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question about building a position in a microcap company


Guest hpmst3
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Hi Hugh,

 

Alot of times new investment managers ask me what is the single best piece of advice I can give when starting a fund, and I always say:  Use good service providers!  In our fund, our broker costs a little more but if I'm trying to accumulate a position, I put in an order for how many shares I want and at what limit price.  They then work the trade, moving the bid up and down as the ask moves, staying below my limit.  It makes it much easier for me when managing our funds.

 

For the average investor, use limits, and for thinly traded stocks you probably should use all or none, because you could get charged the full transaction cost but only get 40 or 50 shares in the day.  But the best piece of advice is find a good broker where you get plenty of value for the cost of service...discount brokerages aren't always the best way to go, since your service providers should be attuned to your needs.  Cheers! 

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Don't lose the forest for the trees. When building a position in a very tiny company, illiquidity is a given, meaning an investment decision is one you make for an extended period of time. Expect to lose money flipping or changing one's mind too many times. Secondly, presumably small cap companies like these are mis-priced and whether you get a few cents here or there isn't going to make a big difference. If you think it's selling for 1/2 or 1/3 intrinsic value, I would go so far as to put orders *above* the ask price as well.

 

 

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I think patience and multiple orders are a key to minimize market impact on an extremely illiquid stock (as in, goes about 1/4 of the year without any trading in a day). On multiple occasions i have been filled days/weeks after putting in orders at the then bid price (which saved me about 10% of the spread cost).

 

I have slowly been building a position in a $11 million market cap company, and it has taken several months to get to 1.4% of the company's shares. One thing i recently learned is that you can also call the firm making a market in the company's shares and negotiate a price for a set amount of shares (I recently had to open a brokerage account with the market making firm to do this). It is a wonderful tiny company that a talented investor on this board actually brought to my attention. I would like to say the name to get additional thoughts on the company, but i am currently working with them to try and increase their share buybacks at the moment, and it is extremely illiquid.

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I have slowly been building a position in a $11 million market cap company, and it has taken several months to get to 1.4% of the company's shares. One thing i recently learned is that you can also call the firm making a market in the company's shares and negotiate a price for a set amount of shares (I recently had to open a brokerage account with the market making firm to do this). It is a wonderful tiny company that a talented investor on this board actually brought to my attention. I would like to say the name to get additional thoughts on the company, but i am currently working with them to try and increase their share buybacks at the moment, and it is extremely illiquid.

 

I must be a really sMAAL company..

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  • 4 months later...

You guys guessed it right, MAAL.PK

 

Hat tip to Matt for bringing up the idea.

 

Well...talks with this sMAAL company's mgmt. yielded little in persuading larger buybacks (or a special dividend) so i am through accumulating shares, and don't mind mentioning it now. They seem intent on doing things slowly. I don't think that it has as large a moat as i would like, but it has some pretty incredible underlying investment characteristics. Very illiquid though.

 

Cheers

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MAAL is a business with some good characteristics (high ROIC, usually can buy at  a low P/E, great CEO). At the same time, I just don't know what the end game really is with it. I don't think they can grow a whole lot, this would be a good biz if they had a good capital allocator -- maybe similar to See's. But it seems like the BoD likes things the way they are and Tim is doing a good job.

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MAAL is a business with some good characteristics (high ROIC, usually can buy at  a low P/E, great CEO). At the same time, I just don't know what the end game really is with it. I don't think they can grow a whole lot, this would be a good biz if they had a good capital allocator -- maybe similar to See's. But it seems like the BoD likes things the way they are and Tim is doing a good job.

 

Yes. The big question is what will they do with the cash that they earn over time. They are a cash flow machine. Since the business model is so asset light they don't require a large reinvestment to earn incremental cash returns. Once you take out the excess cash & investments the ROE is even more impressive, than it already is with excess cash & investments on the balance sheet. They have a goal to grow the dividend every year, so don't expect the dividends to stop. They will continue minuscule share repurchase each year as well, which have historically ranged from 1 to 3 percent of shares per year. They have been investing excess cash (that is not paid in dividends) in a limited partnership, treasuries, and common stocks. The company has a good little investor kit you can request, that includes audited financials. One page of the presentation shows 57.9% compounded annual growth rate in operating income from Q4 2004 through Q2 2009 (the presentation was done in November 2009). The company's plan with respect to cash flow is to return cash to shareholders over time through increasing dividends every year. Shareholders would be better off if they did this more rapidly via paying a larger special dividend instead of investing excess cash flow in other investments. They have a fantastic business, so i see no reason they need to reach for additional returns by investing in other common stocks. Just return the cash to shareholders and let them choose where they want to invest the excess cash.

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