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Ian Cassel
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Full Time Micro Cap Investor. Founder of MicroCapClub.com Founded in 2011, MicroCapClub is an exclusive forum for experienced microcap investors focused on microcap companies (sub $300m market cap). MicroCapClub was created to be a platform for experienced microcap investors to share and discuss... More
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  • Betting on The Jockey 6 comments
    Nov 2, 2010 12:50 PM | about stocks: MEET, GORO, TLR



    The big difference in investing in micro cap (<400m mkt cap) versus mid-large cap ($5b + mkt cap) companies is that qualitative attributes have a far greater impact on ROI.  A mid-large cap fund manager may be able to do purely quantitative analysis (historical ratio analysis, cash flow analysis, etc) and a screening mechanism will spit out a bunch of stocks that fit what he is looking for.  This same fund manager may be able to get away with investing in those securities mainly due to Company A’s 5 year EPS growth warrants a higher stock price.  He places the bet that the market will eventually revalue Company A given this disconnect to its peer group.  The fund manager doesn’t care about the CEO, his background, where he graduated from, if he is an empty suit or brings some value to the company.  The reason the fund manager doesn’t place a lot of emphasis on qualitative measures like (Management) is because Company A is a $5 billion market cap company and surely a company of this size wouldn’t have an idiot at the helm.  The above might be a bit of a generalization but its reality. 

    In micro-small cap, due diligence is much harder because in most cases you don’t have a plethora of historical financial data to draw any type of conclusion.  The company you are looking at is at some sort of inflection point whether it be a new product launch, a new drug hitting the market, a new mine getting into production, etc.  You don’t have business history to be your guide.  You’re making a bet that the CEO has investor’s best interest at heart and can get the company from point A to point B.  In most micro cap cases, the CEO is the person that started the company.  In micro cap you have to take all these little qualitative components into consideration (a few of them): What is the CEO’s background, how did they set up the company, how is the company funded, how is the company structured, who is on the board, Are all 4 of the CEO’s kids on the payroll doing nothing but collecting a paycheck, how many shares outstanding on a fully diluted basis, does the CEO have too much control, does he/she have too little control, why is the CEO driving a brand new Mercedes but also looking to raise $5 million,  why is the company offices in the most expensive part of the city, why does the company offices have a $50k painting in every room,  why is the CEO paying himself $350k/year while the company hasn’t made a dime, Did the CEO hire his managers to be “yes men” or do they actually have a backbone, etc etc so on and so forth.  I’ve made over 250 company visits over the last 8-10 years and I have some stories (might be my next blog), but as a micro cap investor you take all the above into consideration.   

    A few years ago I used to get into heated discussions with a few very popular gold/silver investors (a few are regularly on CNBC).  Back in 2006-2007 gold was at $550-650/oz and silver was $10/oz.  At the time Junior Exploration companies were the rage. They were at ridiculous levels (much higher than they are today with $1300 gold/$24 silver).  If a company had a moose pasture and a geologist that signed off on a 43-101 report (Canadian proven/probable) you had a $50 million market cap.  If you had a moose pasture AND a drill turning, and a 43-101 report you had a $100 million market cap by default.  Most of these companies would raise money every 4 months, drill more holes in the ground, and keep doing it.  That’s why the majority of these companies that are still around today all have 100m+ shares outstanding.  I was looking for “real” businesses in this industry.  I didn’t care if they had a 50 million oz silver deposit.  If management didn’t have a plan to get the silver out of the ground I didn’t care.  I befriended a few mining newsletter guys to help me sort through some stories.  A lot of these guys would value the company by simply taking the amount of resource defined in the ground divided by the amount of shares outstanding.  They would tout this over and over which didn’t make any sense.  How could you place a value on the ounces in the ground if there wasn’t a production strategy? And how do you divide by an amount of shares outstanding that increases constantly?  Anyway it was a funny time and it’s the type of bogus analysis that is done during mini bubbles.  The newsletter guys always would say, “we bet on resources in the ground because the resource doesn’t change, not management”.  It’s rather comical when you think about it.  I kept pounding the table on production focused junior mining companies that have managements that get it.  I ended up investing heavily in Gold Resource Corp (NYSEMKT:GORO) and Timberline Resources (NYSEMKT:TLR).  GORO ended up being a 20 bagger and TLR a slight loss, but most junior exploration have underperformed their 2007-2008 stock price levels due to management incompetence.   It’s pretty sad when you’re a junior gold-silver exploration or mining company that is trading at/or below levels from a couple years ago even while gold/silver doubled in price and costs of production have dropped. 

    This is why you bet on management (“the Jockey”) when you look to invest in a micro cap company as they have the most control over your return.  Once you find a business, company, product you like, management is the most important part of due diligence.  Doing due diligence isn’t easy especially when your weighing the pros and cons of numerous qualitative attributes.  After you visit a few companies you begin to just get a feel for what looks right, feels right, etc.  It’s 50% a mathematical equation where you are adding 1 point for certain things and subtracting 1 point for others, but the other 50% is more about feel. It’s not like after I go visit a company and it passes my smell test, I just go balls to the wall buying the stock.  I used to do this but it can be an expensive mistake.  It can take 3-6-12 months for me to feel comfortable with management.  It just takes time for a company’s management to prove to me they will do the right thing. 

    I met Quepasa Corp (QPSA) management in January 2010 and bought an initial position around 2.75.  I came away very impressed with my first meeting.  I was top ticking (stock making a new high) the market to get my initial position which I hate doing.  I was very cautious though since I thought for sure QPSA management would do a big financing (dilution) thus putting a cap on the stock for a few months, and I’d probably be able to buy more shares lower.  So I waited and waited.  Management kept executing and executing.  They did everything they said they were going to do, and didn’t do anything they said they weren’t going to do.  I was impressed, and bought more stock at 3.50, and top ticked the market for the remainder of my position at $4.  It took me several months before I was comfortable enough to take the plunge and make QPSA a large position.  It didn’t happen overnight, management proved itself to me by “doing” not “saying”.  11 months after initially meeting the management team, QPSA management continues to do what they say they will do, and the stock is now ready to go through $6.  I don’t know what the future holds for QPSA shares but if management keeps executing so will the stock price.  As long as management keeps executing I will keep owning QPSA. 

    Buying a stock in increments with each increment representing an increased conviction level with management is a winning strategy that works for me. This could mean you give up some gains in the beginning but that’s fine because it can save you some losses if you decide to throw in the towel.  I’ve come to the following conclusion in making multiple investments in the same company/stock:  

    In most of my winning investments, I’ve averaged up several times.  In most of my losing investments I’ve averaged down several times.

    In another investment of mine, a private company, Intezyne Technologies.  I’ve made a total of 10 investments in the company over the course of 2.5 years.  The CEO is the best and brightest I’ve ever invested in.  I believe in 3-4 years looking back, Intezyne will be my best performing investment ever.  My conclusion isn’t one that I’ve come to by a quick visit to their Tampa Headquarters, but one that has developed over months and even years.  When you find a winning jockey riding Secretariat you bet big or go home. 

    I hope I’ve helped shed some light on what goes on in my head while evaluating a micro cap investment.  Unlike traders, I’m making a bet for dollars to the upside not cents.  And that’s not a knock against traders, I’m a terrible one, but I’m half decent at investing.  I’m willing to wait 6 months or even 4 years given the velocity of the inflection point I’m investing in.  I’m not always right by any stretch, but finding good companies, betting on management and averaging up will have you increasing your batting average. 



    Disclosure: LONG GORO QPSA Intezyne
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Comments (6)
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  • Skaiste
    , contributor
    Comments (32) | Send Message
     
    What's the symbol for intezyne?
    5 Nov 2010, 04:25 PM Reply Like
  • Ian Cassel
    , contributor
    Comments (210) | Send Message
     
    Author’s reply » Its a private company

     

    If anyone is interested in Intezyne Technologies, please contact the company. www.intezyne.com/

     

    Only accredited investors apply.

     

    IC
    5 Nov 2010, 05:02 PM Reply Like
  • James Levy
    , contributor
    Comments (83) | Send Message
     
    Excellent insight and advice Ian. Many thanks for sharing this with us.
    6 Nov 2010, 02:58 AM Reply Like
  • yellowtailcheek
    , contributor
    Comments (52) | Send Message
     
    "Betting on The Jockey " -- so true, same conclusion with my 20+ year investing experience.

     

    my favorite jockey going forward is J. Melville Engle of Thermogenesis(KOOL).
    6 Nov 2010, 01:56 PM Reply Like
  • beggar8
    , contributor
    Comments (2) | Send Message
     
    Ian,
    Thanks so much for all your insights!
    I have been looking at QPSA off and on for several months now since first hearing about them from you. (i was thinking as you had mentioned, that the company would end up
    doing a big financing/dilution that would provide me an opportunity to build a position). So far that hasn't happened. What are your thoughts on the likelihood/timing of that happening in the future??
    Any comments are appreciated.
    Thanks Ian!

     

    Eric
    6 Nov 2010, 02:03 PM Reply Like
  • Ian Cassel
    , contributor
    Comments (210) | Send Message
     
    Author’s reply » Yellowtail: Exactly, in micro caps they make or break the company and the stock.

     

    Beggar: I'm not that worried about a financing because I think it would only help the stock at this stage if they did do one. When secondary raises are done correctly, they can "make" a stock. So I guess what I'm trying to say is, I'm not worried about it either way.

     

    IC
    6 Nov 2010, 02:47 PM Reply Like
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