The Winnipeg Free Press (nationally syndicated media) did a story on microcap investing and asked me for some insight. The article link is here followed by the original content – NOTE that I was the voice of “reason” in this and NOT the 100-bagger guy 🙂
In search of stock’s Holy Grail: ‘100-baggers’
Microcap stocks are risky, but can boost dramatic returns to a portfolio
Everyone wants to hit a home run — and we’re not just talking baseball.
In the investment industry, the Holy Grail of stocks or just about any other security is the undervalued, underpriced opportunity that the market eventually realizes is a winner while its price soars several times over.
In some circles, these are referred to as “100-baggers” — a term made popular by author Thomas W. Phelps in the 1972 book 100 to 1 in the Stock Market.
“He looked at thousands of stocks and found ones that turn into 100 baggers or more,” says Robin Speziale, Toronto-based author of Market Masters, among other titles.
A do-it-yourself investor and blogger who also works in finance, Speziale has a growing interest in finding diamond-in-the-rough stocks in Canada’s equity market universe. In particular, he’s curious about the prospect of finding those stocks that can go from $1 to $100 in value — veritable “100-baggers.”
That’s a tough proposition when you’re just investing in dividend-paying blue chip companies. Instead, investors seeking large returns must turn to Canada’s active microcap market — which features companies with market capitalizations (the sum of all their shares outstanding) of $250 million or less.
Speziale likens it to a quote by famed value investor (basically a buy-low, sell-high strategy) Peter Lynch: “The person that turns over the most rocks wins the game.”
And that’s what microcap investing involves: scouring through hundreds of stocks to find a handful with the potential to compound returns on your money, several times over.
Yet microcap investing, while offering tremendous potential for triple-digit gains in a matter of months if not days — can be a fool’s game. The inexperienced are more likely to lose their money than multiply it.
Still Speziale — a millennial just getting his feet wet in microcaps — says for investors with the appetite for risk, an aptitude for reading financial statements and a willingness to put in a lot of hard work, the opportunity for enormous return is within reach.
With that in mind, he started applying fundamental value filters to companies with market capitalizations of less than $100 million serving potentially large markets they could grow into. These are companies that are also reinvesting their profits into growing their business. And they have great management to boot.
“These aren’t household names, so you have to overturn as many stones as possible to find them,” he says.
And frankly, in Canada, you have a lot of rocks to look under.
“Ninety per cent of them (microcaps) are just not investable. They’re poor business models,” he says. “Management isn’t great, and they’re not generating a profit, and they don’t really see any chance of them being profitable.”
Yet it’s the rare finds that could potentially turn out to be 100-baggers.
Even with know-how, however, this feat is easier to discuss than it is to accomplish.
“The realistic version of microcap investing is they (one-to-100 returns) just don’t happen,” says Danny Deadlock, microcap investor, and publisher and equity analyst at MicroCap.com.
“But I’ll give you my version of it. I’m 52 now, and I’ve been buying Canadian microcap stocks since I was 18.”
The Alberta-based investor, who makes his living buying and selling microcap stocks along with providing analysis, says even an experienced investor in the sector would be lucky to come across a stock that turns into a 100-bagger.
Still, that doesn’t mean investing in microcap stocks isn’t worth the effort.
“You can’t go into any microcap stock these days with the expectation that you’re going to make even 10 times your money,” says Deadlock, who comes from an accounting background.
If that happens, that’s wonderful, he adds.
“But I think if you go in and target doubles and triples, and you manage the downside risk, they’re really fun, and there really is a lot of money that can be made in them.”
Even then, pursuing this goal for the newcomer is perilous. The sector — particularly when it comes to mining and energy — is full of stocks that essentially are going to incur large losses to your portfolio.
“It’s an industry that’s driven by greed — what’s that saying about a mine and a liar?” Deadlock says, referring to a quote attributed to Mark Twain who described a gold mine as “a hole in the ground owned by a liar.”
New investors, he recommends, should start by following the half dozen or more microcap investing websites for the Canadian market. (He suggests steering away from the U.S. market where regulations on financial reporting are not as strict as they are here for small companies.)
With a lot of work and some know-how, investors can uncover firms such as Exro Technologies, which recently listed on the Canadian Stock Exchange, and aims to revamp the design of electric motors.
“It’s just a completely fascinating company, and that’s what makes microcap investing so much fun,” Deadlock says. Or an investor might dig up an up-and-coming food maker like GreenSpace Brands, which specializes in organic and healthy foods.
“They have a tailwind because of higher demand for healthy foods, so they have a long runway to grow,” says Speziale, who owns the stock and has included it on his list of potential gems.
Yet even the supposedly ‘good companies’ can be bad investments, he adds.
Moreover, microcaps are often illiquid.
“That means that these stocks are volatile,” Speziale says.
“You could be down 10 to 20 per cent some days.”
Part speculation, part fundamental investing, microcap investing is akin to playing poker, Deadlock says.
“I call this educated gambling,” he says. “And the biggest trick is avoiding the BS.”