By Ajay Tandon, CEO of SeeThruEquity
Definition of a Microcap and the Microcap Equity Landscape. In a market dominated by high frequency trading and high correlation within and across the various asset classes, microcap stocks present a differentiated value add to an investor’s portfolio. We generally define microcap stocks as those having market capitalizations equal to or less than $300 million. Based upon our internal research, there are approximately 6,100 stocks with market caps less than $300 million. The investment community generally accepts the proposition that microcaps have outperformed the overall market historically, and that microcaps as an equity class present an attractive value proposition if approached correctly. But the key, of course, for investors is to be able to efficiently identify and analyze the correct opportunities in the right stocks in the microcap universe.
Why Invest in Microcaps? What sort of an edge can an investor truly gain focusing on a stock such as Apple Inc. (NASDAQ: AAPL) or Google Inc. (NASDAQ: GOOG)? These are widely covered stocks, held by the largest of institutional players. Pulling a data point on these names that can enhance a portfolio is quite difficult. The reality could not be more different in the microcap space. As discussed above, most microcap companies have no sell side research coverage, and very little publicly available information is broadcast between quarters. An analyst willing to do the research on these names can gain significant insight into their businesses and operational results. Additionally, the managements of these growing companies are extremely accessible to investors, unlike management teams at mid and large cap companies.
Aiding solid investment work with high quality research can lead to outperformance, and ultimately alpha generation for a portfolio. Microcap stocks offer investors attractive upside potential. Anecdotally, It is not uncommon for the right microcap stock to offer 200-500% return potential around a major company catalyst. In fact, we believe that microcap investing is more analogous to venture capital and private equity investing, and as such, good information and equity research becomes critical.
The Importance of Equity Research. Undoubtedly, equity research remains an important component of the sophisticated investor’s toolkit. According to Greenwich Associates, a leading consulting firm servicing the financial services industry, buyside institutions spent approximately $6 billion on equity research in a recent year. A detailed analysis of the value of equity research in the investment process is beyond the scope of this article, so we will leave it at that. Sophisticated investors spend a lot of money buying good research.
Equity Research for Microcaps—What are the Options? The problem for microcap companies is twofold: 1) the availability of equity research is very limited in terms of firms that provide it because most equity research in the market is focused on largecap and midcap names and, related to that, 2) paid for equity research is uneconomical and not very useful. Certain investment banking firms still maintain high quality research departments focused on providing research to companies, which they believe, fit their parameters for coverage and investment banking services. But this unfortunately does not even begin to address the needs of the 6000+ companies out there in the microcap sector. The other option is so-called independent research firms that cater to microcap companies. The problem here is that these firms charge hefty sums to produce an equity research report, often way beyond the limited budgets of cash strapped but growing microcap companies that are conserving every dollar possible to fund their growth. More importantly, paid for research is not very attractive to investors; we believe, based upon our experience that most investors don’t pay any attention to paid for research as they view it as promotional and completely unreliable as a result.
SeeThruEquity Research. We here at SeeThruEquity are a research team focused on the microcap market, and currently have 118 companies on which we have initiated research coverage. Our research reports have the look and feel of sell-side equity research with well-written, thoughtful 15-20 page initiation reports on microcap companies across industry sectors. Most importantly, we do not charge a fee for our research and are not an investment bank. We invite companies to present at our quarterly investor conferences, and write unbiased and not paid for research on all invited companies. As a result of maintaining an unbiased research model, we are approved to contribute our research to Thomson One Analytics (First Call), Capital IQ, FactSet, Zacks and distribute our research to our database of opt-in investors. We also contribute our estimates to Thomson Estimates, the leading estimates platform on Wall Street.
For more information visit www.seethruequity.com
Chief Executive Officer
Ajay brings over 12 years of experience in the financial service industry and considerable experience advising, structuring transactions, and raising capital for smallcap public and private enterprises with respect to equity and equity linked transactions prior to his role at SeeThruEquity.
Ajay co-founded Emissary Capital, LLC, a private investment firm focused on microcap investment banking. Prior to serving as Director of Research of SeeThruEquity, LLC and President of Emissary Capital, LLC, Ajay served as Vice President of Equity Capital Markets at Maxim Group, LLC, a New York City based, full service investment banking firm. In his role at Maxim, Ajay led the firm's equity syndicate and origination efforts with respect to PIPEs, registered IPOs and follow-on offerings. Prior to his role at Maxim Group, Ajay served as an executive for Dealogic plc, an analytics platform used by global and regional investment banks worldwide to help optimize their performance and improve competitiveness.
Ajay began his career in financial services as a management consultant with IBM Global Services and earned his Bachelor of Arts degree from Cornell University.
SeeThruEquity is an equity research and corporate access firm focused on companies with less than $1 billion in market capitalization. The research is not paid for and is unbiased. We do not conduct any investment banking or commission based business. We are approved to contribute our research to Thomson One Analytics (First Call), Capital IQ, FactSet, Zacks, and distribute our research to our database of opt-in investors. We also contribute our estimates to Thomson Estimates, the leading estimates platform on Wall Street.
For more information visit www.seethruequity.com
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