Micro Caps and Buffett's >50% returns

[gfp]

Oh wow, yeah I guess I am bigger into "micro-caps" than I realized.

[Longnose]

39 minutes ago, Spekulatius said:

I am shocked when I look up the capitalization range of what is called small cap, micro cap or nano cap etc. . I don't think the "nano cap" classification even existed 20 years ago. A stock with $2B in market cap is now a "small cap" and $2B used to be huge, a business that employed 10 thousands of people...

 

I guess that's what inflation and a decades long bull market do to my perception.

 

I mean company inflation is defiantly real. BRK was somewhere between 10 and 22M market cap when Buffet took over BRK. 

 

He was playing with small companies. 22M adjusted for inflation would put it in the ream of ~220M and would still be considered a micro cap by todays standards. 

[RedLion]

On 1/7/2024 at 5:28 AM, blakehampton said:

I actually meant to say nano-caps. There is certainly value in both micro and small, but nano has some real crazy valuations sometimes. It takes a lot of sifting to find them though.

 

One of the issues here is that many of these nanocap companies can be run purely for the benefit of insiders. So an apparent crazy (low) valuation might be completely warranted or even overvalued in terms of your investment odds as an outside shareholder. I think there are probably amazing opportunities in trading nanocaps, but if you have a truly great high ROE business in today's funding market, why be publicly traded at all? You would probably raise private capital to grow the business to a point where it made sense to trade. I love the idea of finding the next Berkshire Hathaway in a nano cap, but honestly there's a reason there are so many shitcos floating around in these realms. 

 

I think you have to have management you can trust, and then if you had an undervalued nano cap with some sort of roll up strategy, this could maybe be very attractive, but why isn't this nano cap private? Most of the time, it's because the listing serves as a way to transfer money from shareholders to insiders. 

[Spekulatius]

Once you eliminated the bad apples, the biggest risk is that you invest in a stock that becomes dead money. I have plenty of those in microcaps. This happens because the management is secretive - most likely because they want to run the business like a private enterprise and don't care about the share price. For them, it's a nuisance to be public and their disclosure and lack of PR reflects it. They typically won't distribute much cash either and just do the bare minimum and are happy to exist in obscurity and do run this business as they please and likely to their benefit (cushy jobs with a high salary, and undisclosed other benefits).

Edited January 8 by Spekulatius

[Intelligent_Investor]

I feel like with true nanocaps that are undervalued the play is probably LEAPS, because most are either value traps or multibaggers, so the end payout even if owning the common stock looks a lot like an option payout anyways. The option leverage will in turn probably turn a 5x return into a 50 bagger

[Longnose]

39 minutes ago, Intelligent_Investor said:

I feel like with true nanocaps that are undervalued the play is probably LEAPS, because most are either value traps or multibaggers, so the end payout even if owning the common stock looks a lot like an option payout anyways. The option leverage will in turn probably turn a 5x return into a 50 bagger

Often nano/micro caps have super low liquidity on the stock let alone liquidity on options if they even exist. 

[Spekulatius]

1 hour ago, Intelligent_Investor said:

I feel like with true nanocaps that are undervalued the play is probably LEAPS, because most are either value traps or multibaggers, so the end payout even if owning the common stock looks a lot like an option payout anyways. The option leverage will in turn probably turn a 5x return into a 50 bagger

There are no options much less leaps with nanocaps. The exception may be a mid cap that becomes a nanocap because it is on the verge of bankruptcy but in this case, the stock is already trading like an option.

[Intelligent_Investor]

37 minutes ago, Spekulatius said:

There are no options much less leaps with nanocaps. The exception may be a mid cap that becomes a nanocap because it is on the verge of bankruptcy but in this case, the stock is already trading like an option.

I see. I've seen small caps in the 100M-200M range with options, so I assumed it would be possible to find something a bit under 100M with options, but I guess that might be very rare

[Saluki]

I find with the very small stuff it's very hard to get comfortable even after doing your due diligence.  The CEO and board are probably people that you aren't familiar with and if it's, say, a $100mm company, you may not even find a lot of articles on them if you search. The answer to that may just be proper position sizing. 

 

Another check may be to see how long it's been around. Smith and Wesson is only a $600mm company, but it's been around since the 1800s. Some of these AI, legal marijuana, crypto businesses, drug patents, haven't been around long enough to know if they are looking to run a business or a ponzi scheme.  I have a small position in a sub $100mm company, and it was hard to find any information about them, but it's been around since the 1950s, so if they were playing the long con, I think we would've seen it by now. 

[Longnose]

4 minutes ago, Saluki said:

I find with the very small stuff it's very hard to get comfortable even after doing your due diligence.  The CEO and board are probably people that you aren't familiar with and if it's, say, a $100mm company, you may not even find a lot of articles on them if you search. The answer to that may just be proper position sizing. 

 

Another check may be to see how long it's been around. Smith and Wesson is only a $600mm company, but it's been around since the 1800s. Some of these AI, legal marijuana, crypto businesses, drug patents, haven't been around long enough to know if they are looking to run a business or a ponzi scheme.  I have a small position in a sub $100mm company, and it was hard to find any information about them, but it's been around since the 1950s, so if they were playing the long con, I think we would've seen it by now. 

Yea, TBH most nano caps you just have to risk size them because your never gonna get all the details. You can do some scuttlebutt to get a little more comfortable but even then its still a gamble. 

 

I found a 16M marketcap OTC stock this past year that has a 10 year CAGR of 15-20% depending on when you start your timeline and not just one big moonshot where they went up like 500%. Steady growth, both in rev and profit. They are also in a pretty small niche with massive barriers to entry. There are only 3 major players above them that dominate a multibilion dollar market and these guys have been steadily stealing little bits of marketshare YoY from these mega companies. Im hoping that they continue to keep eating at the share and then become an acquisition target. 

 

Fun when you find these little guys that are out there hustling. And who knows maybe they get slammed on some regulation or something but thats why you risk size it and call it a day. 

[ValueArb]

2 hours ago, Saluki said:

I find with the very small stuff it's very hard to get comfortable even after doing your due diligence.  The CEO and board are probably people that you aren't familiar with and if it's, say, a $100mm company, you may not even find a lot of articles on them if you search. The answer to that may just be proper position sizing. 

 

Just call them. It's amazing how much more often microcap CEOs and CFOs call you back than larger company management. You can have a conversation that may help judge them better.

Edited January 11 by ValueArb

[coc]

22 hours ago, Longnose said:

I found a 16M marketcap OTC stock this past year that has a 10 year CAGR of 15-20% depending on when you start your timeline and not just one big moonshot where they went up like 500%. Steady growth, both in rev and profit. They are also in a pretty small niche with massive barriers to entry. There are only 3 major players above them that dominate a multibilion dollar market and these guys have been steadily stealing little bits of marketshare YoY from these mega companies. Im hoping that they continue to keep eating at the share and then become an acquisition target. 

 

Care to share?

[Spekulatius]

EACO was one I found about 10 years ago. Somehow tried to buy it around $2.5 or so and somehow only got an odd lot of 30 shares when the stock moved on no news.  I totally forgot about it, but kept the shares.

 

Two years ago, I noticed a price movement in my brokerage account. I checked on the stock 10-K filing again on their IR site and couldn't believe how much it has grown over the last 10 years. The stock traded at a PE of 6 or thereabouts trading around $16 and change. I also noticed a few trades going off on a relatively tight bid ask. Put some bids in several accounts and got a few hundred shares.

 

I looked later the same day, if I could buy more but the offer was gone. Got another 100 shares a  few month later for $19 somehow. I guess you have to get them when you can.

 

EACO owns a sub that does creates part kits for Aerospace  - it's basically a value added Distributor. The owner controls almost all the shares - I have no idea why it's still public- the float is minimal. FWIW this years earning are $4.34/ share - the last stale quote is $34.

Edited January 12 by Spekulatius

[Longnose]

2 hours ago, coc said:

Care to share?

 

I've already built my position. so sure. Ticker is TBTC.

 

Company is essentially Casino Software. Highly regulated industry. There is an old seeking alpha article that gives a pretty good summary of the company. They stole some nice business from their competitors during covid. 

 

to me the biggest risk is CEO retiring and not wanting to hustle anymore. 

[blakehampton]

It's kinda sad how many companies there are where management is just milking their position. They provide 0 value to the business while still paying themselves huge sums.

 

These people should be ashamed of themselves.

[Morgan]

@Longnose Thank you for sharing TBTC. I have not done any kind of deep analysis, but I just want to ask.

 

What do you think of the declining revenues since Q12022? Revenues have had some cyclicality over the years, so maybe this is par for the course? There was a similar pattern in 2012 to 2017, then again from 2018 to 2022. Do you feel revenues are growing from more and more business or simply keeping up with inflation? Revenues have trended upwards for 10 years though.

 

NI also is generally positive, but sometimes negative. Fortunately most of the big jumps are positive NI with small losses.

 

 

A strong spot - debt is being paid down while cash increases.

 

 

Care to share anymore thoughts on the company?

 

Do you think the product from TBTC is superior to their competitors? Why do casinos pick this over their competitors? Why hasn't a competitor just acquired this?

 

 

Thank you

 

[KJP]

32 minutes ago, Morgan said:

@Longnose Thank you for sharing TBTC. I have not done any kind of deep analysis, but I just want to ask.

 

What do you think of the declining revenues since Q12022? Revenues have had some cyclicality over the years, so maybe this is par for the course? There was a similar pattern in 2012 to 2017, then again from 2018 to 2022. Do you feel revenues are growing from more and more business or simply keeping up with inflation? Revenues have trended upwards for 10 years though.

 

 

 

Revenue is lumpy because they record significant one-time revenue when they initially sell a system (and system sales vary significantly from period to period) and then ongoing maintenance revenue for all installed systems.  The maintenance revenue has been steadily increasing over the years.  See, e.g., page 7 of the latest 10-Q to see the lumpiness in system sales:  https://www.sec.gov/ix?doc=/Archives/edgar/data/1090396/000143774923031496/tbltrc20230930_10q.htm

[Longnose]

3 hours ago, Morgan said:

What do you think of the declining revenues since Q12022? Revenues have had some cyclicality over the years, so maybe this is par for the course? There was a similar pattern in 2012 to 2017, then again from 2018 to 2022. 

 

I dont like the revenue declines but like you cited the revenues have been cyclical in the 10 year snapshot. I think we are seeing a post covid pull back. I personally expect them to rebound. 

3 hours ago, Morgan said:

Do you feel revenues are growing from more and more business or simply keeping up with inflation? Revenues have trended upwards for 10 years though.

 

3 hours ago, KJP said:

Revenue is lumpy because they record significant one-time revenue when they initially sell a system

 

This... They receive significant bumps in revenue when they sign new contracts. They had a bunch hit the pipeline near covid. Now we are seeing the draw down as the projects are reaching completion / maturity but this should also add an increase to overall long-term reoccurring revenue with the contracts and systems implemented for the long term.  This old VIC write up talks about that. It was also written when the TBTC marketcap was at about what it is today. 

 

Casino softwares like TBTC's are very sticky like ERP systems. 

3 hours ago, Morgan said:

Why do casinos pick this over their competitors?

I believe they have a better offering. But to the above comment about being sticky... Its really hard to pull yourself off a casino software once your established on it. I think TBTC is taking a Signiant share of the new business for new and emerging casinos both in NA and INTL. This business is almost exclusively a word of mouth business built on trust. You don't sign on a new Casino management software without knowing its good and the executives that are making those decisions probably all know who each other and know which softwares are the best. 

 

3 hours ago, Morgan said:

Why hasn't a competitor just acquired this?

I believe this is the catalyst. When it will happen i dont know... But at some point if they continue to steal share and new casinos continue to choose TBTC instead of the old dinosaur softwares. We will see one of the big guys buy them out. Does that happen this year or in 5 or 10 years I dunno. But, happy to let my position ride and see what happens.  Book value per share is currently about $2 a share. So im getting the rest of the business for 1.45 a share? Havent seen history of shareholder abuse. Business reoccurring rev is sticky all they need to do is keep growing. Then hopefully they become an acquisition target. I think the CEO is about 60 and so if he decides to retire without accepting/seeking a buy out of some sort that could be problematic. He's probably the biggest wild card. 

[coc]

On 1/12/2024 at 3:24 PM, Longnose said:

 

I've already built my position. so sure. Ticker is TBTC.

 

Company is essentially Casino Software. Highly regulated industry. There is an old seeking alpha article that gives a pretty good summary of the company. They stole some nice business from their competitors during covid. 

 

to me the biggest risk is CEO retiring and not wanting to hustle anymore. 

Thanks!

[Morgan]

Thank you for the response!