small cap advice

[Hielko]

I have some experience with the value-investing.eu screener: it's pretty decent, but especially for the very small companies you will need to check if their data is correct. I guess that's true for all databases/screeners.

[hillfronter83]

Racemize, there is no mystery about small caps. It depends on how hard you look. It also helps when you find some original ideas. I apply Joel Greenblatt's concept to small/micro cap investing. The result is very satisfactory. I bought a few issues last year at 2-3x normalized earnings with high ROIC. And they returned triple digit.

 

can you give me detail in the process you look for them ? And how you value them?

 

Hi King, I have been thinking about giving an example. Here it is.

 

I own a company in AU called Jumbo Interactive. I bought it @ 30 cents. The annual report laid out everything very clearly. It is trading at 2.5x P/E before cash. JIN's business is to sell lotteries on the Internet, which is highly scalable. In the last five years, the business has grown just like other online businesses. In normal condition, this kind of business should garner 20x P/E. This is an outstanding business trading at ridiculous price. You see, magic formula wants good business trading at cheap prices. That is simply not enough for me.

 

But the situation is not normal here. JIN's online business hangs on a contract with Tatts, which is expiring at the end of 2014, although the contract will be renegotiated a year earlier. Tatts is a monopoly in the lottery industry which owns the only nation-wide license given by the government. Recently, Tatts launched its own website to compete with JIN. Therefore, the probability that JIN will renew the contract seems low.

 

I believe each of us has different opinion about risk/reward and you can make your own guess. Here is mine. Let's say JIN simply operates until the end of 2014 and then liquidate, the cash will cover more than the current market cap. This is third grade math so I would not give the details here. This is is the bottom line. I personally believe, after some thinking, that there is around 30% chance that the contract will be renewed as it is now. If it is renewed, I will hit a home run; if it is not, I would not lose much. There are also other complications, but I will keep things simple here.

 

This is basically how I make my investment decisions. Hope this helps.

 

Bao, great analysis!

A lot of times for micro cap there are issues with corporate governance or even fraud. How do you stay away from such companies?

The same way you stay away from fraud and bad corporate governance when you invest in a large cap. It isn't a micro-cap unique problem.

 

Agree that it's not micro-cap specific problem. However, in large cap, usually there are institutional investors or activist investors that helps keeping management or controling interest honest.

[DoddDisciple]

I have some experience with the value-investing.eu screener: it's pretty decent, but especially for the very small companies you will need to check if their data is correct. I guess that's true for all databases/screeners.

 

Can you provide some general examples of when the data isn't that great? I've compared with FT screener and some other sites and it seems right more often than not, though FMZ scores show a lot of deviance.

[matjone]

Somehow I missed this discussion  I like hearing from ragnar, oddball and the other micro cap investors cause these are the guys I am trying to follow and steal/learn from these days.

 

I like oddball's comment about missing things in analysis.  After reading analysts reports for a company I worked for I've come to the conclusion that either none of them have sufficient knowledge to understand what is going on, or if they do they are keeping it to themselves.  I work for a company that in the past has dominated their niche and earned high returns on capital.  Recently a private company launched a division that is shaping up to be a serious competitor.  I've never seen this fact mentioned in any analyst report.  I'm  not sure why that is but I imagine they aren't aware because it's not listed as a competitor on morningstar, bloomberg etc.  When they do visits they let the management walk them around and show them the facility and talk to them.  Probably what they should do is find out what bar the vendors, employees, customers, etc. are hanging out in and get people drunk so they start talking.

 

BTW, Nate, did you say you now only have 20 positions?  I know in the past you held 50 or so.  Have you gotten more concentrated?  Or have you just gone to cash?

 

 

[SharperDingaan]

These things are really options; it either BK's, benefits from a specific event, or just bumps along.

 

You could own these small firms individually, or you could own a coy that specializes in it; ALS.TO as an example, that also benefits from professional management - & very good ongoing analysis on this board. However you choose, the length of your holding period is critical ... as your investment is 'dead money' until that exciting promise actually delivers. Generally, the better approach is puts/call options on stronger companies; as there is usually better & deeper liquidity, & less concern over the company itself going bankrupt. The more 'in the weeds' you go, the more critical it is to stay within your circle of competence.

 

Huge numbers of cheap shares are expensive to trade, volatile, & usually not marginable. While waiting, you really need to hold the shares in both taxable & non-taxable accounts, & periodically wash trade with the outside market between the accounts. Losses in the taxable account, & ultra-low cost bases in the non-taxable account. If it works out you get tax free gains & a tax refund less all trading costs.

 

Not for everybody, but just another step on the evolutionary ladder....

 

Good luck,

 

SD

 

[Hielko]

I have some experience with the value-investing.eu screener: it's pretty decent, but especially for the very small companies you will need to check if their data is correct. I guess that's true for all databases/screeners.

 

Can you provide some general examples of when the data isn't that great? I've compared with FT screener and some other sites and it seems right more often than not, though FMZ scores show a lot of deviance.

Comparing it the the FT screener or other sites is pointless, because they often have the same wrong data. You need to compare it with the financials reported by the company.

[DoddDisciple]

Comparing it the the FT screener or other sites is pointless, because they often have the same wrong data. You need to compare it with the financials reported by the company.

 

Is there an easy way of getting the financials for any company in the world, aside from going through each company's website?

 

I've compared some financials and FT and the balance sheet items seem right for the most part.

[oddballstocks]

Comparing it the the FT screener or other sites is pointless, because they often have the same wrong data. You need to compare it with the financials reported by the company.

 

Is there an easy way of getting the financials for any company in the world, aside from going through each company's website?

 

I've compared some financials and FT and the balance sheet items seem right for the most part.

 

Purchase a Bloomberg?

[LC]

I use finviz.com for US screening...they cover other countries as well, though.

 

Thanks for the wisdom, SD.

 

I find my sweet spot is around the $100-300m market cap range. Small enough to be off most (but not all) institutional radars, but large enough that PE guys, small-cap activists, etc. aren't dissuaded. They also get some coverage by smaller sell-side research guys, which can help by piggybacking their marketing efforts to small-cap funds.

 

Plus as Nate said, they're much easier to wrap my head around and consolidate all the relevant information for analysis. Check out the thread on FHCO in the investment section to see one such instance I took part in.

[DoddDisciple]

Purchase a Bloomberg?

 

Haha: nah. It's a case of if you have to ask how much, you can't afford it. And even if I could, why not just plow all that into bitcoins :P

 

However, there is some data on bloomberg.com, which I guess would be the same as what is in a Bloomberg terminal. So for the few data points that are there, I could check for correlation with what FT and others spit out.

 

I use finviz.com for US screening...they cover other countries as well, though.

 

Do they? I may be computer illiterate when it comes to their site. I only see a US screener, and its only for NASDAQ, NYSE, and AMEX (NYSE MKT). I've looked at ADVFN too, but it seems like they only has US and CA screeners.

 

What about level 2 quotes? Do they even have these for international stocks?

 

And then, to pick minds further, for anyone that uses IB, what is the optional data feed fee actually provide? It just looks like it gives information that I could get at any other site for free.

[oddballstocks]

Purchase a Bloomberg?

 

Haha: nah. It's a case of if you have to ask how much, you can't afford it. And even if I could, why not just plow all that into bitcoins :P

 

However, there is some data on bloomberg.com, which I guess would be the same as what is in a Bloomberg terminal. So for the few data points that are there, I could check for correlation with what FT and others spit out.

 

I use finviz.com for US screening...they cover other countries as well, though.

 

Do they? I may be computer illiterate when it comes to their site. I only see a US screener, and its only for NASDAQ, NYSE, and AMEX (NYSE MKT). I've looked at ADVFN too, but it seems like they only has US and CA screeners.

 

What about level 2 quotes? Do they even have these for international stocks?

 

And then, to pick minds further, for anyone that uses IB, what is the optional data feed fee actually provide? It just looks like it gives information that I could get at any other site for free.

 

I believe a Bloomberg costs between $1500 and $2000 a month for a single seat license.  You could always enroll at a local business college that has access and use theirs.  I'm imagining it's cheaper to enroll in a single class and use the Bloomberg rather than subscribe.

 

There is no one source of global stock information.  But just like the US has the SEC most developed countries have their own SEC.  I know Japan has EDINET, France has their Autorité des marchés financiers, Portugal has the CMVM etc.  Often the local exchange has some summary financials or links to the companies or a link to the regulator.  This is really a process you need to go through for each company, often the regulators pages are in the local language and are tough to navigate.  The level of information differs as well, I know in Belgium you can find financials for ALL companies, both public and private.  The problem is financials vary between Dutch and French, and the PDF's aren't translated well because they're often scans of handwritten forms.

 

You've discovered the reason there is value to searching for international stocks.  There is no one source of information that's accessible to anyone.

[yadayada]

you could hire someone to translate them if the numbers look interesting. There are freelance websites where you could do that easily for a couple 100. Probably under a 100 if they are like 10-20 pages long.