Finding Fortune in the Fringes: A Perspective on what Microcaps Offer & How To Find That Value [GeoWire Weekly No. 132]

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On April 17, 2024, Maj had a discussion with Ben Claremon (@BenClaremon at X, formerly Twitter) the host of Compounders Podcast, which has a regular spot on Bobby Kraft’s channel on YouTube, Planet Microcap, picked Maj’s brain on the challenges of being a microcap investor in recent years, the things that go into assessing management teams through interview, portfolio construction, microcap misconceptions, and opportunities in other markets such as those in Canada and little followed sectors.

Maj reflects on how the landscape for microcap investing has dramatically changed over the past three decades. Initially, retail investors had the upper hand in discovering small companies, which later gained institutional attention as they grew. However, post the 2008 financial crisis, the space saw significant withdrawal by both institutional and retail investors due to heavy losses, increasing regulations, and a generally risk-averse sentiment, leading to a diminished pool of microcap investors. But things have changed.

Investment Strategy and Philosophy – Maj discusses his investment strategy which revolves around identifying potential “multi-baggers”—stocks that can significantly increase in value by many multiples. He emphasizes a detailed approach to assessing management teams and a selective portfolio construction to manage the inherent illiquidity of microcap stocks. Despite the challenges, Maj sees a robust opportunity set within Canadian microcaps and underappreciated sectors.

Current Market Setup and Strategy – Maj points out that the market dynamics are shifting back towards a more traditional stock-picking approach where quality and investing in management teams with a long-term vision trumps shortsighted teams. This change is driven by an increasing interest rate environment that contrasts sharply with the low-rate environment of previous years. He anticipates moving away from a concentrated portfolio approach back to a diversified strategy across many microcap stocks, aiming to leverage the inherent inefficiencies and information arbitrage opportunities in the microcap space.

Specific Case Studies – Maj mentions several case studies to illustrate outcomes that can be experienced with different kinds of risk scenarios:

• Bluelinx Holdings Inc. (NYSE:BXC): A company that managed a successful turnaround despite bankruptcy risks, showcasing the potential mispricing in microcaps that can lead to significant returns.
• Wavedancer, Inc. (NASDAQ:WAVD).: A lesson in discipline where Maj discusses holding on to the stock beyond its value due to emotional bias (FOMO), highlighting the importance of strict adherence to valuation and exit strategies.

Challenges / Misunderstandings – Maj addresses common misconceptions about microcap investing, notably the skepticism around the quality of companies and management teams in this space. He argues that many microcaps are substantial businesses with significant revenues and are often overlooked by the market, offering valuable opportunities for discerning investors.

Hear/watch more on Maj’s insights below:

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The post Finding Fortune in the Fringes: A Perspective on what Microcaps Offer & How To Find That Value [GeoWire Weekly No. 132] appeared first on GeoInvesting.