The Ignored Multi-Bagger Dumpster
Our first post on why we started IRR Reporter and how investors can find value in the ignored growing, profitable, sub $100M mkt cap Co's, forgotten IPOs, and turned around (not turnaround) stories.
David picked up an income statement and a conference call transcript with some scribbles on it from my desk.
“You’re buying another penny stock?” he asked, looking at my screen.
David’s a logistics guy. He watched The Big Short and The Wolf of Wall Street and seeing $0.80/share on my monitor probably reminded him of DiCaprio’s penny stock scene.
DiCaprio: “Ok, so where are your Quotrons here?”
Dwayne (broker): “Quotrons?!”
DiCaprio: “Yeah, computers..”
Dwayne: “No, no, we don’t even need computers here, we just trade right off Pink Sheets.”
DiCaprio: “Pink Sheets?”
Dwayne: “Yeah, they’re penny stocks.. you know, companies that can’t get listed on NASDAQ.. they don’t have enough capital. Their shares trade here [at the “investment center”].”
DiCaprio: “$0.06 a share… c’mon, who buys this crap?!”
Dwayne: “Well, I mean mostly schmucks and postman, there’s always postman. Plumbers, they see our ads in the back of Hustler, and our ads actually say they can get rich quick.”
I couldn’t help myself. I shot back, “Yes, David. We’re trying to scam people by looking for growing, profitable companies with compelling products, high insider ownership, and strong management teams.”
I was sarcastic, of course. And a bit annoyed. Not too long ago, I tried to explain that a stock price below $1.0 doesn’t really mean much. It certainly doesn’t necessarily mean it’s a scam and that the business has no money to be listed on a public exchange.
He probably forgot my spiel.. and I guess flashy DiCaprio is much easier to remember.
I actually get it. David is not a professional investor with a ton of experience, especially when it comes to dealing with micro caps.
But here’s the thing: institutional investors do the same. They tend to dismiss the whole small-cap space as too risky. “Those companies are too small,” they say. “They’re not profitable and will dilute you through new financing.”
I know this because I was one of them, before I started to explore the ignored land of growing and profitable businesses run by solid management teams. Here are a few gold bars I found in the micro-cap “dumpster” in the past few years:
So where’s the disconnect? Why the aversion towards the whole sector?
It’s simple: lack of professional coverage.
It’s a paradox in a way. Often, less information equates to less competition, higher inefficiencies, and higher returns. So one would think there should be more people fishing in this pond.
As Howard Marks says: "The less efficient the market, the greater the opportunity for those who can see value."
We agree, the ability to see value is key.
However, there are other (structural) reasons for low interest:
Lack of need for external capital, which simply means no fees for investment bankers. And no fees, means no incentives to push their sell-side analysts to initiate coverage.
Size and low liquidity for larger buy-side institutional players to establish a meaningful position. This is primarily driven by high insider ownership (up to 60% in some cases), making the free-float much smaller/tighter.
Market ignorance. Names like MDA Space or Copperleaf Technologies were simply ignored or forgotten for a period of time, due to 2022/23 market conditions.
This lack of professional coverage is the main reason why we decided to start IRR Reporter.
After more than a decade working in the Canadian corporate finance/investing space, we started our own investment research firm that focuses on the small/mid cap space in Canada (for now).
The idea is to apply the institutional-grade training and experience to this ignored part of the market and help investors (and companies) achieve better returns and visibility.
For example, if we publish something as simple as the IRR Profile (see below) to folks, it’d be a good starting point for many investor to start learning more.
And, once we highlight the factors such as…
Business Background & Business Model
Products, Customers, Suppliers, Management
Industry, Competition
Capital structure
Valuation and Comps
Risks & Mitigants
Detailed discussion around key-value-driver assumptions
…we imagine that the David-s of the world would slowly forget the DiCaprio scene and start appreciating Howard Mark’s quote, worth repeating here:
"The less efficient the market, the greater the opportunity for those who can see value."
We’ll leave it there for now.
Appreciate the read!