Cabot Micro-cap Insider has helped investors identify undervalued micro-cap stocks and outperform the S&P 500 by over 40% in one year.
A year ago, Ed Coburn, President of Cabot Wealth Network, and I brainstormed about launching a micro-cap product. Ed thought adding Cabot Micro-cap Insider would be complementary to the existing stable of Cabot advisories.
My pitch was simple.
The micro-cap market is an inefficient one because most professional investors ignore it. Thus, it’s possible to find great growth companies trading at value multiples. Better yes, micro-caps generally have simple business models and are easy to understand.
Most importantly, micro-caps have outperformed the small, mid-cap, and large-cap stocks by a wide margin. For example, micro-cap stocks (smallest decile of stocks) have generated a 17.5% compound annual return from 1927 to 2016. For comparison, the largest decile of stocks compounded at 9.2% per year over the same period.
And I argued to Ed that now (March/April 2020) was the perfect time to launch a micro-cap product as the market had unfairly punished many of them.
As it turns out, I was right.
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Since launching the Cabot Micro-Cap Insider, I’ve profiled 18 ideas.
6 of the 18 ideas have generated at least a 100% return.
On average, they have generated a total return of 66.1%, beating the S&P 500 by 41.6% and the Russell Micro-cap Index by 18.7%.
While performance has been good, I wasn’t perfect (3 out of 18 ideas were losers).
Here is the full performance data below (I blacked out open recommendations as they are only available to subscribers):
Back in April 2020, I couldn’t say with certainty that the market had bottomed, but I knew I was seeing tremendous value in many micro-cap stocks.
Luckily, Ed agreed and the Cabot Micro-cap Insider is off to a great start.
Even though micro-caps have had quite a run, there is still plenty of opportunity.
In the US and Canada (my primary area of focus), there are over 10,000 micro stocks.
It’s a lot easier to find the winners when you aren’t restricted to the largest 500 stocks in the U.S.
Just this month, I recommended an obscure stock that is growing and profitable yet is trading at a 3.5x EV/EBITDA multiple, over a 50% discount to peers.
Even better, sophisticated private equity investors own over 60% of the company’s shares and are incentivized to sell the company as soon as possible.
Better yet, the industry is consolidating, and an acquisition would make sense for several strategic competitors.
At Cabot Micro-cap Insider, our secret is to focus on finding growth companies that are trading at value prices.
We look for solid balance sheets and high insider alignment.
Finally, we seek out the illiquid names. It’s counterintuitive, but names with relatively few shares outstanding (less than 20 million), are usually the best opportunities. Many investors and indexes only invest in the most liquid names.
This is a mistake.
Low shares outstanding indicates management cares about its shareholders and has not diluted them with frequent equity offerings.
As Peter Lynch says, “The person that turns over the most rocks wins the game.”
At Cabot Micro-cap Insider, we will continue to focus on turning over hundreds of rocks to find the next multi bagger.