When making assessment of how investable a microcap stock is, I consider the following aspects:
Management: Basically the entire company’s prospects rests on how good the management is in execution. Here we’re not talking about just qualification and experience and track record but more importantly MINDSET. Mindset to steer the company well in the long run, look after shareholders’ interests well (put interest and welfare of shareholders ahead of themselves). A good indication is how much they pay themselves in salaries and share compensation and organisation structure relative to the size of the company. If your CEO has the Nasdaq mindset, you may think they have broad vision but they could be just spending your money lavishly without real accountability.
Value Proposition & Market Potential – What value proposition does your company’s products and services provide- how does it help improve something? Value proposition must be unique, help reduce costs or improve businesses at a price or cost customers are willing to pay relative to other offerings in the market place. Does it have global reach and a large global addressable market? Does the service or product need to be customised in each market or readily capable of being sold ‘as is’ wherever globally. What does access to global markets hinge on- e.g approvals, local market factors – how is your company’s products or services uniquely placed to penetrate global markets? What is the track record thus far? What market segmentation strategy- it can’t be for all things.
Competitive Landscape – Most often overlooked consideration because every shareholder likes to think their company’s products/services are novel and offers unique value proposition [ management sells your that in their Powerpoint ] when in reality there are many others in the world trying to do the same thing, maybe with a different angle. Especially those selling HR, delivery and energy solutions. Is your company a fairly new entrant into a saturated market?
Revenue Model– This is important because generating revenue is the first sign of how quickly you can develop the business. What is revenue size per customer? If it is a few hundred or even a thousand per purchase, they would need many customers. Getting many customers is more difficult and less successful than having an anchor large customer with a multimillion offtake (that’s what makes Appen successful). How repeatable is the revenue? For instance once Catapult signs a club and paying subscription for its wearables, unless the club elects to cancel usage, it is an annuity recurring subscription revenue and Catapult sales people won’t need to constantly solicit more customers- it is often called sticky revenue. But how often would you buy smart lighting? How long does it take to close a sale? If the adoption of your service or product is subject to lengthy trials or pilots the likes of Flamingo AI (FGO), Yojee (YOJ) or Buddy Platform (BUD), time is ticking, cash is being used up. Get Swift would get their customers on pilot trials but start booking revenues. And you have to consider churn rates in these adoption- LIFX (BUD’s acquisition) gives money back if you are not satisfied, similar I won’t be surprised LVT (Livetiles) also include them in their ARR calculations
Gross Profit Margin- this is what the company gets from its sales after netting off cost of sales before accounting for overheads. If you are in the tech business, GP margin has to be high. Low GP margins are associated with retail business. Hence this is where LIFX (BUD) low margin (27%) smart lighting business is at. Compare against PME’s 95%.
Expenses run rate- this shows whether management controls its business expenses well. Companies like LVT, BUD, FGO hire expensive staff, fancy offices and large marketing expenses. A company like PME has is HQ in modest Richmond, unlike Livetiles which have theirs in Chelsea neighbourhood in New York.
Cash in Hand – Cash is the life blood. A company can generate revenues but can be unprofitable or can be profitable and yet have negative cashflows. If cash in hand is low and/or company utilises cash at a fast pace relative to income generation, you should expect more CR (capital raising) in the pipeline.
Share base– How big is the share base? Most retail shareholders only look at the price. A company can be having a 2c share price but have 10 billion shares and be worth $200million is no cheaper than a company with a $2 share price with 100 million shares. A bloated share base usually makes it harder for the sp to increase at a quicker pace. A company with a small share base and tight register , i.e low quantity of shares floating can rise much faster (and equally the other way around).
Risks – regulatory risks [ does nature of the company’s products/services subject to regulatory risks or change in Government policies] , liquidity risks [ does the company’s shares have high liquidity risks, i.e you cant sell when there is no buyer] , jurisdiction risk [ is your company operation in a hostile country or country that has a high jurisdiction risk]
Market Cap relative to state of business progress
This is my own benchmark if you follow me on this thread. Some companies have higher market cap than others relative to their state of business progress. So a company like FBR Fastbrick Robotics can command a market cap of $160m without yet having proven adoption of its products/services (generating no revenue) suggests that its market cap is ahead of its progress to date compared to Catapult with a market cap of $145m with proven global market clientele and a $86m annual revenue, demonstrate a large disconnect.
