September 17, 2020: A Historic Opportunity in Micro-Cap Stocks + 3 Micro-Caps to Buy Now


The webinar was recorded September 17, 2020


You can find the slides here.


Chris [00:00:06] Hello and welcome to today’s Cabot Wealth webinar, A Historic Opportunity in Micro-Caps. I’m your host, Chris Preston, Chief Analyst of the Cabot Wealth Daily Advisory and managing editor here at Cabot Wealth Network. With me today is Rich Howe Chief Analyst of our new Cabot Micro-Cap Insider Advisory. Today, Rich is here to talk about the world of micro-cap stocks, why they are historically out performers, but they look particularly attractive today. He’ll also give you three of his highest conviction, micro-cap stock ideas. This is an interactive webinar, which means we’ll be fielding your questions after Rich’s presentation concludes. So if you have a question, feel free to ask it at any time. We’ll try and get to as many of them as time allows, once Rich wraps up. Just keep in mind that we cannot offer advice in regards to your own personal investing situation or portfolio.

Chris [00:00:56] First, let me introduce Rich. Rich is a trained economist and chartered financial analyst. He has researched and invested in stocks for more than 20 years and has become a recognized expert in micro-cap stock investing. He started his career at the investment advisory firm Eaton Vance, where he covered a wide range of sectors, including software and internet, financials and healthcare. Following his time at Eaton Vance, Rich joined Citi Private Bank, Private Bank Private Equity Research team and led the creation of a private equity and real estate fund, a fund that raised over three hundred million dollars in capital commitments from sophisticated high net worth individuals and institutions. Rich left Citi to launch Stock Spin Off Investing Research Service focused on tracking and identifying the most promising stocks, spinoffs and special situations. His recommendations have consistently outperformed the market and have continued to do so since he joined the Cabot teams as Chief Analyst of Cabot Micro-Cap Insider back in April. Bottom line, Rich knows what he’s talking about when it comes to micro-cap stocks. So I’ll let him do just that. Rich, take it away.

Rich [00:02:02] Great. Thank you so much, Chris, for that nice introduction. And thanks everybody for taking some time out of your day to talk about micro-caps. As Chris mentioned throughout this presentation, if you do have any questions, just use the chat box to enter them. And as we get towards the end of the presentation, we will address those questions.

Rich [00:02:25] OK, so first, let’s talk about some high level statistics. Why are micro-caps interesting? Well, first of all, there are a lot of them to look at, just looking at the U.S. there are about 5,000 microcaps that you can look at if you include Canada, which I do in terms of what I’m looking looking for, in terms of my best recommendations for the Cabot Micro-Cap Insider, you get up to about 10,000 publicly traded microcap companies. So there’s a lot of companies to look at. And there aren’t you know, it’s hard to look at them all. And so you can have an informational advantage when you find one that’s very attractive and it’s trading at an attractive valuation. And so that’s what we’re obviously trying to do. Micro-caps, if you look at from a high level, they’ve done really, really well. So they’ve generated about 18 percent compound annual returns over the past 50 years or so. And the statistic that I’ve quoted here shows that about 34 percent of micro-caps don’t have any sell side analyst coverage. Like no banks like Citigroup or Credit Suisse are covering them. And in reality, in terms of the companies that I’m looking at, the vast majority of them do not have sell side coverage. So there’s really no analyst. You’re not competing against the best and brightest on Wall Street and elsewhere. These are hidden companies that few investors are looking at and really no institutional investors are looking at. So it’s a really interesting opportunity for individual investors. Just to dive a little bit deeper in to historic returns by market cap. So stocks have been the best performing – are a great way to make money over the last 100 years. So depending on what you look at, stocks have generated about, you know, eight to 10 percent long term returns, depending on the datasource, depending on the time period, but over long periods of time. And as you get smaller and smaller, the returns go up. So you can see the large cap stocks have generated about a nine point two percent return, you know, over over the long term that’s quite attractive. If you go a little bit smaller and look at mid-cap stocks, you know, the return goes up a little bit. And then you get all the way down to micro-cap stocks and the return jumps up to about seventeen point five percent. So a very interesting opportunity. Why? A question that I get asked oftentimes is why, you know, if the returns are so good, you know, why doesn’t this get arbitraged away? You know, the data is out there. People can see it. And I think the answer to that is that these companies are really almost like private companies. They’re extremely illiquid. And many of the best investors like Warren Greenblat or so like Warren Buffett or Joe Greenblat or Peter Lynch and others started in micro-cap land and then, for better or worse, basically graduated to midcaps in large caps because their performance was so good that they attracted additional assets. And so, you know, it’s a nice situation because if a micro-cap manager is very good, usually they’ll attract more assets and there will be incentive for them to go after bigger companies, leaving the smaller companies for the rest of us investors who are who don’t mind investing these super illiquid, small companies. So I think it’s a it’s really, you know, microcaps aren’t for everybody, but for those that can withstand some volatility, some illiquidity, they offer a really nice opportunity to generate some nice long term – long term returns.

Rich [00:06:13] OK, now let’s talk about why, you know, now it might be and I think that is a good time to be thinking about investing in microcaps. If you haven’t invested in microcaps to date. So over the long term, microcaps have done very well. So the S&P 500, you’re probably well aware, is heavily weighted towards, you know, the FAANG stocks. So Net, Netflix, Facebook, Amazon and Google. And those stocks have just been absolutely on fire and they have really eclipsed all other stocks in the market. And so even though microcaps over the long term, you know, the past, I think this Russell Microcap Index started in 2000, even though over the long term microcaps still have outperformed the S&P 500. Recently. If you look more recently at the data microcaps have actually lagged the index. And I’m going to or lagged the S&P 500. Right now, you can you can see over the past three years, the S&P 500 has returned about 44 percent. While the Russell Microcap Index has returned only eight percent. And so so if you look at the last 10 years, the last five years, year to date, it all shows the same trend, that microcaps have really underperformed recently. And then if you step back and look at from a valuation perspective, this chart here just shows the Russell Microcap versus the Russell 1000 median relative EV to EBIT multiple. So when the chart is below that line, that means that microcaps look pretty attractive versus large caps. When it’s above the line, microcaps are unattractive from a relative valuation perspective versus large caps. So you can see 2007 was the last time that microcaps were really trading at a significant premium to large caps. And it’s been about a 13 year period where the valuation has just declined. So, you know, I can’t tell you I don’t have a crystal ball. I can’t tell you exactly when microcaps will catch fire. But at some point or another, they’re going to have a very strong run and the index is going to do very well. With that being said, I don’t recommend that you invest in the index we’re in – in the micro-cap world it really pays to be a stock picker. And if you look at this, this is a really amazing chart. So if you look at it’s a little bit busy, but basically the punch line is that the median manager has outperformed the Russell Microcap Index, and that’s really different from what you typically see. Usually active managers do not outperform the index – the passive index – before factoring fees, never mind after factoring active active management fees. But in the in the in the micro-cap world, because it’s such a stock pickers’ market, because they’re such garbage that you want to avoid, you can invest with a microcap manager and they have a pretty good chance of outperforming outperform the index. So that is that’s pretty unusual, even though if you just invest in the index, you will probably outperform the S&P 500 over a long period of time. But I would argue that it makes a lot more sense to either allocate to a microcap manager or better yet, pick your own microcap stocks yourself, because you just have a tremendous opportunity to take advantage of stocks that larger institutions just cannot buy because they just manage too much money. So it in a nutshell, that’s why I think it’s a really interesting opportunity right now to consider micro-cap stocks. So let’s talk about what you should look for and what I look for when I’m evaluating a microcap opportunity. Now, this is a little counterintuitive, but if you look at these charts, you see that the lower liquidity the microcap has, but the higher the historic return has been. So if you if you were to invest in the lowest liquidity stocks, you would have generated an eighteen point four percent historic return. And if you had historically invested in in middle to low liquidity microcaps, you would have generated about a 19 percent return. The risk when you’re looking at microcaps is investing in high liquidity, microcaps. So these are high fliers that you see could be going up 100 percent or 200 percent that are really hot stocks that people are maybe talking about on Twitter or is quoted on and Seeking Alpha, where they have, you know, millions and millions of shares outstanding and a lot of high daily trading volume. Those are the stocks that you want to be especially careful of because historically those types of stocks have have performed the poorest. I get a lot of questions from subscribers to Cabot Micro-Cap Insider about stocks that have been flying, you know, flying higher in are popular stocks on Twitter or on Robinhood, like Genius Brands was it was a company that that many people asked me about that was talked about as the Netflix of kids’ programing. Another one was expressed XpresSpa, which is a basically a Covid play. They do you know, they historically had done massages at airports, but they were switching to Covid testing and anything associated with Covid testing has just gone through the roof. Both of these companies, it was pretty easy to just say, you know, avoid these companies or if you can even consider shorting them, because there was just they were so overhyped by the management team, by excessive, excessively optimistic press releases. And it was pretty clear that there wasn’t much substance underlying these companies. And that’s often what you will see with with companies that have a small market cap but have a lot of trading. So that is one thing that you should be aware of when you’re evaluating microcaps. I don’t just look for a little liquidity stocks, but it just so happens that the most attractive microcaps that I find tend to be lower liquidity. And it makes sense because those have historically generated the highest returns.

Rich [00:12:47] Okay, what else should we look for? Well, value’s so cheap. Microcaps are have historically been a very performing, very positively performing area of the market. You know, of late recently, it’s been a tough time to be a value investor. Value has had a very difficult stretch over the past 10 years. Growth has really surpassed growth, growth investing performance has done really well and value investing has done pretty poorly. Companies that are growing really well, even if they’re unprofitable, are the ones that are bid up in the market these days. So it’s been it’s been a pretty challenging environment to be a value a value investor. The nice thing about microcaps is that you can find companies that are trading at value multiples, like literally trading at a price to cash flow, multiple of three or four, and but growing revenue at twenty five percent in earnings at twenty five percent plus these opportunities exist. So you don’t have to really just choose between being a value manager and buying really out of favor stocks like auto stocks or retail stocks or media legacy companies and just having to be patient and wait around for years and years and years to get rewarded for your patients with micro-cap stocks. The nice thing is that you can buy these really cheap stocks that are also growing and as a result, there is a lot more upside. So historically, you want to look for micro-cap stocks that are cheap. So whether that’s on an EV EBITDA basis or price to earnings basis or price to cash flow, you want to look for microcaps that are cheap. Those have been the – those – the cheapest microcaps have performed incredibly well.

Rich [00:14:37] OK, what else should we look for? The other thing that’s important to look for is momentum. So momentum, I think of momentum both as price momentum but also as business momentum. So it’s taken me way too long to understand and to know that stocks that are going down can tend to continue to go down and stocks that are going up tend to continue to go up. You know, Jesse Livermore famously said, don’t fight the tape. And it’s taking me a little bit too long to appreciate that. But interestingly, the data backs it up that stocks with high price momentum tend to do quite well. So if you can find an illiquid, cheap stock that is at its 52 week high, that is a good formula for continued success going forward. So stocks that are, you know, at their 52 week high or close to their 52 week high aren’t on that, you know. It’s sometimes it’s easy to say, oh, I’ve missed the run. You know, it’s doubled in the past year. But but in micro-cap land, do not just write a stock off because it’s because it’s done well in the past. That can actually be a really nice positive predictor of future excess returns. So so be you know, so be very cognizant of that. In many of the stocks that I’m recommending that are performed very well since we launched our service in April are at or near their 52 week highs, yet they’re very cheap. So that’s a that’s a really good combination that you want to look for.

[00:16:08] OK, so other factors that you should consider high insider ownership. So what this basically means is that you want a management team that is running the company to own a large portion of shares. So all the companies that I am recommending have insider ownership of between 15 percent and 50 percent, five oh percent, because when it’s a really small company, you want the outcome for that company to really matter to the management team. There are horror stories in micro-cap land of middle management teams that just pay themselves, access both cash bonuses, grant themselves tons of stock, then sell the stock, dilute shareholders ridiculously and don’t really own much of the stock because once they issued and sell stock, they just sell it. They view it as cash compensation. And those are stocks you definitely want to avoid. You want to make sure that you, as a shareholder of this company that can be viewed as a private company because it’s so small, you’re aligned with the management team that’s running the day to day operations. And that management team won’t make the best decision every every time. You know, you can’t guarantee that everything will work out. But if the management teams, you know, Networth is really highly leveraged to the to the outcome of the business, you can probably safely assume that they’re going to make decisions that they think are in the best interest of the company. So that’s something that I that I always look for. It is incredibly important when you’re looking at micro-cap stocks. Another thing that you want to look for is a relatively low share count. So if you see a microcap with like a billion shares outstanding, that is a bad sign. That is a sign that the management team just has burned a ton of cash in the past and decides to issue more shares, usually accompanied by a promotional press release to get the stock price up. Then they issue more shares, get more cash from the balance sheet, continue to pay themselves egregious salaries and burn cash. So that’s it. So if you see a company with a ton of very high share countersuing, that’s something that’s a red flag, something that you want to avoid. Usually I’m looking for companies with with shares outstanding of 30 million or less. Really low or the lower the better. So if it’s under 10 million dollars, that’s that’s usually a very good thing. It just goes to show that management has been -really cares about diluting the company and that they won’t that they haven’t historically diluted shareholders in the past and that they they likely won’t in the future. And that obviously is tied to high insider ownership. If they’re if they own a lot of the company, they don’t want to just give away shares there. They want to keep that share count as low as possible.

Rich [00:18:50] The third factor that I just want to highlight is a reasonable balance sheet. Now, I’m – you want to be careful with microcaps because obviously they’re a little bit more risky than larger cap companies. Usually they have less diversity of revenue. And so they’re riskier. You know, they’re smaller. They’re not quite as stable. They’re not as diversified from a geographic perspective. So you definitely want to have a conservative balance sheet. But from my perspective, I’m okay with a company having a little bit of debt. I want to look at that debt to see what it’s yielding, see if it’s an egregious interest rate or if the debt to EBITDA ratio is excessively high, then that will be a company that I will avoid. But, you know, some of the companies that I’m recommending have a fair amount of debt, but for reasons that I can get that I can get into, I’m very comfortable with their capital structure. And it’s usually because, you know, the underlying cash flow and dynamics of the business support the debt and because or because the debt is at an incredibly low interest rate or because the management team has has guaranteed the debt with their – has personaly guaranteed the debt, which is which is usually a pretty good sign as well. So these are some other factors that I can that that I consider when I’m when I’m deciding what I really want to look for or when I’m reviewing a potential microcap, whether or not it looks interesting. High insider ownership, relatively low share count and a reasonable balance sheet.

Rich [00:20:24] OK. So let’s get into some of my top picks, some of my highest conviction ideas, and I just want to preface this that please use a – please use limit orders when you’re buying microcaps, because if you so Medexus Pharmaceuticals, if you were to buy the company, buy the stock right now and entered just a market order, even though the stock’s trading at two dollars, 90 cents, the stock could spike to five dollars because there’s just a lot of illiquidity with microcaps. So just be be very careful and use limits. You know, if you wanted to buy Medexus Pharmaceuticals, you could use a limit of maybe three dollars to try to, you know, buy, buy, buy the stock. It’s just, you know, when you’re buying a large cap stock, it doesn’t matter. You can enter an open market order, but be sure to use limits when you are trafficking in the microcap walls. So this company is Medexus Pharmaceuticals. Excuse me for the typo of the ticker. Should be M E D X F, and that ticker was recently changed. So it’s it’s it’s slightly new, but if you just type type in Medexus to Yahoo Finance or to Schwab or whoever you used to trade stocks, it should pop right out. But this company is probably my highest conviction idea. It’s a Canadian pharmaceutical company that has had strong organic and inorganic growth, but it’s trading at an extremely attractive valuation. So it’s trading at about three and a half times free cash flow. But it grew organic revenue organically. Twenty seven percent in the last quarter. Factor in a recent acquisition. It grew at about seventy five percent revenue. And so this gets back to my point that when you’re investing in micro-cap stocks, you don’t have to choose between growth and value. You can invest in growth stocks that are trading at value multiples. This is an extremely small company that’s under the radar. There’s high insider ownership. The reason that I stumbled upon this company is I closely follow the spin off market. And a company called Aptevo was – had a drug called a hemophilia drug that I knew at Aptevo was probably going to sell at some point. And when they announced that they had sold this drug, I was shocked at how good a deal the company that bought this hemophilia drug drug got. So I dug into the company. Turns out the company that bought this drug was Medexus Pharmaceuticals. And the more I dug into Medexus Pharmaceuticals, the more I liked it. They really focus on their there, especially pharma company that focuses on licensing and acquiring drugs and marketing those drugs to their through their existing sales force in Canada, in the United States. They’re very disciplined in terms of how much they’ll pay for an acquisition. They focus on auto immune conditions. That’s what the vast majority of their their drugs treat. And this company really transformed from being a negative earner. So a company that generated negative EBITDA last year or even two quarters ago to a wildly profitable company. And the reason why they became wildly profitable is because they bought this drug called Xinity. This hemophilia drug from Aptevo Pharmaceuticals. And they didn’t have to add any additional basically OP acts. They only had to hire an additional two or three individuals to basically support the marketing in the sales of this drug. And they could basically layer on the gross profit from this drug, on the existing infrastructure, operational infrastructure of Medexus. And so there was incredible operating leverage. And even though the stock is up, you know, call it 60 or 70 percent since when we recommended it, this is a stock that trades at – it trades at three and a half times free cash flow. It trades at less than point one times revenue, especially pharma peers, trade at three point five times revenue. So if it were to trade at a pure multiple, it would be multiples higher to where it is right now. So this is a good example of a company that has trading in a value multiple. It’s a growing business with high insider ownership, positive momentum in the stock price, but also in the results of the business. Operating results, momentum, operating momentum. And and so this one this is one that I think could could could be 10 ten dollar could trade at ten dollars. Fifteen dollars over time. I right now I’m saying buy at three dollars you could even maybe buy up to three dollars and 50 cents. You just want to make sure that you’re using limit orders. And full disclosure, I do personally own this one. I only buy companies that I’m recommending after I’ve shared my recommendation with my Cabot Micro-Cap Insiders. But full disclosure, I do I do own shares of Medexus. So any questions on Medexus? I’m happy to take them.

Rich [00:25:28] I’m just going to briefly touch on my two other recommendations and then we can open up for questions. OK, so Greystone Logistics is another really interesting microcaps, so this is a company that has insider ownership of over 40 percent of the company manufactures plastic pallets. So a pallet, usually they’re made of wood and pallets are used to move goods around the country, around the globe, whether it’s beverages or food, food, consumer packaged products or pharmaceuticals, basically, anything that is shipped to a different location where they’re on a ship or in a truck is oftentimes shipped on pallets and most pallets are made of wood. This company, specialized in plastic pallets and plastic pallets are taking share because they’re more durable with wooden pallets you can only use the months, plastic pallets you can use them several times and they’re more hygienic, which is important in the post pandemic world. This is a company that has historically grown revenue incredibly, but gross margin has been a little bit volatile. But they’ve – the company has made significant investments in their manufacturing capabilities such that gross margins have improved by almost 100, 100 percent over the past year as a result this company is has become extremely profitable. This year they’re on pace to grow earnings about 140 percent. Yet the stock is only trading at about seven and a half times earnings. So this is a this is a really interesting company. Again, it’s trading at it at pretty close to a 52 week high right now. But remember, the business is doing really well. And from an earnings perspective, the company is extremely cheap. And you have the other thing is you have the management team. So the management team owns over 40 percent of the company. And recently they were buying stock in the open market. So this is one that I like a lot. It’s another high conviction idea with this one. My current recommendation is to buy it. Last time I checked, it was about ninety eight cents. My recommendation is to buy up to a dollar. You know, I wouldn’t I wouldn’t chase it. It’s been a little volatile. So don’t chase this one. But, you know, I would use a limit and buy it up to up to a dollar. You could go a little bit over a dollar. But I just obviously wouldn’t wouldn’t place an open market order with this one.

Rich [00:27:55] OK. NamSys is an interesting company, and this is actually my latest recommendation. So last I checked, the stock was trading at about 80 cents. It has about a twenty two million market cap. It is a Canadian software company. So it’s a SaaS company. So if you as you probably heard, software companies are hot. You know, they’re trading at, you know, 10, 20 or 100 times revenue. Like the recent Snow IPO on this company is just trading at five times revenue. It’s trading at just twenty two times earnings. Historically, they’ve grown revenue about 25 percent annually over the past five years. This company, just to step back and talk about what this company actually does. They provide software that goes in smart safes. So stay you – say you operate a convenience store or a grocery store or gas station or or a store that uses a lot of cash or any cash at all. What you can do is you can stick the cash in a smart safe. And the great thing about the smart safe is it will not open it. Basically, you can’t open it unless you’re cash in transit operator. So it really decreases theft, both internal and external theft. And it also allows companies that use these smart safes to interact with their banking companies and get credit for cash, that is, for sales that are made in that day. So it’s really important for for cash flow businesses so that you can really get credit in your bank account for the sales that have happened really on an on an hourly basis. And, NamSys is a company that provides the software for these smart safes. So they work very closely with smart safe manufacturers like Brinks. Brinks is a big customer of theirs. They represent 40 percent of sales. So that’s, you know, that that you’ll often see that with microcaps, that a single customer will will will represent a large portion of of of revenue. It’s a risk, but it’s also an opportunity because Brinks has been growing incredibly quickly. But in terms of how this company generates revenue, they get revenue from Brinks and other smart safe operators that use the NamSys software. They also have a couple other products that are branded under the Cirreon name. There’s a controller product that is geared towards the controller of the company that is using the smart safe and allows the controller to know how much cash they have spread across the country in the world. It basically brings the controller up to date in terms of what cash has come into the smart safe in the past hour, there’s a banking app which the company will use as well, that will allow the company to get up to date financials, counting cash that’s been that’s been used in sales in the most recent up to the most recent day. So this is really important in terms of managing your liquidity and your working capital. And then there’s also an app that the cash and transit operators use. So the big armored vehicles that drive around and pick up cash, those companies use the app, the Cirreon Cash-in-Transit app to schedule pickups or deliveries, to coordinate deliveries, to interact with the smart safe operators. So those are the real revenue generators. But it’s a business that is historically has grown at about 25 percent. You know, it’s trading. It’s not dirt cheap, but it’s trading at about 20 times earnings a little bit more than that. Twenty two times earnings. This is one that is actually close to my buy limit. So keep an eye on this one. I wouldn’t want to buy this one higher than 80 cents for now. So so keep it to keep an eye on this one. Last time I checked, it was at 80 cents. But if it were to drop below 80 cents, I would I would I would take that as an opportunity to establish a position if you if you think the investment really meets, meets what you’re looking for. But I think this is a nice secular grower. The one issue here is that they you they obviously depend on people paying for things, using cash. You know, I personally don’t use a lot of cash, but cash still represents about a quarter of all transactions worldwide. So a lot of people still use it. It’s still a big market and they’re really riding the coattails of Brinks, which is the cash in transit and smart safe operator, which is growing both organically but also through acquisitions and so that represents a big opportunity to continue to grow. So this is really my last high conviction idea that I wanted to share. And with that, I will turn it back to Chris.

Rich [00:32:34] Thanks. Thanks for that, Rich. So we’ve got a lot of questions rolling in and we’re gonna get to those in just a minute. First, let me tell you about how you can sign up for Rich’s Cabot Micro-Cap Insider advisory, which again just launched in April. If you like, we’ve heard from Rich today and are interested we do have a special offer reserved exclusively for listeners of today’s webinar. You get the first 90 days for just ninety dollars. So dollar a day. What you get in return are monthly issues featuring new microcap investing ideas, weekly updates and special bulletins with market updates, news and trade alerts, 24/7 online access to our exclusive subscriber web site, analyst archives, and direct private access to Rich for answers to any questions you have. And there was a question earlier about track record. I looked it up, Rich, since launching April 28, the stocks are up an average of 40 percent, compared to a 17 percent gain in the S&P during that time, more than double the return on the S&P. So pretty good. So sign up. Sign up now, again, just a dollar a day for the first three months. Go to the website on your screen, CabotWealth.com/WebinarSpecial.

Chris [00:33:58] Now, let’s move on to your questions. I’ll start from the beginning. People have been waiting patiently. Let’s see, one from K. Lowry. “The one downside I’ve had with microcaps has been they can be manipulated by groups that like to short the stock and then spread disinformation. How do you avoid this potential manipulation?”

Rich [00:34:22] Yeah, so good question K. You know what? One benefit of microcaps actually is that they’re relatively hard to short. If – so, the vast majority, the ones that I’m going to be recommending are trading below five dollars. And many of them are trading below two dollars and fifty cents or even below a dollar. And many brokerage firms do not allow you to or they they they require you to have basically excess almost double the margin coverage if you’re going to short a microcap. Let me let me just give you – give you an example. Say you wanted to short GLGI, Greystone Logistics. That stock’s trading at about a dollar right now. If I wanted to short that stock from Schwab, say I wanted to short a hundred shares at a dollar. Right. So theoretically I should have a hundred dollars in the bank to cover that short position. And in case it turns against me, Schwab will make me actually reserve two hundred and fifty dollars to – against that one hundred dollar short position. So it’s incredibly capital inefficient to short really low priced microcap stocks, which are the ones that I’m typically recommending. Many if you if if we’re talking about some of the high fliers, for instance, let’s see XpresSpa. That one was heavily shorted. So much so that it was really hard to borrow because it was trading so, so high above, far in excess, above what it was, what it was actually worth. But but again, though, those types of companies are ones that I would not be recommending anyway, because those tend to be the highest liquidity stocks in the market. So those are the ones that I tend to avoid anyway. But K, if you have any specific questions about about stocks that looked attractive to you, but you weren’t able to because they’re driven down by short a short, short attacks, I’d be happy to look at those either now or or as a follow up.

Chris [00:36:40] Good question. One just clarification question from Bill. “Are most of these going to be pink sheet or bulletin board stocks, over the counter stocks, I guess?”

Rich [00:36:49] Yes, that’s that’s a great question. Yes, most of them will trade over the counter or the equivalent over the counter in Canada. Actually, two of the stocks that I recommended that I talked about today are are based in Canada, Medexus and NamSys. But you can buy them in the US and they are traded or basically over the counter in Canada. Some company, some stocks. I won’t just recommend stocks that are trading over the counter. If there’s a if there’s a company that’s trading on the Nasdaq. But it looks really attractive and I’m happy recommending that. And then there are other companies that I’m looking at, like, for instance, Liberated Syndication, which is a podcast hosting company that I like a lot, which is over-the-counter. But there they could up list if they wanted to. And if they did, that would probably be a pretty big catalyst because, you know, more investors could invest in it. But for now, you know, primarily the vast majority, the stocks that I’m talking about will be over-the-counter.

Chris [00:37:46] Question from – two questions from Edward. One, “Do you have any thoughts on the SEC’s decision and pulling quotes from those over-the-counter companies that don’t meet certain disclosure requirements?” And two, “When using comps are you adjusting for any type of liquidity premium, i.e., if you’re using a large cap comp?”

Rich [00:38:07] Yeah. Great question. So the first question is and I just saw that news. I just saw some news on it. On on Twitter. Yes. So I need to dig more into that. But basically, to catch everybody up to the SEC has ruled that as far as I understand, that there – there aren’t going to be a bid and ask is there’s just gonna be a lot less liquidity for stocks that’re considered dark or trade or basically that don’t file financials. So these are companies that don’t file with the SEC but do you know that are legitimate companies and will publish annual reports and are audited they just have chosen not to file SEC, reports with the SEC and the benefit of doing that is that you basically saved a million bucks a year, roughly a million bucks a year. So for it for microcap company, that that’s that’s a real that’s a real savings. So I don’t have any initial thoughts other than it’s probably a negative for these these dark companies. I currently I’m not recommending any dark companies. And what I mean by that is companies that aren’t reporting to the SEC or the equivalent in their in their country. But I think I think it will be a negative. You know, I just think it’s anything that basically discourages people to invest in these companies will probably have a deleterious effect on on their price. But I admittedly, I haven’t read read up too much on it. So I guess I got a dig it, dig up, dig in more there. And then in terms of comps, yes, I do adjust for liquidity, for instance, Medexus Pharma. So that’s a company that I like a lot. It’s trading at a big you know, it’s trading at zero point eight times revenue on an EV to revenue basis. Specialty pharma peers trade at about three point five times revenue. But those companies are a lot larger and just larger. And so my price target, for instance, for Medexus. Let me just go back to see what it is. Yeah. So. So my price target is five dollars. So, you know, call 60 percent or sell or 65 percent upside. That’s I mean, that’s really, I think only assuming like a like a, you know, one point three times on EV to revenue multiple still at a huge discount to where the where the comps are trading. I actually think that this one could trade at three, three or four times revenue or even higher considering the growth there and the really interesting deals that they’ve done. But for the purposes of my valuation, yeah, they basically, I’m assuming a huge discount to their larger peers in terms of getting a sense for what you know, what this what this company would be worth. I mean, also just just look at NamSys. So that’s a software company like a SAS company that, you know, the whole world is you know, software companies are trading at absurd multiples. I’m not assuming any sort of crazy valuation multiple for NamSys to get to my dollar fifteen price target. You know, obviously, these are smaller companies. They’re not going to trade at 10 or 20 times revenue, most likely. But the good thing is that if you buy these companies that are that are small and under the radar, eventually they could get overvalued. Right. So, you know, Medexus Pharma. I talked about it. It’s trading under one times revenue. If this story gets out and it gets really bid up and people really like it, like I could see them it becoming a quote unquote hot stock. And if they decide to list in the U.S., which they’ve talked about doing and list on the Nasdaq, you know, it could be ironically, the higher the valuation, the more like the institutional investors are to come in and buy it. And so that’s the nice thing about investing in microcaps, right. If you’re not if you’re paying a really cheap multiple. But these are companies that have really strong fundamentals and could potentially become overvalued. You know, that’s when that’s how you can get, you know, five baggers or 10 bagger. So that’s you know, that’s really what we’re looking for. Obviously, we’re not going be able to get that all the time. But but you’re looking for that that exponential upside potential versus relatively limited downside.

Chris [00:42:35] Alright, question from Bradley. Bradley asks, “If the stocks are illiquid. How hard is it to sell when it’s time to get out?”

Rich [00:42:42] Yeah, really good question. And that’s I mean, that that’s one of the issues with with microcaps that getting in and getting out is – can be very hard. And as a result, it’s smart to not, you know, only invest a portion of your money that you’re comfortable with, that you could see, you know, going away or maybe not having, you know, access to for a while. Like, you can’t just sell these names on on on on a whim. You know, what I’m looking for with many of these microcaps is. There could be a windfall event where, you know, the stock gets bid up. There’s an article published on Seeking Alpha or on Twitter, and everybody is getting really excited about it. It just gets gets bid up to a level that just doesn’t make sense. And with that comes more liquidity. And those situations can be good times to take profits. So so those can be good, good, good times, to, you know, to take advantage of liquidity that the market is is is providing for you. But you just know that it’s going to take a while. Usually it’s going to take a while to sell you. Again, you don’t want to you don’t want to invest, you know, assuming that you can just sell your shares in a heartbeat and have liquidity the next day, you want to be comfortable knowing that it might take a little while for you to get liquidity. But I think, you know, that is the opportunity. And then another thing that we just protect against is like if you’re investing companies with really strong fundamentals, really strong businesses, and the majority of the companies that I’m recommending do have really strong, really strong businesses where, you know, capital light, whether it’s a software business like like NamSys or a podcast hosting business like Liberated Syndication or especially pharma business with patents like like Medexus Pharma, those companies, those are really, really good businesses. And in they’re, because they’re such solid businesses and because because they’re selling at such such reasonable valuations, that provides like some measure of downside protection to me. But I think, you know, I’ll be the first to admit that, you know, microcaps aren’t for everybody. And if you really like having that liquidity, the daily liquidity, knowing that you can get out at basically any moment you want to, then then maybe microcaps out for you. But for those that can stomach a little bit of a liquidity and a little volatility. And for those that, you know, aren’t managing a billion dollars or maybe even two hundred million dollars on, because at that point it gets hard to basically allocate to these companies and build a big enough position to make it worthwhile for you. But, you know, it’s definitely a fair point that that basically on the buy and on the exit, you you know, there can be there will be a liquidity. And so it’s it’s you just got to be patient. And that’s why it’s important to just buy at the right time too. So don’t don’t don’t bid a stock up too high because, you know, it’ll probably hit bit by bid down the next day. You just got to be a little bit careful when you’re entering these positions.

Chris [00:45:56] I think we have time for one or two more questions. A question from Neil. Neil asks, “Would it would any of these stocks you shared be recommended to be held on to you for the four long term growth? And if so, which one?”

Rich [00:46:09] Yeah. So really, I mean, all my recommendations are for long term, if little. Just to give an example. Medexus Pharma. So I really you know, as I said, that’s one of my highest conviction ideas. If probably my highest conviction idea. If I oh, if you know, if if the stock went to my price target to five dollars tomorrow, maybe I would lighten up a little bit. I don’t know if I would just because I really do think there’s I think it going to 10 or higher is – feels likely over time. So I do fully intend to hold these. Obviously things could change, but I do fully intend to hold these for a number of years. Obviously the thesis could change for better or worse. And and, you know, I could sell off if if it makes sense. But all my recommendations are are generally long term recommendations. Greystone Logistics. If it if it traded a dollar 60 tomorrow, I would probably lighten up on that just because it’s not as high quality of business. It is lower margins. So I’d probably be happy, you know, for whatever reason, if if, you know, the stock got bid up to a dollar 60 tomorrow, I’d probably, you know, take take my profits there and then on on NamSys. This is one that I think, you know, the term compounders become become popular. Companies that can just compound revenue and earnings over time. And I think this is a company like that. But at the same time, if it were to trade up immediately to a dollar fifteen, my price target, you know, I would be fine lightening, lightening my position there or or selling or changing my recommendation to hold or maybe sell a half. But I think, again, that this this one could be multiples, you know, looking out a few years. It definitely sells at a very reasonable multiple. And they should be able to grow revenue earnings consistently going forward. So it really depends on on the company. But I, I really intend to hold all these for the long term with the caveat that, of course, you know, fundamentals can change. And so you just have to have to be be flexible.

Chris [00:48:21] All right. Last question a couple people, ask about what brokerage discount online brokers to use. I guess some peoples’ don’t allow for over-the-counter stocks. Are there any discount brokers that’ll allow for your trading recommendations that you would recommend?

Rich [00:48:40] Yeah. So I know that Robinhood does not have many of the stocks, unfortunately, that I am recommending. I’ve gotten that through feedback through customers, unfortunately. But the good news is that most other high quality brokerage firms will have – will let you buy and sell these stocks. I use Schwab, you know, and now I’m able to basically buy all these stocks through Schwab. I know T.D. Ameritrade is is pretty good, too. I’ve heard good things about interactive brokers, although, you know, there’s not there’s not great service there. You know, one thing that I love about Schwab is that really good customer service and you still get to trade for free. Right. There’s there’s no commissions. So even if it’s even if it’s a microcap stock. So most of these you should be able to buy with kind of the name brand brokerage firms. But, you know, the caveat, again, is that most of them will be relatively illiquid. Occasion.. I could I could recommend a situation that’s that’s has a little bit higher liquidity but is in and is still attractive. So it’s not like as I said earlier tonight, not like I’m just looking for illiquid names. But it just so happens that some of the most interesting opportunities that I’ve seen tend to be illiquid.

Chris [00:49:57] Good stuff, Rich. Thanks. Thanks for that and thanks for all your questions today and for tuning in. We will be back next month on October 22nd, Thursday, October 22nd. Our next webinar also by recent Cabot addition. Bruce Kaser, who is Chief Analyst of our Cabot Undervalued Stocks Advisor. He’ll be talking about his favorite turnaround stocks and his philosophy for finding them. And again, that’ll be Thursday, October 22nd, at 2 p.m. Eastern. That does it for us. For Rich Howe, and the entire Cabot Wealth Network team. I’m Chris Preston. And we’ll see you next time.

Rich [00:50:37] All right. Thanks so much.

Comments

  • I want to join but do not know if. It

    I hope to join but not sure of which section. I am a small investor, very Elderly(so not too complicated)And have spent hours On all the videos to no avail. As too much info for me. Thanks. Norma Riley

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