Podcast Summary
Focusing on profitable, growing small businesses: Look for small companies with strong growth potential, attractive price to earnings growth ratios, and the ability to raise capital effectively. Success lies in finding multibagger stocks through a disciplined, growth-focused approach.
Successful small cap investing involves evaluating a large number of potential investments and focusing on profitable, growing businesses. Paul Andreola, an experienced investor, emphasizes the importance of looking for companies with strong growth potential that larger institutions cannot participate in due to their small market caps. He also discussed the significance of the price to earnings growth ratio in finding great opportunities and the importance of understanding the capital raising process. Additionally, Andreola shared his belief that value will always succeed in the long term and highlighted his success in finding multibagger stocks, such as Ex-Pel, which went from $0.20 to $53.80. Overall, the conversation underscores the importance of a disciplined, growth-focused approach to small cap investing.
Considering a company's growth rate when evaluating investments: PEG ratio helps identify undervalued companies with high revenue growth rates, especially those growing at 70-80% per year and having a PEG ratio below one.
When evaluating potential investments, it's important to consider the growth rate of a company in addition to its price-to-earnings ratio. A faster growing company may deserve a higher multiple, leading to a lower price-to-earnings-to-growth (PEG) ratio. For instance, a company growing at 70-80% per year with a PEG ratio below one is considered inexpensive. By using a PEG ratio, investors can identify potentially undervalued companies, especially those with high revenue growth rates. Currently, the percentage of profitable businesses in Canada is roughly the same as it was in mid-2023, despite the market's fluctuations.
Focus on profitable companies in small caps: Invest in small caps with healthy balance sheets to mitigate risks of business failure and financing dilution. Evaluate financials carefully and maintain a big margin of safety.
Profitable companies with a healthy balance sheet are key for investors in small caps, as they mitigate the risks of business failure and financing dilution. Historically, around 13-15% of Canadian listed companies are profitable, but the risk for small caps lies in their short histories, making it difficult for investors to make informed decisions. To minimize risks, investors should focus on profitable companies, maintain a big margin of safety, and be cautious of excessive debt. Additionally, financing can be expensive and potentially detrimental, especially during challenging market conditions. Therefore, it's essential to carefully evaluate a company's financial situation and consider the potential risks and rewards before investing.
Costs and Distractions of Raising External Funds: Raising external funds for a business comes with hidden costs and distractions for management, including commissions, discounts, and impact on stock price. Ideal for businesses to be self-funded, but smaller companies can benefit from a board member with capital markets experience.
Raising external funding for a business comes with significant costs and distractions for management. These costs include commissions, discounts to trading prices, and the need to offer sweeteners like warrants. The process of raising funds can also negatively impact the stock price and divert the attention of management from operational tasks. Therefore, it's ideal for a business to be self-funded, but this is a luxury often reserved for larger and more mature businesses. A key strategy for assessing funding situations in smaller companies is to look for a board member with capital markets experience and a significant vested interest in the company. This individual can help navigate the cutthroat financing industry and ensure the company gets a good deal. Overall, the cost of raising funds goes beyond just the commission and can impact the operations and share price of a business.
Manage Finances Effectively with Monarch Money: Monarch Money, a top-rated personal finance app, offers a comprehensive view of all accounts, transactions, and investments, enabling users to create custom budgets, track progress towards goals, and collaborate with partners. Import data from previous tools like Mint for a 30-day free trial.
Effective financial management is crucial for reaching your goals, and automated personal finance apps like Monarch Money make this process seamless. Monarch Money, the new top-rated all-in-one personal finance app, offers a comprehensive view of all accounts, transactions, and investments, allowing users to create custom budgets, track progress towards financial goals, and collaborate with partners. With the ability to import data from previous tools like Mint, Monarch Money provides an extended 30-day free trial for listeners of this show. For those interested in alternative investments, Tony Robbins' new book, The Holy Grail of Investing, reveals secrets from investing legends on private equity, real estate, energy, and more. In the world of nano caps, companies must prove their ability to pay back loans to secure debt financing from banks, as equity capital is not always an option. The type of company also plays a role, as banks are more likely to lend against hard assets or revenue streams that can be collateralized.
Tangible assets help secure debt financing, but companies need to consider capital allocation and share price impact before taking on debt or equity.: Invest in undervalued microcap companies with fixable problems for potential profits from market recognition. Practice information arbitrage and averaging up on stocks to maximize value investment returns.
Companies with tangible assets as collateral are more likely to secure debt financing even before they start cash flowing, while software companies typically need to be cash flowing before they can obtain debt. However, it's crucial for companies to make informed decisions about capital allocation and consider the potential impact on their share price before taking on debt or equity. The speaker also emphasizes the value of investing in "ugly duckling" microcap companies with fixable problems, rather than trying to turn around struggling businesses. These companies often face optics issues, such as poor IR or balance sheet concerns, but have strong income statements. By identifying and investing in these undervalued companies, investors can profit from the market's slow recognition of their turnaround or recovery. The speaker also mentioned the concept of information arbitrage, where investors can profit from discovering and acting on information that others have overlooked. Averaging up on stocks, even as prices increase, can be a successful strategy for value investors, as long as the underlying company continues to perform well.
Assessing business value and buying at a discount: Continuously evaluate businesses, buy when undervalued, and avoid averaging down on disappointments
Successful investing involves constantly assessing the value of a business and buying when the price is below that value, ensuring there's a margin of safety. This requires continuous measurement against other opportunities and understanding the business well enough to identify potential value drivers. The percentage of portfolio invested in a single position isn't fixed, and the best investors reassess each case individually. If a business's value significantly increases, it shouldn't prevent increasing ownership if it's the best opportunity available. Avoiding averaging down into disappointing investments is key, just as you wouldn't lend more money to someone who hasn't repaid you in full.
Averaging down on a stock can make sense if the business value is increasing rapidly while the price is decreasing.: Consider averaging down on a stock if business value is rising despite price decrease, but thoroughly evaluate the company beforehand. Selling may be better if value has also decreased. Biggest driver for selling is a compelling investment opportunity, be aware of opportunity cost and tax consequences.
Averaging down on a stock can make sense if the business value is increasing rapidly while the price is decreasing. However, it's crucial to thoroughly evaluate the company's value and circumstances before making such a decision. If the value has also decreased, it may be time to consider selling instead. The biggest driver for selling a position is often finding a more compelling investment opportunity. It's essential to be aware of opportunity cost and tax consequences when making investment decisions. Fully exiting a position is rare unless there are significant issues with the business. Instead, investors may choose to be patient and hold onto a well-performing, confidently valued stock.
Deciding to sell a struggling business: When a business underperforms, evaluate carefully before selling for cash. Consider the extent of the decline, liquidity, and new opportunities. Hold if the stock remains cheap, or sell for a compelling new investment.
Even when a business in your portfolio experiences decreased growth, it doesn't necessarily mean you should sell. The decision to sell depends on various factors such as the extent of the growth decrease, liquidity, and the availability of compelling new opportunities. The speaker emphasized the importance of maintaining conviction in the business you understand and the need for careful consideration of what you will do with the resulting cash. If the stock still looks cheap, you might not be in a rush to sell. Conversely, if there's a compelling new opportunity, you might decide to sell and deploy the capital. The speaker likened this process to deciding whether to hold on to or let go of a long-term investment, like a child from a marriage – it requires careful thought and consideration.
Dealing with underperforming stocks and building a strong network: Stay adaptable and focused on best investment opportunities, let go of underperforming stocks, build a strong network for valuable insights, and understand financing system to avoid pitfalls.
Investing, especially in microcap spaces, requires constant evaluation and letting go of underperforming stocks. The speaker shared his personal experience of dealing with legacy positions that were causing a mental and financial drain, emphasizing the importance of mental currency and finding new opportunities. He advised selling underperforming stocks and focusing on the best investment opportunities. Building a strong network in the investing community is also crucial for success, as it provides valuable insights and experiences that can help in making informed decisions. The speaker emphasized the importance of getting to know the players in the industry and understanding the financing system to avoid potential pitfalls. Overall, the key takeaway is to remain adaptable and focused on finding the best investment opportunities while continuously learning from the experiences and insights of industry experts. Sign up for a trial period at Shopify.com/WSB to start or grow your business with their supportive tools.
Expand your network for success in investing: Building relationships in the investing industry can lead to valuable insights, opportunities, and mentorship. Reach out and ask questions to expand your network.
Building a network of investors and industry professionals is crucial for success in investing, particularly in the microcap space. Reach out to people, ask questions, and don't be afraid to seek help or mentorship. The industry is full of people willing to share their knowledge and experiences. By expanding your network, you can learn efficiently, gain valuable insights, and save time. Additionally, having a strong network can lead to ideas and opportunities being shared, increasing the potential for success. Remember, it's impossible to know everything, and the value of building relationships cannot be overstated.
Small, growing profitable companies outperform larger ones: Institutional investors are starting to invest in small, growing companies, indicating a potential bull market for microcaps. Finding promising small companies before they reach $100M market cap can lead to significant future returns.
The small and growing profitable companies within the smaller market have outperformed the larger companies in the last two years, despite the overall poor performance of small companies. Institutional investors are starting to take notice and capital is beginning to flow into these companies, indicating a potential euphoric bull market for small and growing microcap companies. However, the market for money-losing small companies is expected to improve as well, with an increase in IPOs and financing, which could lead to significant growth in that sector as well. Despite the lack of significant capital influx in the past two years, small companies with promising businesses and low valuations have continued to generate strong returns. Institutional investors typically focus on companies with a market cap of around $100 million, so finding and investing in small, growing companies before they reach that size can lead to significant returns in the future. The sentiment in the market can also impact the timeline for these companies to be discovered by institutional investors.
Institutional discovery cycle drives stock price growth: Institutional investors' discovery and investment in a stock can lead to significant price increases. However, this cycle can take time and depends on market conditions, liquidity, and availability of capital.
The institutional discovery cycle is a significant driver of share price growth in the stock market. This cycle occurs when institutional investors, who manage a large amount of capital, discover and invest in a particular stock. The impact of their investment can lead to a significant increase in the stock's price. However, this cycle can take time to occur, as it depends on various factors such as market conditions, the liquidity of the stock, and the availability of capital for institutional investors. Currently, there is less institutional capital flowing into small cap stocks due to market conditions and regulatory issues, but when this changes, it could lead to a surge in demand and price increases for these stocks. Despite the current challenges in finding new investment opportunities, those that are currently held are still considered good opportunities due to their potential for significant price growth once the institutional discovery cycle takes effect.
Sudden influx of investment can significantly drive up share prices for small companies: Small cap investor Paul Andreola shares insight on how investment funds can drive up share prices for promising small companies, emphasizing the importance of consulting professionals before making investment decisions.
As small companies reach inflection points and begin to show promising growth, they can attract a flood of interest from investment funds. This sudden influx of investment can significantly drive up share prices. Paul Andreola, a small cap investor and founder of Small Cap Discoveries, shared this insight during a recent interview. He also mentioned that interested listeners can learn more about him and his services at smallcapdiscovery.com, or follow him on Twitter @PaulAndreola. Remember, before making any investment decisions, it's important to consult with a professional. This information is for entertainment purposes only. To access show notes and courses, visit theinvestorspodcast.com. Follow us on TikTok, Instagram, LinkedIn, and YouTube under theinvestorspodcastnetwork. This show is copyrighted by the Investors Podcast Network. Permissions must be granted before syndication or rebroadcasting.
