We’ve all heard it said that it’s hard to beat the market because future expectations are so heavily priced. However, this assumes that the stock is known from the beginning.
Efficient market theory just doesn’t apply to most small caps, let alone microcaps. There are several reasons, but the most important is visibility. Institutional investors with the money to move stocks and generate significant momentum and attention are almost non-existent in stocks less than $100 million in market cap.
We are looking for opportunities here. Our approach is to understand how “discovered” a stock is, and less is more. We find unknown stocks that we believe have the potential for significant appreciation and acquire shares before their true value is realized.
This is a successful approach that we have used for many years. We’ve been using it because it works, as the video below from 2016 shows.
patience and standards
This approach requires patience and faith because you can never be absolutely sure where you are in the discovery process.
However, if companies meet most or all of our criteria, it’s probably just a matter of time. Also this:
- Revenue growth of at least 25% year over year
- At least two consecutive quarters of profit growth
- Small shares of 30 million shares or less
- Tight stock structure with high illiquidity or insider ownership
- And there are few or no institutional investors.
The road is often rocky, and most people who jump in without a solid approach or strategy to back up their buying decisions fall short. But in the end you will find a company that meets most criteria. In some cases, early investors like us create the initial commotion, and getting others involved makes it self-fulfilling. But more often than not, that’s when deep-pocketed institutional investors get involved.
This is why we recommend paying particular attention to small-cap stocks that are hovering in line with their 52-week highs. This advice works against the common investor mentality that companies at the highest prices are now ‘expensive’. In the small-cap space, this often means they’re in the discovery stage, and if they’re growing at a healthy rate, they can generate more value. .
The important thing to remember when things like this happen is that fundamentals didn’t cause the sudden rise in stock prices. Discoveries that change the perceived value of your business. That is the reason for its high price. Because it’s easier to predict stock price movements based on findings than on fundamentals.
where we come in
How do I know which companies to follow?
You have to find a growing company. This is why we always pursue revenue and profit growth. Without sufficient growth momentum, small businesses are inherently isolated when they are too small. Even if the company trades at a market cap of $5 million and is worth $50 million, no one cares.
Companies that show strong growth will basically get by. And even if the company continues to grow and the stock price doesn’t rise, the company has options. You can go private, buy back shares, or use capital to grow further. All of these can lead to increased value in the future.
Overall, I have not seen a company whose stock price does not rise when earnings per share is increasing. At some point, something triggers your attention, whether it’s an analyst, an important press release, or a newsletter, and the tide turns.
For example, last year we saw some of the products we selected perform exactly along these lines.
We recently covered Total Telecom (TSX.V: TTZ), a leading developer and provider of remote monitoring, asset management and control products and services throughout North America. TTZ is a great example of a price discovery journey. They traded flat for two years, but then surged in November and December. It then started a strong rally at 15 cents earlier this year and slowly gained momentum as it was discovered.
Atlas Engineered Products (TSX.V: AEP) is another good example of a company doing institutional price discovery. They continued to perform well last year, and their growth finally caught the eye, with their stock up more than 50% year-to-date. This time, we’ve gone from a market cap of $50 million to $100, which everyone can participate in.
There is also IBEX Technologies (TSX.V: IBT)….
And Cannabis Capital (TSXV:CANB)….
And the list goes on….
keep the course
Investing in undiscovered companies with solid standards and strong growth is one of the most calculated bets.
This is a strategy that requires a great deal of patience and strong conviction. After all, big companies trade at 25 times his price-earnings ratio for no other reason than being famous, even though profitable small-cap stocks barely reach 5 times. You may get annoyed when you see But if you stick to buying undiscovered companies with strong fundamentals, you’ll be in business. Better margin of safety than just chasing hot stocks.
Fundamentals are the key foundations that create opportunities for discoveries to occur and continue. The bet makes sense when you understand the price discovery journey to be both on a solid growth trajectory and at the same time attracting interest from large companies.
After all, price discovery is what happens when interest is shown. As Howard Marks says, “Purchasing at a discount from intrinsic value and bringing the price of an asset closer to its value does not require contingency. It just requires market participants to wake up to reality.”