Introduction
I am an experienced microcap investor, and have been writing comprehensive articles for Seeking Alpha for many years. My recent articles can be found here for those wanting to review my past work. The exclusive research service I am offering will profile micro capitalization stocks every month. Every month will include at least two straight undervalued stocks, as well as companies trading at a discount to their net current assets/cash "net-nets" and special situations. To see what initial subscribers have to say about the service, click here.
Introduction of Microcaps
Microcap stocks are an area of the market that has a surprising number of inefficiencies to exploit. There is a significant body of academic research showing a marked outperformance by small capitalization stocks. While efficient market theory mavens suggest that is because small stocks have greater risk, I strongly disagree. While everyone has a "penny stock promotion" story, well selected value based small stocks actually have less risk than large stocks. Their businesses and balance sheets are easier to understand, which makes effective predictions about their future more accurate. Plus, as fewer investors are looking at small stocks, their valuations are more likely to be low. Buying simple businesses at low prices provides a margin of safety to the ideas that I am profiling in my newsletter.
How I find ideas
Quality microcap stocks, however, are the proverbial needle in a haystack. The Google Finance stock screener has over 18,000 US stocks with market capitalizations under $100 million. By comparison, they have less than 1800 stocks listed with market capitalizations over $10 billion. Plus, small companies are more likely to have errors in reported financial databases, and are less likely to show up on investor's screens.
I do basic (usually single metric) value filters and then pull financials on companies one at time. I don't mind saying that sometimes the haystack doesn't even have a needle, which makes the process long. However, the best ideas come from casting a wide net, and that is what I'm putting in my subscription service.
Arbitrage ideas
The service will also include special situations and arbitrage ideas. Special situation ideas are an unusual type of stock investment, one tied to an event rather than a valuation of a business. Typical special situations include takeovers, dividends, spin-outs, tenders, liquidations, rights offerings, etc. Warren Buffett himself is a fan of special situation investing, and did it in his partnership days when opportunities arose.
Special situations are especially attractive when the market as a whole is highly valued, as returns from special situations are not highly correlated to market returns. Plus, when special situation play out, they often return cash to investors, which is timely if the market has declined as that is when bargains abound. Thus, putting a portion of a portfolio into special situations is good insurance against market declines.
My service will provide frequent updates on special situation arbitrage opportunities. The current issue includes an odd lot self tender, the profit from which would cover the first few months of subscription, making trying the service even more risk free than implied by Seeking Alpha's money back guarantee.
What You Don't Get
This isn't a "penny stock promotion" service, and you shouldn't expect to see me talking about what mine/oil well/new drug a company is just about to have. What you will get is actionable trades on established, but small, businesses. Real companies with real earnings and cash flow that get lost in the dreck at the bottom end of the market. I liken it to searching the beach with a metal detector. There's a lot of sand and trash, but the amazing finds make it worthwhile. The other things you'll see are companies with a hard catalyst, and those whose cash balances outweigh their market capitalizations.
Conclusion and Price
The market prices of small stocks often provide opportunities for investors (both individual and professional) to purchase a dollar for fifty cents. While this often requires patience as these securities are less liquid, it is typically possible to build a reasonable sized position in my ideas.
If you have any questions feel free to message me through Seeking Alpha, or subscribe now!