By Fred Rockwell
I’ve been researching and picking stocks for quite some time. But selecting companies for the upcoming MicroCap Conference has given me an opportunity to review my process for finding ideas. The following is a rundown of my methodology.
There are three main sources of my ideas: 1) conversations with other investors often met at investor conferences, 2) stock screens, and 3) reviewing company filings. First, I tap into my network of investor and analyst friends to identify which companies they are interested in and why. Second, I regularly attend other investor conferences to discover up-and-coming companies. Third, I use screens to narrow down the list. The micro-cap space contains over 12,000 different companies, and screens reduce that number to a more manageable level. Lastly, I monitor filings for significant events. Once I have compiled a list of micro-cap stocks through the above methods, it is time to dig deeper.
How do I narrow down the list to 25 conference attendees? What do I look for at this point? First, I look at the basics: business quality, growth potential, intrinsic value, and strength of management.
I carefully analyze companies’ income statements to assess their prospects for long-term profitability. I look for companies with robust streams of recurring revenue and high gross margins. Another way companies can gain favor in our selection process is through their growth potential. As we evaluate market size and key drivers, we identify trends—not fads. Meanwhile, I manage the uncertainty in my assumptions by evaluating the range of potential outcomes and weighing the potential upsides and downsides. Next, I compare companies’ valuations with industry counterparts and identify companies that may be undervalued by the market. But I don’t stop there—I also identify one or more catalysts that may drive the companies’ prices to their intrinsic values. Otherwise, the companies could remain undervalued for the foreseeable future.
All of the companies attending The MicroCap Conference have been inspected for the quality of their management. A company’s management should be not only experienced but hardworking—that is, actively promoting the company’s interests rather than sitting back and collecting paychecks. Furthermore, I examine the past decisions made by management and evaluate whether they demonstrate sound judgement. A company with strong management is more likely to remain competitive and withstand economic downturns.
Still, it’s not enough to look good on paper— a company needs to have a good product or service. More specifically, it must have an edge over the competition. When selecting companies to invite to The MicroCap Conference, I assess their products and services for quality as well as differentiation, even trying the products and services myself when possible.
Overall, The MicroCap Conference’s objective is to give attractive companies a platform to voice their story. The conference will be a valuable experience for investors and analysts too. There will be panel discussions by prominent investment managers, activist investors, and financial bloggers. There will also be plenty of time for networking and sharing ideas with colleagues.
Fred Rockwell is the President of Tarsier Capital Management. He is a Chartered Financial Analyst, Certified Public Accountant, and a University of Michigan MBA graduate. The MicroCap Conference will take place on November 5th at the Philadelphia Marriott Downtown. Register at www.microcapconf.com
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