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TMFBabo (100.00)

Micro Cap Value

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May 08, 2009 – Comments (19)

Hello, CAPS world. 

Does anybody else invest in micro cap value stocks?? I tend to think that there are WAY more pricing inefficiencies to be found in the world of micro caps, and that the only way to buy a stock is for less than its purchase price.  Put those together, and (duh) you get micro cap value.

My two favorite measures of cheapness are price-to-book and price-to-sales.  In terms of evaluating companies, I look for cheapness, profitability, and health.  While I understand that cheapness is most important, I try to look for adequate profitability and confidence that the company will not implode in the next year or two.

I don't know if it's very amateurish of me, but I am generally ONLY long in real life.  I don't buy options, I don't short sell, or anything.  I've seen that many of the top fools here have more complex money-making strategies than I do.  I've done well enough with my boring strategy though, so I'll keep it going until I learn enough about other strategies to expand.

I'm very curious to see what everyone else's style is.  Since this is my first blog post and I have essentially no following, I'm just hoping for a few responses.  

If you happen to find this blog post 3 months late, feel free to respond anyway! I'd really love to hear the different trading/investing styles any of you have.

19 Comments – Post Your Own

#1) On May 08, 2009 at 8:18 PM, portefeuille (99.77) wrote:

There are some "micro cap picks" among the calls in the list I entertain here ...

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#2) On May 08, 2009 at 9:28 PM, newway1 (< 20) wrote:

Ok , here is your one comment for the night. Look at this new IR company that is about to launch. The name is theexchangellc.com . They profile companies in a new way. For one thing companies that sign up must have a monthly boardroom meeting and address the hard hitting questions from investors. The real ones will answer them and the other will answer softball questions and lose credibility.

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#3) On May 08, 2009 at 9:52 PM, walt373 (99.84) wrote:

A couple stocks I have been looking at are TRID and VIMC. Both are trading at around 60% of cash minus total liabilities so they are "Ben Graham stocks." But I don't really know how well this strategy works and what happens if these companies do fail somehow. Care to enlighten me?

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#4) On May 08, 2009 at 10:34 PM, TMFBabo (100.00) wrote:

portefeuille, congratulations on your rise to the top 10.  I started seeing your name pop up a month or so ago, and you've only gone up since then.

Anyway, I've seen that list.  I've seen some names of companies that I bought in real life such as CSR, DWSN, SKX, and a few others.  What is the purpose of that list? Are those stocks you're watching? Are those stocks you've been green thumbing through your various profiles? 

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#5) On May 08, 2009 at 10:46 PM, portefeuille (99.77) wrote:

The raison d'être is here and recent statistics here.

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#6) On May 08, 2009 at 10:52 PM, TMFBabo (100.00) wrote:

Thanks for the links.  Do you buy any of those in real life? You've had some pretty nice picks.  I actually did buy some of those in real life at similar prices to what you chose, so that means I like your list (at least some of them).

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#7) On May 08, 2009 at 10:56 PM, TMFBabo (100.00) wrote:

walt373, while I've been able to make money since I first started investing, I have not been at this for that long.  I'll still try to give you my 2 minute breakdown.

TRID: This stock closed at $1.45, but I calculated a net current asset value north of $2.35.  I did that calcalation with only cash, since the other current assets were almost nil.  The company's had 3 or 4 profitable years in the last 10, so it doesn't fit my profitability criteria.  However, liquidation value of this stock is at least $2.35, so that's what this stock is worth at the very least.

VIMC: This stock closed at $1.80, but I only calculated $0.84 in net current asset value according to Graham's approach.  I counted 80% of receivables and 50% of inventory.  As far as pure asset plays go, I like TRID better.

You saw my criteria, right? Cheapness, profitability, and health.  The only thing those 2 are lacking is the profitability.  Although I do buy mostly micro caps, I buy the more established ones.  I like seeing a decent record of earnings, and I often calculate the company's 10 year average PE ratio (if they've even had 10 years of operation).

If I had to choose one of those lists, I'd go more with TRID because it's trading under its NCAV, but let me reiterate that both companies don't have strong earnings records yet.  Even among micro caps, I look for companies that know how to make money somewhat consistently.

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#8) On May 08, 2009 at 11:06 PM, portefeuille (99.77) wrote:

I focus on the portefeuille (currently ranked #8), hdgf2 (#28) and hansschmidt (#33) players but since my other players today were ranked #42, 52, 61, 78, 89, 139, 151, 167 and 2745 one of them might actually turn out to be my "best" player. The only player that is pretty active is portefeuille. There is quite some "overlap" in the calls of those players. I guess I should retire all but 2 or 3 of my players in a few weeks.

The good thing about the list is that I have the greatest possible "freedom" to make a call (whenever I want and on whatever I want (if I wanted to add some football score predictions I could do that as well!)).

 

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#9) On May 08, 2009 at 11:08 PM, portefeuille (99.77) wrote:

(I bought very few of them)

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#10) On May 08, 2009 at 11:16 PM, TMFBabo (100.00) wrote:

Alright, since it's my first blog post, I'll go the extra mile.  walt373, I pulled out Graham's Security Analysis from my bookshelf and looked up the asset value chapter.  Stocks in this category are expected to have bad earnings records, or they wouldn't be trading so low.  Companies such as this may improve their earnings power if conditions improve, there's a sale or merger, or if there is complete or partial liquidation.

I also highlighted a section in my book where Graham said these types of plays are safest in normal markets, not in severe bear or bull markets.  A decline could happen in either case, which would destroy the stock's price.  TRID went from over 15 in Oct 2007 to a March bottom of $1.20 or so.  That would mean Graham was right in saying not to buy it in a bull market.

However, I see that it is trading barely above the March bottom of $1.22.  It's probably a decent candidate for a buy, BUT (and this is important)...it'd be nice if you had a whole basket of these so you could buy them all at once.  If you were to buy 20 similar issues, you'd probably get some enormous winners and some almost-bankruptcies, but I almost guarantee you'd make a good return on average.  With just 1 or 2, however, I don't think I could personally put my money into those unless I were decently diversified.  

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#11) On May 08, 2009 at 11:17 PM, TMFBabo (100.00) wrote:

portefeuille, I saw in one of your blog posts (or was it someone else's blog?) where you said you trade stocks and long-term options.  What kinds of stocks?

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#12) On May 08, 2009 at 11:36 PM, portefeuille (99.77) wrote:

not a certain category

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#13) On May 08, 2009 at 11:37 PM, portefeuille (99.77) wrote:

(the list and my "calls" here give an indication)

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#14) On May 09, 2009 at 12:58 AM, walt373 (99.84) wrote:

About VIMC, I see cash and equivalents of 119.76, total liabilities of 15.9, and a market cap of 64. What am I missing here?

And if you are interested in Graham stocks, QXM is the ultimate Graham stock. Not only is it trading well below liquidation value, it's also highly profitable. The only reason I don't own it is because people say they are doing some sketchy stuff with some hedge fund like stock manipulating, and its a Chinese stock so I can't really trust that they aren't cooking their books.

Also, what about DWSN? Everyone on CAPS seems to love that stock. It's been trading up a lot on huge volume in the past 2 days. It has only a P/E of 6, zero debt, massive growth, and it just creamed estimates on Thursday. Only thing I found weird was that management owns so little stock and the CEO even sold some back in November at a price less than its trading at now.

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#15) On May 09, 2009 at 8:56 AM, TMFBabo (100.00) wrote:

Hmm.  Reuters shows 141 million shares outstanding, while Yahoo shows 35.29 million.  I was using Reuters to share whatever I shared with you.  Using the 35.29 million number instead, I now come up with $3.27 in liquidation value per share of VIMC based on their 9/30/08 balance sheet.  The shares traded at $1.80 on Friday, so this also seems to be a good NCAV play.  I don't like that the newest balance sheet I could find was 9/30/08.  I'm sure things haven't changed THAT much, but that's all I could find.

Together with TRID, VIMC could be a decent play.  However, I normally like investing in companies that have already made money for several years in a row.  If you could find more of these and put an equal amount of money in each, that would be the safe way to go.  

I bought DWSN at about $14.50.  Given the opportunity to buy anything in the market, I would not buy DWSN at $28.99.  At the time, I bought it at an incredibly low PB and PS, my two favorite indicators of value.  It also has no debt like you said.  It's still relatively cheap compared to many other stocks, but I think I can do better elsewhere.

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#16) On May 09, 2009 at 4:30 PM, walt373 (99.84) wrote:

I see. Thanks for your insight. From your experience, what are the most important things to notice in doing analysis for these micro cap companies?

My goal is to be a long-term investor, and the problem I have with micro caps in that regard is that most micro cap companies do not succeed in the long run. However, I am interested because some of them are so ridiculously cheap that the risk/reward ratio looks attractive. And the data backs it up because historically, they have performed very well in terms of absolute return. But because the vast majority of them do not turn into success stories, like you said, you have to have a basket of many of these stocks, so you are much more likely to have at least a few winners. At least that's my understanding. So my biggest problem right now is that I can't diversify in enough of these micro caps without piling up transaction costs. How do you deal with this issue, or do you believe that focus investing in micro caps can work?

Also, it seems like the idea of NCAV stocks is too good to be true. The fact that an almost-worst case scenario for most other stocks, liquidation, would actually benefit the shareholders of NCAV stocks, seems to make them a safe play in any environment - as long as you are patient enough for the market to recognize the value or for the company to return some money to shareholders by way of dividends, stock buyback, etc. My only worry would be that management would continue to burn cash for a long time, and I guess that would be the very worst case scenario. Have you ever bought these or know of someone (friend, website, anything) who has, and how they turned out?

Great topic for a blog btw, I've been dying to talk to someone about micro caps.

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#17) On May 10, 2009 at 12:16 AM, TMFBabo (100.00) wrote:

While I think micro cap value is the best type of stock, I don't necessarily search out micro caps.  I put in my criteria into stock screeners and see what the screener gives me.  It just so happens that the criteria I give the screeners tend to spit out micro cap value back at me. 

A lot of my influence comes from Ben Graham.  I advocate:
1. Cheapness
2. Profitability
3. Health

Graham advocates the same things, and more (long history of dividends, etc).  

I don't know the extent of your investing background and knowledge, but I'd follow Warren Buffett's advice, which is to "read everything in sight."  I'd start with Graham's Intelligent Investor and Security Analysis.  

I know there are plenty of people making money with technical analysis, but I believe that a strong value-minded strategy is the way to go.  That way, you're a security analyst and not a market analyst.

I don't know what to tell you about these NCAV stocks.  I've read that Graham did exceptionally well with these, but in his day, there were tons of these.  He just bought 25-50 and held them all.  

I am pretty young, and I have no friends who actively invest their money (profitably) like I do.  I tend to go for companies with strong earnings records in addition to the cheapness, so I can't tell you what I've seen these things do.  If you're able to find 15 or so of these, I'd be perfectly happy putting an equal amount in each.  However, NCAV stocks are a lot harder to find in our day.  

I was hooked on trying to find NCAV stocks at one time, but I found that there just aren't enough for my tastes.  I changed my strategy to include companies that make money and aren't trading under NCAV.  Since I shifted my strategy, this is the first time I considered an NCAV stock, when you mentioned it.

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#18) On May 10, 2009 at 3:03 AM, walt373 (99.84) wrote:

I invest in a similar way - profitability, growth, and financial health at a good price. I only buy stocks that will most likely be around in 20 years and have a wide economic moat that will allow them to stay very profitable, since I believe that the market consistently underprices these high-quality companies' long-term earnings. So this criteria leads me mostly to non-cyclical large caps such as JNJ and PG. I've just begun to venture into the smaller cap space. But I'm young too and have a long time horizon, so I figure I can tolerate higher volatility for higher returns.

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#19) On May 10, 2009 at 8:23 AM, TMFBabo (100.00) wrote:

When I buy micro caps, I follow Graham's philosophy, which is to sell when it reaches intrinsic value or is no longer cheap.  I then proceed to buy one that is cheaper relative to the one I just sold.

My approach is pretty mechanical, since I don't want to spend hours and hours deciding whether companies have competitive advantages and such.  I just buy a basket based on the numbers and win out most of the time.  I've been fortunate enough to have avoided major losses through my limited research.  

An example of the danger of my limited research is my pick of NCTY.  I green thumbed it based on past numbers, without knowing they'd lose their license for World of Warcraft in China.  They are now down 50% since I picked them and I now have to keep that pick open forever and hope it goes green again. 

I do believe, however, that mechanical investing is practical if you put an equal amount of money into each pick and are willing to hold them till they reach fair value.  I've made pretty good money doing so, and it only takes me 10 minutes tops to evaluate companies.  I will have my occasional 50% loss after which I find out something I didn't know before and have to bail.  I've been lucky to have avoided such losses thus far though.

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