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I have followed the markets for over 15 years. I have an MBA in Finance, I'm a CFA Charterholder and have taken numerous industry course. I currently work for a large financial institution. I am a private investor that enjoys learning from this community and contributing every so often. Feel... More
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  • What I Look For In Micro Cap Stocks 0 comments
    Jul 26, 2013 11:10 PM | about stocks: CLCN, AVTCQ, REPR, ISDR, SYEV, WFCF

    I have been told by Seeking Alpha that a company generally has to have a market cap of at least $100M for an article to be published about them. Therefore this article is going on my blog instead.

    The over the counter (OTC) market includes thousands of companies. Most of these companies fall into one of four camps: a) small financial institutions, b) start-up companies that have a "great-idea" c) mature companies that never grew, or d) formerly large companies that took a few missteps over the years and are on the verge of or in chapter 11.

    Many small companies that have a solid business plan and capable managers either stay private and gradually grow or get venture capital injections, grow big very quickly, then list on NASDAQ or NYSE. Some of these companies either fly under the radar of VC funding or aren't interested in losing control and being told what to do by VC's and instead end up listing on the OTC markets.

    There are 10,000 companies listed on the OTC Markets website (OTCM being one of them). Companies are broken up into three categories:

    · OTCQX: These companies tend to be large international companies (e.g. Adidas) or U.S. companies that meet certain criteria, although not too high of a hurdle. They have real-time quotes, which tend to be good for companies with higher trading volume.

    · OTCQB: These companies report their financials to the SEC. They are current in their disclosures to regulators, but do not have a minimum financial standard.

    · OTCPink: These companies may or may not publicly report their financial statements or may not be current with their filing to the SEC.

    I like to stick with the first two categories because I am ensured that the most recent financials have been filed with the SEC. This brings the list down to 3,572 from the original 10,000. To simplify things, I only want to look at common shares of U.S. companies. This further reduces the list to 2,400. I also don't want to buy companies that have their share price as a fraction of one cent or even only a few cents. I set the bar at a minimum of 20 cents. This further reduces the screen down to 1,216. Still a large number, but only 12% of what it was at the beginning.

    Unfortunately the OTC Markets website does not have a more advanced screen, so I have reviewed hundreds of these companies. I have tended to avoid looking at financials because small banks with one or a few branches may look good financially for years, before a few bad loans put them under. It only takes me about 20 seconds each to do an initial screen.

    Must Haves

    - Company has to be profitable

    - Revenue and net income have to be growing

    - Relatively strong balance sheet (positive equity, more cash than debt)

    - It has to be trading at a reasonable price

    - Company should have a history of filing their 10Q's and 10K's on time

    Nice to Haves

    - Management/board should have a significant stake in the company

    - There should be independent board members

    - Management compensation should be aligned with performance

    I have screened hundreds of companies on the OTC and there have only been a few that have met the "must have criteria"; these include Issuer Direct (NYSEMKT:ISDR), Creative Learning (OTCPK:CLCN) and Seychelle Environmental Technologies (OTCQB:SYEV). There are a few other companies that come close but have at least one issue that prevents them from making it on my current buy list: AVT Inc (AVTC), Repro-Med Systems (OTCQX:REPR) and Where Food Comes From (OTCQB:WFCF). Let's start off with the companies that don't quite cut it and why that is:

    · I was excited about AVTC, I really was. I think that they are developing some very innovative systems for the vending machine industry and retailing in general. There are a lot of areas of growth for this company. I even bought some shares and continue to hold a small position in the company. However they are currently in my dog house and I believe a number of other investors' dog houses mainly because they have not filed their 10Q for the first quarter yet. They also have a history of getting extensions on their filings, but up until Q1, they had been able to file before the extension deadline.

    Furthermore, the company promotes themselves way too much by getting PR news releases with little substance sent out on a regular basis. I could say more why this company leaves a bad taste in my mouth, but I'll leave it at that.

    · REPR is a company that has been around for 33 years. It has developed a couple of medical products that have had moderate success in the marketplace. I like the top line growth of this company however net income has remained stubbornly flat, resulting in consistently decreasing profit margins. If I saw profits starting to lift up, I would take a more serious look at this company.

    · WFCF meets all my criteria except that it is currently overpriced based on forward P/E. It is currently trading around $1.45. I would be interested at around $0.70.

    There are actually only two companies that I truly like in the OTC marketplace: ISDR and CLCN. I am concerned about SYEV.

    · SYEV has existed since the mid-80's. The company develops portable water filtration systems. Although sales and profits have been a little bumpy along the way, the longer-term trend has shown a significant increase in sales, profits, shareholders equity and cash. With a P/E of 10, this company seems like a buy, however there is one main reason that is stopping me. The Chairman and President of the company is 78 years old, the CEO is also 78 and the COO and CFO is 74. There are no obvious heir apparent for any of these senior positions, so succession planning is a big concern. They may look to sell the company, but if and when are unknown.

    Now to the companies that meet my criteria and are on my buy list:

    · ISDR is a company I started following around $3.30 and is now trading at $6.34. I am sad to say that I have so far missed the boat on getting into this name. I have tried multiple times, but the price always seems to get ahead of what I want to spend. I haven't given up. Co-founder and CEO Brian Balbirnie is the largest shareholder. There are only about 642K shares not held by insiders, so this stock is often quite illiquid. This company is one of the few non-financial name on OTC that pay a dividend. The company generates a lot of recurring revenue and has a strong balance sheet to make further strategic acquisitions.

    · CLCN is a name that I loaded up on at $0.60 and now trades at $1.35 after having recently gone on a nice run. CEO Brian Pappas is the largest shareholder, with founder and director Michelle Cote also a significant holder. Brian has many years of experience in the franchise business which gives me comfort with this name. The company currently has sold 350 Bricks 4 Kidz franchises in 40 states and 14 countries outside the U.S. I believe they have just scratched the surface with the potential for this franchise. They also have others in development.

    I will continue to scour the OTC universe in search of great companies that meet the criteria I listed earlier.

    Disclosure: I am long OTCPK:CLCN, AVTC.PK.

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