By Sam Namiri
Grand Slam Asset Management
Investing in microcap companies is very different compared to larger and more liquid stocks. Timing as to when to buy a stock is more difficult in microcaps as one large buyer or seller can quickly move the stock price. The key is to have a strong and repeatable investment process in place that includes when to buy and sell. My investment life cycle has the following 5 phases: Finding quality companies, performing extensive due diligence, paying the right price, monitoring results, and strict sell discipline.
Finding quality companies is key to microcap investing because no one wants to invest in a business model that doesn’t work. Some of the key attributes that I look for are recurring revenue either contractually or by nature of the product, high barriers to entry, low competition and pricing power. This is in addition to strong management teams and businesses that are not highly levered.
After finding a company that fits the bill as a quality business, I follow-up with intense research into the organization. I read all of the company’s and its competitors filings, industry publications and scour the internet for more information. I initially talk to management, competitors, customers and suppliers on the phone. Eventually I will attend industry trade shows and conferences as well as visit the company. The main reason for the visit is to make sure that the company has the systems and culture in place to run the organization well that allows both the employees and management of the company to effectively perform their jobs and monitor the business. Many microcap companies do not have effective processes and culture in place which is a risk not typically found in large cap companies. Throughout this process I am building my position over time as research is done and the investment still looks positive.
While doing research I am also building a financial model. The key to the model is to make sure that the financial results work out so that the stock can at least double within 2 years. If I don’t think that it can meet or surpass that hurdle, I’m not interested. I generally use cash flow or earnings multiples and look at comparable company valuations that are either publicly traded or have been acquired. If I think that a company’s stock is worth $5 per share in 2 years, I don’t really worry if I pay $1 or $1.50 per share, although cheaper is always better!
I continue to monitor the results of the business and industry as time goes on and update my model and valuation. At any point if price targets are met, fundamentals break down, or performance milestones are not reached, it is time to sell the stock. Depending on the liquidity of the stock and/or how quickly things have turned determines the price that I am willing to sell the stock at. It is important to never place market orders for stock and to always have a limit price set when buying and selling microcaps. You risk buying or selling the stock at irrational prices due to lack of volume. On the other hand, you can occasionally take advantage of these irrational buyers and sellers as well in the microcap universe which is nearly impossible to do with large caps.
In general, as a value investor in microcaps I look for quality companies that at reasonable market driven valuations can at least double within 24 months and once it does or if I do not think that it can, I sell.
Sam Namiri is Vice President at Grand Slam Asset Management, a registered investment adviser specializing in small and micro-cap value investing.
Prior to Grand Slam, Mr. Namiri was the Founder and President of International Strategic Investment Group, Inc., a jewelry company involved in television, media, manufacturing, distribution and e-commerce. He led the company in producing a reverse-auction show selling jewelry which aired on DirectTV and also started a plant to manufacture semi-precious gemstone jewelry in Pakistan.
Mr. Namiri has a BS in Industrial Engineering and Operations Research from the University of California, Berkeley and an MBA from Columbia Business School.
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