Minimum Viable Market Cap For A Listed Company?

[Voodooking]

As a fortunate consequence of having neither vast amounts of personal wealth, nor a phenomenally successful professional investment career, I am left in the favourable position of having no real limitation on the market cap of stocks I can consider.

 

However, I am aware that there are costs involved in running a company and maintaining a listing on any stock exchange. My question is, what should be my cut-off on the lower end as to whether the company is too small to viably sustain itself?

 

Do I only look at stocks with a market cap of $25m USD and upwards? Is that silly, should I also be looking at $5m to $25m USD market caps? Is a company with a market cap of $4.7m USD for example too small to reasonably make enough money to comfortably cover its ongoing admin and listing costs for the next 10 years?

 

I'd be interested to hear your thoughts...

Edited December 9, 2024 by Voodooking

[Longnose]

In most of your mentioned market caps you are mostly looking at pinksheets. 

 

I personally like to troll these but you dont see lots of people talking about them on COBF because of a myraid of factors. (unclear financials, lack of liquidity, misaligned management incentives, risk/reward profile) There are some better boards/forums for people who actively invest in nanocap companies. (investorshub, /r/pennystocks, depending on the name you can find decent stuff on seekingalpha)

 

To answer a few of your questions. 

 

My question is, what should be my cut-off on the lower end as to whether the company is too small to viably sustain itself? - IMO as low as you feel comfortable. A company can sustain itself at any size depending on who is running it and how they are running it. Here is the kicker if its on a regulated exchange such as the NASDAQ then it is subject to a much higher standard which incurs a bunch of costs. The benefit here is if they are on one of these exchanges you can feel much more confident in their numbers they are reporting. Whereas, the majority of public companies in the marketcaps your describing will be listed on the pinksheets / OTC and they wont be held the the same regulatory standards. 

Do I only look at stocks with a market cap of $25m USD and upwards? - Up to you.

 

Is that silly, should I also be looking at $5m to $25m USD market caps? - Again up to you, There is money to be made in the lower buckets its just a slightly different game.

 

Is a company with a market cap of $4.7m USD for example too small to reasonably make enough money to comfortably cover its ongoing admin and listing costs for the next 10 years? - Sure, lots of successful small businesses out there. Question is why are you investing in it? is there a viable path to 10M? 20M? 30M?  is it a 4.7M marketcap with 25M of had assets on the balance sheet? is there a way to as an investor to unlock said assets? Will there be a sale of the company?  -- The reality of most businesses public or not in these size ranges are not to be providing returns to the shareholders but to be a business that is providing for its direct employees. Many of these companies will have heavy family ownership and the people making money are the management not the shareholders. 

 

My advice if your going to continue down this rabbit hole. Really do your due diligence. if you're looking at pink sheet companies do some real scuttle butt. Remember that in these marketcaps its often small companies who don't have the investor in mind but are just trying to pay themselves and service their niche. So what is the value unlock your expecting? What is the timeline you expect that in? 

 

All that to say. its fun if you're into it. Probably more effort than its worth. I've made money on several nanocap. I'm holding bags/lost on some nano cap companies. 

 

 

[Malmqky]

IF you have the capital, it’s better to look at local businesses once you get below ~$25m imo. Often you can find people looking to sell GOOD businesses for 2-3x earnings, and they aren’t even necessarily the type of business where you’re buying a job.

 

stock market is better for slightly “larger” micro caps.

[oscarazocar]

42 minutes ago, Longnose said:

In most of your mentioned market caps you are mostly looking at pinksheets. 

 

I personally like to troll these but you dont see lots of people talking about them on COBF because of a myraid of factors. (unclear financials, lack of liquidity, misaligned management incentives, risk/reward profile) There are some better boards/forums for people who actively invest in nanocap companies. (investorshub, /r/pennystocks, depending on the name you can find decent stuff on seekingalpha)

 

To answer a few of your questions. 

 

My question is, what should be my cut-off on the lower end as to whether the company is too small to viably sustain itself? - IMO as low as you feel comfortable. A company can sustain itself at any size depending on who is running it and how they are running it. Here is the kicker if its on a regulated exchange such as the NASDAQ then it is subject to a much higher standard which incurs a bunch of costs. The benefit here is if they are on one of these exchanges you can feel much more confident in their numbers they are reporting. Whereas, the majority of public companies in the marketcaps your describing will be listed on the pinksheets / OTC and they wont be held the the same regulatory standards. 

Do I only look at stocks with a market cap of $25m USD and upwards? - Up to you.

 

Is that silly, should I also be looking at $5m to $25m USD market caps? - Again up to you, There is money to be made in the lower buckets its just a slightly different game.

 

Is a company with a market cap of $4.7m USD for example too small to reasonably make enough money to comfortably cover its ongoing admin and listing costs for the next 10 years? - Sure, lots of successful small businesses out there. Question is why are you investing in it? is there a viable path to 10M? 20M? 30M?  is it a 4.7M marketcap with 25M of had assets on the balance sheet? is there a way to as an investor to unlock said assets? Will there be a sale of the company?  -- The reality of most businesses public or not in these size ranges are not to be providing returns to the shareholders but to be a business that is providing for its direct employees. Many of these companies will have heavy family ownership and the people making money are the management not the shareholders. 

 

My advice if your going to continue down this rabbit hole. Really do your due diligence. if you're looking at pink sheet companies do some real scuttle butt. Remember that in these marketcaps its often small companies who don't have the investor in mind but are just trying to pay themselves and service their niche. So what is the value unlock your expecting? What is the timeline you expect that in? 

 

All that to say. its fun if you're into it. Probably more effort than its worth. I've made money on several nanocap. I'm holding bags/lost on some nano cap companies. 

 

 

 

ITEX is a good example of a tiny company like this that has worked reasonably well.  It trades on OTC, it's a weird little business that's basically a platform for barter exchange.  Market cap is around $8 million, it has over $4.5 million net cash, has earned around $1 million EBIT per year going back on $6 million revenue, slowly shrinking, paying $1/share dividend per year now, has paid $3/share in dividends since 2019, stock was available around $4/share at various points over past 5 years.  Chairman owns a big chunk (Sardar Biglari owns a piece too as a minority holder).  For most of the period from 2019-2023, it has traded around 1x EBIT.  Dividend bumped from $0.20/yr to $1.00/yr last year.

 

I don't see why you shouldn't invest in a company like this if you are comfortable with the business.

 

[Masterofnone]

The most important aspect of nanocap investing is whether ownership/management gives a hoot about you as a stakeholder. Some, such as Tim Eriksen succeed because they are willing to take activist roles- even end up running the business.

There are many pratfalls. Good companies with large insider ownership go private or do reverse stock splits to squeeze out small owners. It is hard to accumulate a meaningful position and sometimes even harder to exit. But there can be major misprising during stressful events for the same reason. Look at Eriksen capital management and Alluvial capital. It will give you a feel for the how and what in this space.

 

It will take a ton of your time. It is way easier to find a few exceptional companies and sit on your hands.

[Saluki]

The Canadian exchanges have some lighter regulation for the new small caps, but they tend to be very speculative businesses, so buyer beware.  I think Toronto and Vancouver have venture exchange listings. 

 

In the US, it's not a great regulatory structure for small companies. For accounting and legal fees it will be several hundred thousand a year, realistically.   I remember a while back some horrible woman at the SEC spearheaded an experiment they called the aircraft carrier where you could use a special category and raise less money and allegedly have fewer regulatory requirements. I thought it was a terrible idea because the requirements will still pretty burdensome and it capped the amount of money you could raise. And if you wanted to be a real public company where you could raise a lot more, you would have to start all over and couldn't just use your existing aircraft carrier registration. I never worked with this woman, but I did have to deal with her in my professional capacity across the table for about 6 months and I thought she was an idiot. She brought up the aircraft carrier to us several times even though it had nothing to do with why were talking to her and lamented that she worked so hard on it and nobody was using it.  The last time someone mentioned her was to tell me that she left the SEC and wrote a children's book.  I bet it sucks  

[Longnose]

2 hours ago, Malmqky said:

IF you have the capital, it’s better to look at local businesses once you get below ~$25m imo. Often you can find people looking to sell GOOD businesses for 2-3x earnings, and they aren’t even necessarily the type of business where you’re buying a job.

+1 for this ^^ 

 

57 minutes ago, Masterofnone said:

It will take a ton of your time. It is way easier to find a few exceptional companies and sit on your hands.

+1 for this too ^^

 

A lot of work and effort and some big ass maybes. 

 

But if your a masochist like me then sure keep diggin. 

[schin]

On 12/9/2024 at 11:20 AM, Malmqky said:

IF you have the capital, it’s better to look at local businesses once you get below ~$25m imo. Often you can find people looking to sell GOOD businesses for 2-3x earnings, and they aren’t even necessarily the type of business where you’re buying a job.

 

stock market is better for slightly “larger” micro caps.

@Malmqky -  Do you use brokers to find these local businesses? I've been wanting to find something local, but don't know where to start... and is it so competitive that that 2-3x earnings don't exist any more? Or someone in your network kinda things.

[Malmqky]

59 minutes ago, schin said:

@Malmqky -  Do you use brokers to find these local businesses? I've been wanting to find something local, but don't know where to start... and is it so competitive that that 2-3x earnings don't exist any more? Or someone in your network kinda things.

 

I have little experience when it comes to this - I just got lucky during/right after covid and got approached with some good opportunities. Everything was an in my network kind of thing. I live in a smaller Midwest city - besides folks from Chicago there's not competition like coastal cities experience and deals can be found much easier imo.

 

2-3x earnings probably have dried up since Covid except for things like pizza joints which obviously are not what you want as an investor.

[Blake Hampton]

1 hour ago, Malmqky said:

 

I have little experience when it comes to this - I just got lucky during/right after covid and got approached with some good opportunities. Everything was an in my network kind of thing. I live in a smaller Midwest city - besides folks from Chicago there's not competition like coastal cities experience and deals can be found much easier imo.

 

2-3x earnings probably have dried up since Covid except for things like pizza joints which obviously are not what you want as an investor.

What's wrong with a pizza joint?

[Longnose]

1 hour ago, Blake Hampton said:

What's wrong with a pizza joint?

Lots of work, lots of variable costs, crappy margins, high employee turnover. To name a few.

 

It can work but to be hands off youll need an incredible manager. Or youre buying yourself a job. 

[Blugolds]

5 hours ago, Longnose said:

Lots of work, lots of variable costs, crappy margins, high employee turnover. To name a few.

 

It can work but to be hands off youll need an incredible manager. Or youre buying yourself a job. 

 

Pizza has one of the best margins of any food/restaurant business..COGS of say 20% with gross profits of 80% assuming you arent talking about franchise since you said small business, but Pizza can be very lucrative if you have a good product and a good reputation. My grandfather owned a pizza business that did very very well and I knew a guy who had a small storefront in a college town that sold by the slice and had a great business, 90% of his sales probably came between the hours of 11-2am (bar close) but there was always a line out the door. Sold 1 kind of pizza and had one other kid that worked with him, he just stood at the till and took in piles of cash. Mac and cheese pizza was the go-to so he didnt even have the high meat costs! Just cheese and noodles on the top of thin crust, but that gooey slice got the line out the door every night he never even closed the till for hours, just cash hand over fist for hours.

 

Probably not great if you want to be a hands off owner like you said, you're right its more of a job, and I dont like food businesses in general but if I DID, you could do a lot worse than pizza, if you have a good location that would be toward the top of my list actually. Keep the menu simple, flour, sauce is cheap and homemade, main variable costs are cheese and meat assuming you want quality and if you source correctly and make decent relationships with local butchers to produce your sausage recipe it somewhat insulates you from major fluctuations. 

 

If you wanna talk about plain cheese pizza 16" you can get your costs to about a buck on a 16" and sell for $10 thats a pretty sexy margin, if you're talking chicago style deep dish then you're gonna be on the lower end, but for thin crust NY style pizza with quality cheese and sausage or pepperoni you're gonna be around that 80% gross mainly from the cheese and meat options, soda is high margin, employees are cheap assuming you have a younger workforce. 

Edited December 11, 2024 by Blugolds

[Malmqky]

12 hours ago, Longnose said:

Lots of work, lots of variable costs, crappy margins, high employee turnover. To name a few.

 

It can work but to be hands off youll need an incredible manager. Or youre buying yourself a job. 

@Blake Hampton Exactly this.

 

If you're looking to start buying local businesses....well, if you accidentally buy a job, how are you going to have time to buy/run more local businesses? As an investor, ideally you want a business where you can be more hands off/have the time to buy more businesses. Being an investor and operator is a very different thing.

 

I don't think there's anything wrong innately with a pizza business. I just used it as an example as I've come across opportunities to buy a local joint at less than 1x owner earnings. But, it'd require me putting in 60+ hours working there or finding unicorn managers.

[Longnose]

6 hours ago, Blugolds said:

 

Pizza has one of the best margins of any food/restaurant business..COGS of say 20% with gross profits of 80% assuming you arent talking about franchise since you said small business, but Pizza can be very lucrative if you have a good product and a good reputation. My grandfather owned a pizza business that did very very well and I knew a guy who had a small storefront in a college town that sold by the slice and had a great business, 90% of his sales probably came between the hours of 11-2am (bar close) but there was always a line out the door. Sold 1 kind of pizza and had one other kid that worked with him, he just stood at the till and took in piles of cash. Mac and cheese pizza was the go-to so he didnt even have the high meat costs! Just cheese and noodles on the top of thin crust, but that gooey slice got the line out the door every night he never even closed the till for hours, just cash hand over fist for hours.

 

Probably not great if you want to be a hands off owner like you said, you're right its more of a job, and I dont like food businesses in general but if I DID, you could do a lot worse than pizza, if you have a good location that would be toward the top of my list actually. Keep the menu simple, flour, sauce is cheap and homemade, main variable costs are cheese and meat assuming you want quality and if you source correctly and make decent relationships with local butchers to produce your sausage recipe it somewhat insulates you from major fluctuations. 

 

If you wanna talk about plain cheese pizza 16" you can get your costs to about a buck on a 16" and sell for $10 thats a pretty sexy margin, if you're talking chicago style deep dish then you're gonna be on the lower end, but for thin crust NY style pizza with quality cheese and sausage or pepperoni you're gonna be around that 80% gross mainly from the cheese and meat options, soda is high margin, employees are cheap assuming you have a younger workforce. 

Id argue exception not the rule on this one. 

 

*edit*

And to circle back on the actual initial topic of the thread for small cap companies. 

I have held/traded a small position in an OTC stock NROM. Noble romans pizza. for several years now.  That embodies a myriad of the things discussed in this thread. 

 

Management is a family. Most the money of the business goes to them or is used within the company probably to benefit the family. They've had all sorts of ups and downs in the past 3 years with variable costs of cheese. They franchise lots of locations and they have tried sit down pub styles.  Employee challenges are brought up regularly if/when they hold an investor conference call. 

 

On a separate note personally I have debated many times about buying a Little Caesars Pizza franchise. Right location with a solid brand name could be very lucrative. Again having a quality manager makes or breaks the investment though. 

Edited December 11, 2024 by Longnose

[Blake Hampton]

Also @Longnose is absolutely correct.
 

Management always matters enormously when it comes to returning money to shareholders, but especially so with smaller companies. I’ve seen a couple of extremely cheap stocks where management absolutely refuses to do anything for shareholders. It’s quite sad really.

 

[Gregmal]

Ive made a living in the small and even super microcap space over the years. Returns are extraordinary if you figure it out. You either need good management AND a good capital structure, or you need a clear catalyst. Then market cap doesnt matter. 

[Saluki]

22 hours ago, Gregmal said:

Ive made a living in the small and even super microcap space over the years. Returns are extraordinary if you figure it out. You either need good management AND a good capital structure, or you need a clear catalyst. Then market cap doesnt matter. 

 

I just looked at the 10K for a $50mm company the the audit fees were almost $500k, so out of their $4mm projected profit, it is a big % and that's only part of their fixed their costs, like legal and HR etc. 

 

Management is essential in companies like this.  Check out SOWG and you will see that the company has $6mm shares outstanding and management awarded themselves options that will entitle them to another $3mm of shares, and there are related party transactions that I'm not comfortable with.  It's hard to make money like that.  By contrast, Taylor Devices was less than $100mm when I started looking at them and they don't issue crazy compensation to insiders.   

 

And I agree, a lot of these companies will stay cheap forever unless you can identify something, besides price, that will make things better.  PETS cut costs and returned to profitability after years of losses.  Taylor's aerospace business increased after people started shooting down predator and reaper drones, and they needed to replace them. Another company I'm looking at converted all their preferred shares to common, which eliminated the cash drain that was soaking up all their profits.