Micro caps

[Partner24]

Warren Buffett said that investing in very cheap small stocks is a good way to make money when you don't have the anchor of a large portfolio to manage. I've began to look for micro caps businesses that sell very cheap, have low or no debt, a good return on equity and generate free cash flow. Didn't found a lot of interesting companies yet...but I understand that with all these criteria, opportunities are not found easily.

 

If you have some ideas, don't hesitate to share them.

 

Cheers!

[Palantir]

I currently own RSKIA, but I don't recommend you buy at this price, maybe below 7.50, and I also own REED, which I recommend you not buy above 5.80.

 

I'm studying another microcap, but I'll only discuss it over PM. :)

[Cunninghamew]

Nice Ballmer avatar...  that guy scares me

[hendrie]

Take a look at Macro Enterprises (MCR on the TSX Venture). Low P/E, minimal debt, great ROE. I suggest you wait for a pull back below $4.75-$5.00. Almost everyone has significant gains, so you could see hefty pullbacks as shareholders realize gains. They have had significant growth in the last 6-8 quarters. Would be nice to hear from management on their growth plans, they currently have a single office in BC, but recently purchased land in Alberta by the oil sands.

[oddballstocks]

I have a portfolio full of these little gems, the better ones require more work to find.

 

A few random names that I like:

 

First Aviation (FAVS)

Goodheart-Willcox (GWOX)

Scheid Vineyards (SVIN)

PD-Rx (PDRX)

Kopp Glass (KOGL)

Hammond Manufacturing (HMM/A.Canada)

 

 

[rpadebet]

I recently got very interested in these too. Personally I find these companies easier to understand. The have unique risks/qualities associated with them, are under followed, less liquid, management/majority ownership is usually a bigger deal, but there are definitely some interesting companies in there.

 

Some good resources to find some quality names are

http://www.oddballstocks.com/

http://otcadventures.com/

http://www.whopperinvestments.com/

http://ragnarisapirate.blogspot.com/

 

Personally I own or I am waiting to own some of the names below

AMNF,TLF,ARTW, MPAD

 

 

 

[Guest hellsten]

I have a portfolio full of these little gems, the better ones require more work to find.

 

A few random names that I like:

 

First Aviation (FAVS)

Goodheart-Willcox (GWOX)

Scheid Vineyards (SVIN)

PD-Rx (PDRX)

Kopp Glass (KOGL)

Hammond Manufacturing (HMM/A.Canada)

 

Thanks. I'll try to go through these companies and see if I can reverse engineer your thinking :)

 

I had a very quick look at FAV:

http://www.ftportfolios.com/Common/ContentFileLoader.aspx?ContentGUID=81cae14e-5bba-4d9f-a40d-895abb9f2954

 

Inception 9/20/2007

Total returns Inception to Date

Share price: -13.60%

NAV: 0.23%

Discount to NAV 11.76%

 

Dividend is great, but they are underperforming the market pretty badly. I guess you have other reasons for owning FAV?

 

The Fund’s NAV total return lagged the performance of its main benchmark, the Russell 1000 Value Index, by 15.21% for the twelve-month reporting period.

http://www.ftportfolios.com/Common/ContentFileLoader.aspx?ContentGUID=d69c9986-1ae5-4bd1-8280-6761f7ff30da

 

The Fund’s underperformance was mainly the result of the Fund’s defensive positioning and the benchmark’s “hope based” rally.

[rpadebet]

I have a portfolio full of these little gems, the better ones require more work to find.

 

A few random names that I like:

 

First Aviation (FAVS)

Goodheart-Willcox (GWOX)

Scheid Vineyards (SVIN)

PD-Rx (PDRX)

Kopp Glass (KOGL)

Hammond Manufacturing (HMM/A.Canada)

 

Nate,

Truly appreciate the great work you do on your blog. Are there any plans for keeping a running list of the stocks which you have analyzed and written about in a separate section on your website?

[oddballstocks]

 

First Aviation (FAVS)

 

 

Thanks. I'll try to go through these companies and see if I can reverse engineer your thinking :)

 

I had a very quick look at FAV:

http://www.ftportfolios.com/Common/ContentFileLoader.aspx?ContentGUID=81cae14e-5bba-4d9f-a40d-895abb9f2954

 

Inception 9/20/2007

Total returns Inception to Date

Share price: -13.60%

NAV: 0.23%

Discount to NAV 11.76%

 

Dividend is great, but they are underperforming the market pretty badly. I guess you have other reasons for owning FAV?

 

The Fund’s NAV total return lagged the performance of its main benchmark, the Russell 1000 Value Index, by 15.21% for the twelve-month reporting period.

http://www.ftportfolios.com/Common/ContentFileLoader.aspx?ContentGUID=d69c9986-1ae5-4bd1-8280-6761f7ff30da

 

The Fund’s underperformance was mainly the result of the Fund’s defensive positioning and the benchmark’s “hope based” rally.

 

I think you missed the "S" at the end of the ticker, it's FAVS, an OTC listed stock, not the fund you pointed to.  The company sold off their underperforming division and are left with two profitable divisions.  Earnings have shot up.  The CEO has a hedge fund/PE background and is very focused on capital allocation.  They paid down debt with the proceeds from the sale and not have a fairly clean balance sheet.  The company isn't afraid to take on debt for an attractive acquisition.

 

The company was a net-net for a while, but almost all of NCAV was tied up in the division they sold.  This was an interesting case, would I rather have the balance sheet safety where the safety comes from a money losing division, or no asset safety with earnings growth coming out strong?  I'll take the cheap earnings without the balance sheet.  Off the top of my head they're trading at an effective P/E of 5 or so. 

 

I've done very well buying the balance sheet bargains, but I've also done very well buying cheap earnings, and I mean cheap, P/E 5 or less type companies.

[oddballstocks]

I have a portfolio full of these little gems, the better ones require more work to find.

 

A few random names that I like:

 

First Aviation (FAVS)

Goodheart-Willcox (GWOX)

Scheid Vineyards (SVIN)

PD-Rx (PDRX)

Kopp Glass (KOGL)

Hammond Manufacturing (HMM/A.Canada)

 

Nate,

Truly appreciate the great work you do on your blog. Are there any plans for keeping a running list of the stocks which you have analyzed and written about in a separate section on your website?

 

Thanks.  I tried this at one point, but it was an upkeep nightmare for me.  I see the value though, after doing this for a few years I've probably profiled 150-200 different companies, and some from a year or two ago are still very attractive.  There is probably a way to expose those somehow without having to read through the whole archives.  Maybe the prunes guy can write some web scraper for my site?

[Guest hellsten]

 

First Aviation (FAVS)

 

 

Thanks. I'll try to go through these companies and see if I can reverse engineer your thinking :)

 

I had a very quick look at FAV:

http://www.ftportfolios.com/Common/ContentFileLoader.aspx?ContentGUID=81cae14e-5bba-4d9f-a40d-895abb9f2954

 

Inception 9/20/2007

Total returns Inception to Date

Share price: -13.60%

NAV: 0.23%

Discount to NAV 11.76%

 

Dividend is great, but they are underperforming the market pretty badly. I guess you have other reasons for owning FAV?

 

The Fund’s NAV total return lagged the performance of its main benchmark, the Russell 1000 Value Index, by 15.21% for the twelve-month reporting period.

http://www.ftportfolios.com/Common/ContentFileLoader.aspx?ContentGUID=d69c9986-1ae5-4bd1-8280-6761f7ff30da

 

The Fund’s underperformance was mainly the result of the Fund’s defensive positioning and the benchmark’s “hope based” rally.

 

I think you missed the "S" at the end of the ticker, it's FAVS, an OTC listed stock, not the fund you pointed to.  The company sold off their underperforming division and are left with two profitable divisions.  Earnings have shot up.  The CEO has a hedge fund/PE background and is very focused on capital allocation.  They paid down debt with the proceeds from the sale and not have a fairly clean balance sheet.  The company isn't afraid to take on debt for an attractive acquisition.

 

The company was a net-net for a while, but almost all of NCAV was tied up in the division they sold.  This was an interesting case, would I rather have the balance sheet safety where the safety comes from a money losing division, or no asset safety with earnings growth coming out strong?  I'll take the cheap earnings without the balance sheet.  Off the top of my head they're trading at an effective P/E of 5 or so. 

 

I've done very well buying the balance sheet bargains, but I've also done very well buying cheap earnings, and I mean cheap, P/E 5 or less type companies.

 

Aah… One of the dangers of coattail investing; copy and paste errors ;D

 

PD-RX looks like a nice and tiny stock. Sales growth looks pretty stable, and judging by their website (http://www.pdrx.com/) their capital allocation skills should be good.

[LC]

I've looked a bit in the micro & nano-cap space recently versus the small cap area where I find myself looking for cheap companies the most. The best I could find before being dragged back to contemplating Strayer and some companies in the R.V. space was a company called Federal Screw Works, but my valuation (20m) and the market cap (3m) were so far apart that I feared I must be missing something (probably how bad the pension liability is). At any rate...

 

Nate, I would like to pose two questions to you:

 

-Do you find it takes longer to find gems in the micro-cap area? As well, do you find it easier to quickly place a company in the "no" pile?

 

-How concentrated with these companies do you get in your portfolio? Do you have self-impose limits, and if so, when would you break them?

 

Best,

Louis

[Guest hellsten]

 

First Aviation (FAVS)

 

 

Thanks. I'll try to go through these companies and see if I can reverse engineer your thinking :)

 

I had a very quick look at FAV:

http://www.ftportfolios.com/Common/ContentFileLoader.aspx?ContentGUID=81cae14e-5bba-4d9f-a40d-895abb9f2954

 

Inception 9/20/2007

Total returns Inception to Date

Share price: -13.60%

NAV: 0.23%

Discount to NAV 11.76%

 

Dividend is great, but they are underperforming the market pretty badly. I guess you have other reasons for owning FAV?

 

The Fund’s NAV total return lagged the performance of its main benchmark, the Russell 1000 Value Index, by 15.21% for the twelve-month reporting period.

http://www.ftportfolios.com/Common/ContentFileLoader.aspx?ContentGUID=d69c9986-1ae5-4bd1-8280-6761f7ff30da

 

The Fund’s underperformance was mainly the result of the Fund’s defensive positioning and the benchmark’s “hope based” rally.

 

I think you missed the "S" at the end of the ticker, it's FAVS, an OTC listed stock, not the fund you pointed to.  The company sold off their underperforming division and are left with two profitable divisions.  Earnings have shot up.  The CEO has a hedge fund/PE background and is very focused on capital allocation.  They paid down debt with the proceeds from the sale and not have a fairly clean balance sheet.  The company isn't afraid to take on debt for an attractive acquisition.

 

The company was a net-net for a while, but almost all of NCAV was tied up in the division they sold.  This was an interesting case, would I rather have the balance sheet safety where the safety comes from a money losing division, or no asset safety with earnings growth coming out strong?  I'll take the cheap earnings without the balance sheet.  Off the top of my head they're trading at an effective P/E of 5 or so. 

 

I've done very well buying the balance sheet bargains, but I've also done very well buying cheap earnings, and I mean cheap, P/E 5 or less type companies.

 

Aah… One of the dangers of coattail investing; copy and paste errors ;D

 

PD-RX looks like a nice and tiny stock. Sales growth looks pretty stable, and judging by their website (http://www.pdrx.com/) their capital allocation skills should be good.

 

By the way, it wasn't a copy-paste error I made. Searching for FAVS on Google Finance shows you FAV, not FAVS:

https://www.google.com/finance?q=favs

 

Wonder when Google will shut down Google Finance…

 

Anyway, thank you for providing some background on FAVS. I'll have a closer look at the stock:

http://finance.yahoo.com/q?s=FAVS

[oddballstocks]

I've looked a bit in the micro & nano-cap space recently versus the small cap area where I find myself looking for cheap companies the most. The best I could find before being dragged back to contemplating Strayer and some companies in the R.V. space was a company called Federal Screw Works, but my valuation (20m) and the market cap (3m) were so far apart that I feared I must be missing something (probably how bad the pension liability is). At any rate...

 

Nate, I would like to pose two questions to you:

 

-Do you find it takes longer to find gems in the micro-cap area? As well, do you find it easier to quickly place a company in the "no" pile?

 

-How concentrated with these companies do you get in your portfolio? Do you have self-impose limits, and if so, when would you break them?

 

Best,

Louis

 

I look at tiny companies because it's easy.  I can usually eliminate a company within 15-20 minutes, which is incidentally about how long it takes a read the entire annual report.  I can eliminate something quicker is most cases.  I'm looking for gross undervaluations, something like Federal Screw Works, at 10% of BV would catch my eye.  I'm actually familiar with them, what always steered me clear was the constant losses.

 

For these positions I start with a 1% sizing, I will increase it up to 5% if I grow to love the company, or if it becomes cheaper.

 

Here's the attraction for me, I can buy higher quality companies cheaper than on a listed exchange.  The net-nets on the NASDAQ are complete junk.  There are a handful of unlisted net-nets that are very profitable, and decent companies.  I'd rather scrounge for information and get the higher quality company at a lower price.  The attraction of the very small stuff isn't just absolute cheapness, it's also being able to get things that are a notch up in quality.

 

PD-Rx, yes, I really like them.  They are an example of what's great about these companies, a press release came out two (maybe three) weeks ago saying they signed a $40+m contract with the government.  The stock didn't move, just look at their latest annual report to see how significant this news is, I'd say very!

 

It seems weird to say, but I believe that micro-cap investing is both the easiest, as in easy to understand, and takes the least amount of time.  I could read the SHLD annual report or read the annual reports for 5-10 small companies that all have the same upside.  There's also less of a chance I mess up with a small simple company by assuming something wrongly, or mis-estimating.

[Palantir]

Where do you find the financials for these? They're not on OTC markets or the SEC website....do you have to contact the firm for an AR?

[oddballstocks]

Where do you find the financials for these? They're not on OTC markets or the SEC website....do you have to contact the firm for an AR?

 

Sometimes you need to buy a share and call the CFO.  Seems like a pain doesn't it?  It is, but where information is hard to get it's extremely valuable.  It's very hard to have an informational edge on Pfizer, but to have one on Thermwood Corporation you just need to spend a few cents for a share and call the CFO.

[Tim Eriksen]

I believe focusing on micro and small caps is the easiest way to outperform the market.  The companies are easier to understand and there is no institutional competition.  My fund has significantly outperformed the market over its 7 year life and my personal record is longer than that.  There are differing approaches.  Some choose a less concentrated, deep value approach that often means owning illiquid stocks, where the stock price may stay flat for some time before popping.  While I occasionally nibble on those I prefer more liquidity that allows me to buy stocks at 6 times earnings and typically sell at 10 times earnings.  When I find the right one I have no problem going to 15% position (the fund's limit) or higher for my personal account.

 

listed alphabetically

Deep Value ideas (illiquid) - BOZZ, PDRX, SADL, SHFK, TETAA, TRKX

Value (liquid) - CPKF(bank), PDER

Liquid with near term catalyst (higher earnings) - CNRD, HNNA, NROM

 

I also go for listed micros and small caps - AM.TO, HNRG, INBK (bank), PRLS

 

The key is to develop a large watch list.  Since you can research them in a much shorter period of time than a large cap it is relatively easy to do over time. 

[watsa_is_a_randian_hero]

Nate - How have you valued FAVS?  Despite what you say about core operations being solid and profitable, and the management focus, it doesn't seem cheap.

 

They still have about $8mm of debt/preferred stock for a total EV of around $18mm... stand alone financials are not available, but annualizing the last quarter would get you 3mm in EBITDA for a 6x multiple.  In addition, backing out goodwill and the balance sheet doesn't look great either.

 

Are you looking for margin improvements/organic growth with new management?  Is your ownership all based on management at this point

[oddballstocks]

I would argue that Tim's definition of liquidity is much different than most on the board.

 

I enjoy the buy at P/E 5 and ride to P/E 10 investments as well.  I have purchased a few P/E 1 stocks too, in every case they've doubled, I'm not complaining.

 

If I'm buying something VERY illiquid, I want to ensure the business is sound.  These companies are the type that Buffett mentions wanting to own if the market were to close for five years.  I have a number of holdings that only report once a year, I haven't lost a blink of sleep over them, they're well run companies that are cheap.  Eventually value will be realized, but I'm patient.

[oddballstocks]

Nate - How have you valued FAVS?  Despite what you say about core operations being solid and profitable, and the management focus, it doesn't seem cheap.

 

They still have about $8mm of debt/preferred stock for a total EV of around $18mm... stand alone financials are not available, but annualizing the last quarter would get you 3mm in EBITDA for a 6x multiple.  In addition, backing out goodwill and the balance sheet doesn't look great either.

 

Are you looking for margin improvements/organic growth with new management?  Is your ownership all based on management at this point

 

Here are second quarter results: http://www.otcmarkets.com/otciq/ajax/showNewsReleaseDocumentById.pdf?id=2021204066

 

I'm taking that plus the CEO statement in the annual report that these core earnings are what we should expect going forward.  So $.42 a quarter, maybe $1.50 for the year.  This is the same as what you put together.

 

I believe some of the stock situation might be cleaned up soon with TATT reducing or eliminating their stake.  I believe the preferred is owned by the CEO and is convertible.  Presume that converts and the company buys back the TATT stake, it would be a net positive.

 

I'm betting on management and margin growth.  The balance sheet is much better than where it was when I purchased this.  My initial buy was based on the fact that they sold their money losing division for more than their entire market cap, the stock didn't move.  They used the proceeds to pay down debt, and now they have two profitable divisions that are poised for growth.

 

Maybe this is why I'm not a GARP investor... In terms of the stocks I listed I'd say PDRX is probably worth a look over FAVS, but FAVS is interesting for sure.

 

[Tim Eriksen]

I would argue that Tim's definition of liquidity is much different than most on the board.

 

I enjoy the buy at P/E 5 and ride to P/E 10 investments as well.  I have purchased a few P/E 1 stocks too, in every case they've doubled, I'm not complaining.

 

If I'm buying something VERY illiquid, I want to ensure the business is sound.  These companies are the type that Buffett mentions wanting to own if the market were to close for five years.  I have a number of holdings that only report once a year, I haven't lost a blink of sleep over them, they're well run companies that are cheap.  Eventually value will be realized, but I'm patient.

 

Good point.  By liquid I mean able to typically get in and out within a week for those with portfolios less than $5 million.  Anyone investing in the space knows liquidity can dry up surprisingly fast.  The key is to use that to your advantage.   

 

I think micro caps investing is the best way for enterprising investors with smaller sums to grow their portfolio more quickly without leverage.   

[Tim Eriksen]

People who study Buffett should spend more time on the early partnership years IMO.  It is fascinating.  They weren't all cigar butts but most were micro caps. 

Holding................................................................market cap at time

Commonwealth Trust Co (bank) bought in 1957-58  - $1 million  (he owned 12% of the stock)

National American Fire Insurance 1957-59  - $2 million (he owned 10% of the stock)

Sanborn Map  1958-1960  - $4.7 million  (he owned 23% of the stock)

Demptser Mill  1956-1960  - $1.5 million (eventually owned 70%)

 

even American Express was small enough that he bought 5% of the o/s shares. 

 

[rockket]

nate - what kind of returns have you been able to get? and how much time do you think you typically devote?

 

i'm beginning to invest my savings - trouble is that i am limited on time right now and can only invest in either microcaps or mid/large caps for work reasons. i'd find it difficult to get a real edge in large caps, and have just begun considering the microcap space now.

[king888]

Just my 2 cent.

The undervalued areas are not just micro-cap. It can be whole stock market in some countries . For example, Japan stocks  a few year back and maybe S.Korea for now. 

The problem with micro cap is you are not able to build a meaningful position but it depends on portfolio size as well.

With 1-5% position in each micro cap ,I guess that won't make much differences comparing to market return. 

The key to outperform market and build wealth is concentration in the overlooked sectors/stocks.  Warren Buffett does that in his early day.  But that might be another topic.

 

I am interesting to hear Nate's return also. He is the real pro is this space.   

[DTEJD1997]

Hey all:

 

I've been yelling this from the rooftops.  Nano cap value is the way to go!

 

There are some caveats though:

 

-You can't invest $500,000k per position.  If you are managing 100's of millions, you are going to have a very difficult time.

 

-If you are working with a $200k portfolio, this won't be too much of a problem.

 

-You need to do a lot of work.

 

-You need to be VERY patient.

 

-You need to be able to go against the crowd and think for yourself.  You are going to be out on your own.

 

-You need to be able to go out and check things for yourself.  For example, checking the real estate locations of Calloway's Nursery (CLWY).

 

-Got to watch the bid & ask.  Some of these can get pretty wide.

 

If you are able to work with the constraints, there are plenty of pickings.  Stocks will regularly trade WELL under book value and for LOW single digit P/E ratios.  If you are really lucky, you will also get a dividend too!

 

It took me many years to come around to this, but this area is VERY inefficient. 

 

Bloggers can give you some help.  I'm looking at:  "Ragnar is a Pirate", "Whopper Investments", "OTC Adventures", and "Oddball Stocks".  These guys do a good job and know what they are talking about!  I can highly recommend them.