I’d say that this is a huge red flag for me. I had to sign an NDA at my last employer before I started and turned out to be a poorly managed firm with a toxic work environment. I would never want to put myself in a position like that, so if they are treating YOUR compensation as if it was a state secret id be wary about what other expectations/reservations they may have.
Hey bromiom, just a not so quick aside, what makes small cap investing fundamentally different from large cap?
Recruiter - how much do you make?
Me - More than you. Next question.
haha that’s a good one - it must kind of suck for recruiters to constantly hear salaries higher than they will ever make
but good recruiters/headhunters def make a lot more than the run of the mill HR folks
The small cap side of the market is much less efficient. The investment process is similar, but you are potentially able to get a significant research edge in small caps, and the stocks are much more volatile, so this is required. It is statistically difficult for a widely held institutional large cap stock to triple but you can find triples in small caps. There are also many more stocks that can drop in value by 50% or more in a given year.
^^ Also because large cap indices are so top heavy in weight and small cap indices are more equal weighted, it is a lot easier for a small cap manager to beat their index.
But, obiviously it is a lot more difficult to take a large position in a small cap company and obviously more difficult for large funds.
Yes.
Most funds can’t look at stocks under $500 million in cap or under $5.00 in price. Anything under that level is de facto less competitive, but it’s also riskier since these business are more volatile than KO and WMT. It’s a stock pickers market.
Also, the majority of small cap stocks under $500m don’t have any sell side coverage at all.
You can get around the position sizing issue to some extent if you participate in the block market and buy 1-5% of the company outright.
I understand that, but what makes the job and required skillset different from the large cap space.
The job is similar, but it’s a question of degree. What makes the job different:
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You are dealing with a different calibre of management team and they often lie. You have increased access to management, often getting the chance to sit down with the CEO, but this cuts both ways. You need far more skill interviewing and uncovering information. The gamesmanship is extremely high on both sides of the table. I excel here due to my natural trolling skills.
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Many of these companies never talk to Wall Street or host investors on company tours. I met a company in October that no investor had toured in the last two years (lack of interest – $20 million market cap). On the same tour, I met another company that hadn’t had an investor in house… maybe ever. The CEO couldn’t even remember one. That stock is going to double ($45 million market cap stock).
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Some meaningful portion of companies don’t have any publicly available disclosure except for the very basic boiler plate stuff they have to put in a 10-K. They may have no investor presentation, no conference calls, and no sell side coverage. Some companies don’t even take investor calls. These stocks can be wide open opportunities, but you have to dig in via talks with competitors, channel checks, industry research etc. It helps to be able to hustle people on the phone.
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You have to understand the incentives very well. The CEO of Coca Cola is not going to be an asshole. You can assume that, because only very high quality managers rise that far, and the Board of Directors of one ofthe most famous brands in America isn’t going to let the company get tarnished by some clown trying to grant himself a bunch of extra options or something extreme like that. All bets are off on the small cap side. There are frauds every year, excessive compensation packages, take unders, etc. These can be a source of opportunity and risk. I saw some asshole last year try to grant himself 18% of the stock of the company, but fortunately an activist stepped in and executed a hostile take over.
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The business models themselves are usually more volatile in both directions. Large caps are the winners of society and are already established with low turn over. How often does a company drop out of the Dow? Every year companies are added to or dropped from the Russell in large numbers, creating opportunities on both sides. You also have much higher bankruptcy risk on the small cap side – I could name several companies that almost certainly won’t exist in five years though the Street doesn’t know that yet.
It’s shocking when you find a company that is fraudulent to the core. These don’t exist on the large cap side – sure, there is corporate fraud and shenanigans (Hewlett-Packard FTW!) but you never see companies that are out and out frauds like you see on the small cap side (some of these frauds, have, at times, had market caps exceeding a billion dollars).
I’m obviously not unbiased, but I think the large cap side is pretty busch league stuff – you run the same DCF model everyone else runs and try to buy at the low end of the multiple range of some stock. The market is efficient and you’re dealing with massive, multi-segment companies that are usually mature where it is difficult to get an edge. Small caps are definitely the wild west, and a good manager can add a lot of alpha (or get completely blown out if they do it wrong).
Nice, it definitely sounds alot more interesting then simply being an excel monkey. I live in a town notorious for promoting shitty and often fradulent small caps and was always curious about the practical differences in analysing those companies from the larger caps were. thanks for the info I appreciate it.
Vancouver?
Yeah, good old stock promoting Vancouver.
Can’t walk down the street without tripping over some pink sheet CEO’s ferrari.
Are there that many in Vancouver? Do any of them reach a decent size in market cap? I looked at trying to systematically short a basket of microcap frauds in the US, but it’s not really feasible. They’re fairly easy to find but hard to borrow and the volatility creates insane buy-ins.
Is this another tiny bank like FBC?
No, not a bank. But I assume banks are worth checking out in general given the recovery in housing. I don’t spend much time looking at banks, FBC was just a one off situation. The weird thing about FBC that immediately got my attention is that the stock was trading at $0.75 with a market cap around $400 million, which in my world is not “tiny”. It’s kind of stupid to have a $400 million company trading as a penny stock, and I assumed they would fix that eventually with a reverse split, which is what happened.
Yeah, FBC is not tiny, its just that I think most of the sub 50M space is full of little banks…I should probably go take a peek at these firms.
I think the sweet spot for anything is $200-500 in cap. Sub 200 doesn’t trade as well, and the quality of management falls off a cliff sub 100. There are some good niche businesses under 50 (amidst a sea of trash companies), but I don’t know about sub 50 banks. You might find an outlier but I assume most of those are pretty crumby or have flimsy portfolios. You want something that has good momentum but is also robust enough to weather any set back.
The momentum is especially key because “no one” looks at these stocks so they don’t behave “rationally” to newsflow, nor do they come up on most screens. So merely having a good annoucement is not enough; they need to have stellar annoucements – plural – so they can break through the obscurity barrier. That or they need to be written up on a credible news or research site to get interest.
The company I referenced above grew its revenue 50% yoy in the recent quarter with >120% EPS growth yoy and the stock did nothing. They’re about to exceed their guidance with an outlook for continued 20% top line growth over the next 18 months at least and are achieving P&L leverage the company has never previously seen (after extensive cost restructuring). Stock isn’t up because its thin and still under the radar. The company has actually had _ eight _ quarters of yoy revenue increases of good size and yet still no one has noticed, though at some point it will have to get some attention.
I’m invested in another that is trading at 40% of its intrinsic value to a strategic where it’s known the company will be for sale (an activist took it over) and yet the stock does nothing. It hardly even trades. One day I’ll wake up and it will be sold and and I’ll get 2.5x my money, but until then it’s a frustrating wait.
Basically, microcaps are brutal to invest in.
NTIC? Ok don’t tell us the answer, I kind of want to figure it out.
No, but it’s interesting to see a ~$10.00 stock with a $44 million market cap.
There have been a number of pump and dumps that originated here that hit mid high nine figure market caps. The city is a centre for Junior miners and exploration companies, through that their is an entire network of IR firms, accountants and lawyers that support rather dubious share issues but its not as bad as it once was. Vancouver once had its own stock market and in the 70s and 80s it was notorious for fraud, alot of the people from that time are still around.
I think one of the biggest outright frauds in Canada was a junior minor that ended up with a multiple billion dollar market cap. It was called bre-x, you can read up on the history of that to see basically the types of businesses that originate here. That example doesnt really aupport my case as it originated out of alberta at first.