InvestNewswire Week in Review - Week Ending March 9, 2001
In this issue:
* Perspectives On The Micro Cap Market
* News Links "Top Ten": This Week's Small-Cap Highlights
Perspectives On The Micro Cap Market:
Grant Howard, President of The Howard Group Inc.
The definition of a micro cap stock is quite dependent on
which side of the border you live. In the United States it
is generally accepted that a stock less than $500 million in
market capitalization is a micro cap, while in Canada the
figure is $200 million ($130 million USD). Anything under
$50 million market capitalization falls into the new
definition of "nano cap".
This is as far as the article will go on definitions, as my
focus is the perspectives, perceptions and approach to the
micro and nano cap market. On these points it doesn't matter
where you live in the world, the principles are the same.
First, I don't agree that this segment of the market is
always a crap-shoot. While volatility used to be synonymous
with this segment of the market, the past year especially
has proven that large caps can suffer the same fate as their
little cousins. True, micro caps rarely enjoy the same level
of liquidity as the large companies which makes exiting a
stock much more difficult. However, I can't recall too many
micro companies that plunged tens of dollars in hours!
Another point to consider is that we have been bearing
witness to a decline of the traditional "investor".
Shareholder has taken on a different meaning with the
entrance of momentum players and day traders into the market.
To call these people shareholders is almost sinful, as the
word "holder" is a foreign concept to them. In many respects,
a large bulls-eye in the middle of their forehead would be
more appropriate as they tend to create their own chaos. As
you can tell, I have little time for those who blame the
micro market for their ills. We all have control over our
own decisions.
Research is just as important in the micro cap area as it is
with large caps. Perhaps it is even more important as there
are a considerable number of variables to weigh. In many
cases, your ultimate decision to buy or sell a micro stock
will be driven by your "gut feel". However, why you listen
to your instincts and how you made the decision is important.
Let's presume you are looking at "investing" in a micro or
nano cap stock. These are my recommendations of what you
should ask and what you should look for BEFORE putting your
money on the line.
QUESTION YOURSELF:
The basis of the stock market was and
hopefully is, to invest in companies which you believe have
a legitimate business, concept, product, market etc. If this
is true, the company's stock should ultimately reflect the
increased value of the business. Yes, you can think this way
about the micro market. If the reason for you buying stock
was based on a "hot tip" or you're trying to catch the
up-tick, then don't be surprised if you get burned. Assess
your own expectations for the company and the stock. Are
your expectations realistic or wishful thinking? Don't do
yourself the disservice of blaming the market or the company
for your disappointment if you were only looking for the pot
of gold but failed to understand the map which may deliver
you to your destination.
QUESTION OTHERS:
Let's say you get the "tip". Who did you
get it from and where did they get it from and so on and so
on? Who are your sources and how legitimate is their
information and importantly, research. Don't be afraid to ask
your friend or contact why they have a particular opinion.
How did they come to their conclusions?
RUN WHEN YOU HEAR THIS:
The next time someone tells you a
stock is going to "be up two dollars by next week", head for
the door. No one, no one, no one can call a price today,
tomorrow or next month. Analysts make their calls based on
research, interviewing management, assessing market
conditions and applying fundamental evaluation principles to
their valuation. Even at that, the stock market has been
cruel and left more than one analyst crying at the altar.
For a person to stand up and exclaim the moon is the next
stop is kidding themself or has bought into someone else's
hype. Some people operate on the concept that if there are
enough people saying the same thing "maybe it will come
true". Don't get caught up in it.
BUSINESS TAKES TIME:
If you are impatient or looking
short-term, don't buy micro companies. A business takes time
to build and the road can be full of potholes. Too often the
micro market is out of step with the reality of a business
at any point in time. Many times I've seen small companies
which are doing "good business" but the market yawns. On the
other side, we've all seen the "bluesky company" grab mass
attention only to later plunge in flames. Why? People liked
"the story" because this thing is going to be big! So is a
balloon when you fill it with air. A business evolves, often
over years. Sometimes what a company started as is not what
it ends up as because the original business model did not
work well enough.
A NEED FOR UNDERSTANDING:
As the majority of the population
has never run, built or failed in business, it is
understandably difficult for many to appreciate the
difficulties of creating a successful entity. It's also that
much tougher to build a successful public as compared to
private business.
THERE ARE TOO MANY PUBLIC COMPANIES:
When you begin to
assess a business, ask yourself if it has the potential to
become a successful company AND a successful public company.
I say this based on a lot of experience. In our firm, we put
prospective clients through a lengthy due diligence process
that looks in length at the pros and cons of the business,
the target market for the product or services, the management
team etc. and whether or not the company stands a good
chance of being a story the market will ultimately embrace.
We have seen many public companies that should have remained
private. Almost without exception, the people who run these
companies recognize their dilemma and regret being public.
This does not bode well for the stock price.
We've also been in the same room with management teams that
are looking for nothing more than "moving the price" because
they need to raise money. These are very short meetings!
This also does not bode well for the stock or those
unfortunate to have it in their account. Strictly as a point
of interest, on average The Howard Group accepts only one of
every fifteen companies it reviews to join its client
portfolio.
THE MANAGEMENT TEAM:
Pay attention to management expertise
and related experience in context of the current business.
In most cases, micro companies don't have enough bench
strength. In other words, they lack sufficient resources and
infrastructure which places additional pressures on the
managers who have to get used to everything from making the
coffee to selling the product and everything in between.
Successful people are very resourceful. The more experience
they bring into the company the better the chances of
success. On this point, spend time looking at their previous
corporate relationships and how those companies fared under
their tutorship. All companies and especially the micro
caps, are extremely reliant on management. Should a key
officer decide to leave or be forced to leave a micro
organization, the impact will be much greater on the company
and the stock price as compared to a large organization. An
important factor to consider is whether or not the
management group has previous public company experience.
BOARD OF DIRECTORS:
Does the company have members on the
board with experience in the public or financial markets? Do
board members have a history of being successful
entrepreneurs? Do their backgrounds suggest they may have
contacts who will be of value to the company? Have they
personally invested in the company? They should hold a
decent size stock position that they have paid for as it
more closely aligns their interests with those of the
shareholders. One thing to keep in mind is that micro
companies usually have a tough time attracting experienced
proven people to their boards because individuals of merit
are not easily lured to sit as a director of a company in
its infancy. Should a micro company be successful in
attracting people of note, this should be viewed as a bonus
rather than the norm. Another point to consider is "outside"
director representation on the board. These are people who
are not aligned directly with management and their role is
to serve as the eyes and ears of shareholders.
SHOW ME THE MONEY:
How much personal capital have members of
the management team invested and how did each one earn his
or her respective stock position? You want management to
have its own money on the line and to maintain a sizeable
interest.
REVIEW PREVIOUS COMMUNICATIONS:
Take time to thoroughly read
all previous news releases, management discussion papers,
financial reports etc. Is there consistency in previous
statements especially as it relates to deals, agreements and
contracts? Too often micro companies, in an effort to please
"the market" will issue news prematurely. A Letter of Intent
is not a done deal. Announcements should be reserved for the
signing of final agreements unless there are extenuating
circumstances which would force a company to issue an
announcement as it would represent a material change for the
company. Be aware of flowery language that promotes
speculation and lacks significant detail. While there may be
competitive reasons for not disclosing all material facts,
the company should file all contractual details with the
regulatory and stock exchange officials and state that fact
in its news release.
Be mindful of companies that like to consistently throw it
in your face that their market segment is many billions of
dollars and growing at an astounding annual percentage. This
is a double edged sword as you want to know the company is
in a market that has potential but it also opens the door
for abuse. We have handled this particular issue on behalf
of one of our clients, a chemical technology company which
is in the multi-billion dollar composite materials sector.
However, it is on the public record that this company is
only looking to capture 5% of one particular segment that
represents 10% of the total industry. As such, 5% of 10%
still represents many millions of dollars and is a credible
target.
ANALYSTS AND FINANCIAL PUBLICATIONS:
Real analytical coverage and independent financial
publications are a valuable source for your research. Micro
cap companies do attract such coverage. There are a myriad
of services which publish research, for a fee. Most companies
will have this material available and will provide it at
your request.
INSTITUTIONAL INVESTORS:
Micro cap companies do attract more
investment than you may imagine from fund, portfolio
managers, family trusts and wealthy individuals. While this
information is not always available as these investors may
insist the information not be disclosed, it doesn't hurt to
ask. At the very least, most companies will want you to know
what percentage ownership is held by funds.
MANAGEMENT RESPONSE:
It is always a telling sign if you
receive no or very late responses to your inquiries directed
to management or investor relations representatives. If a
company is tardy in its communications, be wary. If they
can't give you the time of day, why would you bother with
them? At the same time, there is an onus on you to ask well
thought out questions. It is unlikely you will receive a
response to your subsequent inquiries if you are accusatory
or do not have your facts correct. If you feel that negative
about a company and its management team, sell your position.
INVESTOR RELATIONS / PUBLIC RELATIONS / PROMOTERS:
How credible are the organizations or individuals who act as
representatives of the company you are researching? If the
company is contracting outside services, who have they
previously or are currently representing and how long have
those companies been clients? How long have they been in
business?
BULLETIN BOARDS:
With the odd exception, most chatter on
bulletin boards is a waste of time. There are a lot of
people who like to hear themselves talk and the bulletin
boards are an extension of this psychology. That being said,
the forum can have great value as a venue for the thoughtful
exchange of information. We suggest you exercise caution and
do not allow yourself to be unduly influenced, as the
quality of the information and comment can be questionable.
Certainly, we post information on our clients on the
relevant bulletin boards as retail buyers use the BB as an
information gathering point. However, we always reveal
ourselves, use our real names and provide contact
information. We know many people visit the boards but do not
post messages and we attempt to appeal to this group as
well. I believe the anonymous aspect of the BB is demeaning
to the principle of the exchange of information for which
you have to take responsibility. Of course, unscrupulous
promoters couldn't care less about your well-being so
beware; they are out there!
ONE CLOSING THOUGHT:
When it comes to investing, let common
sense be your ultimate guide. |
