oriented private equity firm recently. I write "private equity" in quotation marks because although they are officially a private equity fund, they almost exclusively invest in nano cap companies that are publicly traded. The firm generally takes a large stake of the company and gets on the board. When I say nano-cap I do not mean a small cap company with 500 market cap, I am refering to companies with a market cap sometimes as low as $10 million, and usually not above $100 million.
While some of this area is not the type of investing I would do i.e. I do not have $5 million to buy a 20% stake in a $25 million firm(maybe one day though!). However, I still have learned some valuable things about the nano-cap world so far in the short time I have been there.
First off why should you care about nano cap companies? Everyone probably has different definitions of nano cap companies but let us take a 50 million market cap as the threshold. A quick screen shows that there are nearly 2000 US equities with under a $50 market cap. About 25% of US stocks are micro caps so if you are not looking at these companies you are missing out on some possible bargains. In addition, these companies have no analyst coverage, many times no news for months, and you can even sometimes call the CEO and get in touch with him quickly.
I do not like to give "hot stock" picks (which I am not doing in this article anyway) so I will avoid any specific names. In addition, I doubt there are disclosure problems(unless the firm plans on investing in the company), I want to be 100% certain and therefore will not mention any specific stock names or symbols
On that note I wanted to discuss some aspects about nano-cap investing that I believe all investors should be aware of. All this information could be found in the latest 10-Qs and 10-ks.
Concentration Risk
While a company like Walmart can afford to lose a customer because they have tens of millions of other customers, this is not true for nano cap companies. I have seen a nano-cap company where their three largest customers make up 85% of their revenue, and one customer made up 50% of their revenue. Imagine losing one of these customers (which is bound to happen time to time). A nano company can switch from very profitable entity to a company burning through cash and on the verge of bankruptcy overnight.
Concentration of Vendors
In addition to having a smaller base of customers a company usually buys its products either raw goods which it converts to a finished product, or acts as a middleman and resells to individuals or other companies. The nano company is highly dependent on these vendors. I saw a company which purchased 95% of it's goods from one vendor. I also saw one company that had 40% of it's goods stored in one or two locations. Even if the company were insured, If a fire were to burn the warehouse they would lose a huge amount of inventory which could leave their stores empty of any goods.
I will continue this article in Part II and maybe a Part III.
While some of this area is not the type of investing I would do i.e. I do not have $5 million to buy a 20% stake in a $25 million firm(maybe one day though!). However, I still have learned some valuable things about the nano-cap world so far in the short time I have been there.
First off why should you care about nano cap companies? Everyone probably has different definitions of nano cap companies but let us take a 50 million market cap as the threshold. A quick screen shows that there are nearly 2000 US equities with under a $50 market cap. About 25% of US stocks are micro caps so if you are not looking at these companies you are missing out on some possible bargains. In addition, these companies have no analyst coverage, many times no news for months, and you can even sometimes call the CEO and get in touch with him quickly.
I do not like to give "hot stock" picks (which I am not doing in this article anyway) so I will avoid any specific names. In addition, I doubt there are disclosure problems(unless the firm plans on investing in the company), I want to be 100% certain and therefore will not mention any specific stock names or symbols
On that note I wanted to discuss some aspects about nano-cap investing that I believe all investors should be aware of. All this information could be found in the latest 10-Qs and 10-ks.
Concentration Risk
While a company like Walmart can afford to lose a customer because they have tens of millions of other customers, this is not true for nano cap companies. I have seen a nano-cap company where their three largest customers make up 85% of their revenue, and one customer made up 50% of their revenue. Imagine losing one of these customers (which is bound to happen time to time). A nano company can switch from very profitable entity to a company burning through cash and on the verge of bankruptcy overnight.
Concentration of Vendors
In addition to having a smaller base of customers a company usually buys its products either raw goods which it converts to a finished product, or acts as a middleman and resells to individuals or other companies. The nano company is highly dependent on these vendors. I saw a company which purchased 95% of it's goods from one vendor. I also saw one company that had 40% of it's goods stored in one or two locations. Even if the company were insured, If a fire were to burn the warehouse they would lose a huge amount of inventory which could leave their stores empty of any goods.
I will continue this article in Part II and maybe a Part III.
