Its Over, page-17

Small Caps Revisited
Those who followed my posts would recall that I had mentioned two things in relation to small caps. One, that I’m generally wary about smallcaps when they reach a valuation in excess of $100m with minimal revenues despite all the potential the stock may well have and second, always track the Mcap/Revenue ratio to determine its continued under or over valuation.

Take the example of once market darling EDE. In early Feb 2017 when it was a popular stock when it broke into the Georgia market with its concrete technology (which is great), it had a market cap of $380m (sp=$0.30) and reached a high of 36c. 4C quarterly showed cash receipts of $394k. One year later now, market cap has dropped by 57% to $164m after posting quarterly 4C cash receipts of just $225k. One year on, the traction is not great. It is taking longer than everyone anticipated and a more pumped up infrastructure spending under Trump administration is what holders can look forward to.

My example is not having a go at EDE but to illustrate that for small caps, the risks grow significantly when it trades above $100m especially where there’s no revenue to boot. The warning signs are there if your management starts issuing more CR (cash calls) and more options/performance shares to themselves that further dilutes shareholders and bloats the capital base. In reality, gaining penetration into a market requires a lot more time than holders want to believe; sales and distribution takes a significant time to gain traction – hiring, training, solicitation process, trials and testing, modest rollouts with small revenues to begin with. Understanding and questioning the revenue construct, deal sizes and competitive environment also helps provide a better perspective on how quick their revenues can be scalable