One overlooked benefit of investing in micro-cap stocks is that, because there are 10,000 stocks in the U.S. and Canada, there’s always an investment making a compelling case.
I like to accumulate a watch list of stocks that pop up on my radar and then I’ll spend the first week of every month fine-tuning my analysis of high-conviction ideas for my advisory. Then, on the second Wednesday of the month, I’ll publish my newest idea.
While the initial ideas can come from anywhere or anyone, I do have specific criteria a stock has to meet for me to share it with subscribers.
My ideal setup is a stock with the following characteristics:
My Ideal Set-Up
- Growing
- Cheap (absolute/relative)
- Positive momentum
- Not over-extended (at 50-day moving average)
- Illiquid
- Bonus points:
- Recent insider buying
- Under-followed on Twitter, Seeking Alpha, and Value Investor Club
Sometimes it’s tough to get all these attributes—especially positive momentum when the stock market is in a pullback.
I keep a live document with my watch list. Whenever I stumble upon a new idea, I jot down the basic pitch on my watch list. I get ideas from hedge fund investor letters, Twitter and Cabot Micro-Cap Insider subscribers who share their ideas. Sometimes, if an idea is easy to understand and incredibly compelling, I will drop everything and dive into the situation. But more often, I will note the basic investment case as well as any questions that I have and put it aside for later.
Every day I review my watch list, doing additional research to better understand an opportunity.
As you can imagine, my “watch list” document is quite long. It’s up to 98 pages now!
But it’s a gold mine of potentially lucrative opportunities.
As I get ready to publish my latest high conviction idea for June, here are the three names on my watch list that look most intriguing.
Currency Exchange International Corp. (CURN)
Currency Exchange (CURN) is an interesting micro-cap/special situation.
Its main business is providing currency exchange services in the U.S. and Canada. The pandemic hit this business hard, but travel is back above 2019 peaks as people are ready to put Covid behind them.
The company currently has $85MM of net cash on its balance sheet vs. its market cap of $89MM. Only a portion of this cash balance is required as working capital to run the business.
In its most recent quarter, revenue grew 245%. It generated net operating income of $3.1MM, or $12.4MM on an annualized basis. Better yet, revenue is typically strongest in the middle of the calendar year due to typical seasonal travel.
Finally, the company owns a fast-growing (+30%) payments software business, which is a hidden asset.
Insiders own over 20% of shares of the company, ensuring incentives are aligned with minority shareholders.
SWK Holdings (SWKH)
SWK Holdings (SWKH) is an interesting idea which was recently flagged by Chris DeMuth Jr. on Seeking Alpha.
The thesis is simple (my favorite kind of thesis): The company is a specialty finance company that specializes in small pharmaceutical and healthcare financing.
The company trades at book value yet has valuable hidden assets. Carlson Capital is the company’s largest shareholder and has tried to buy the company twice outright (the board rejected Carlson’s acquisition offers).
Finally, SWKH could be added to the Russell 2000 Index in June which would drive “forced buying” from index funds.
Unit Corp (UNTC)
Unit is a post-bankruptcy re-org energy company that looks interesting.
The business is made up of an upstream oil and gas business that is for sale, a contract drilling business, and a midstream business.
The press reported that Unit is seeking up to $1BN for its upstream assets. However, the company currently has unprofitable hedges that it would have to cover in the event of a sale. Nonetheless, the potential sale proceeds compare favorably to the company’s current market cap of $608MM and enterprise value of $767MM.
Besides the upstream business that is listed for sale, Unit has a valuable contract drilling business and midstream business.
Do you own any micro-cap stocks not on this list? How have they performed? Tell us about them in the comments below!