Investing in low P/E nano caps

[LC]

I personally like the sub-300mm market...I just find I can actually understand the numbers in real business terms, whereas with huge megacaps, the numbers are so large that I find it difficult to make a business connection.

[Palantir]

I think you need to own diversified baskets of nanocaps because in many cases these are just mediocre businesses trading at discount to IV, and your call is primarily driven by valuation and not business quality. You don't want too much specific risk. The other problem with nanocaps is that without a catalyst they can remain undervalued for ages, and if you're diversified, you're not dependent on one stock. On the other hand if you know a firm pretty deeply and are willing to stomach large declines, maybe a concentrated position could be good.

 

That being said, my perspective is different from others, I don't buy into the idea of "buy cheap and pray it works out", I'm more of a "moat" investor who finds large and mega caps easier to understand.

[Kraven]

I think you need to own diversified baskets of nanocaps because in many cases these are just mediocre businesses trading at discount to IV, and your call is primarily driven by valuation and not business quality. You don't want too much specific risk. The other problem with nanocaps is that without a catalyst they can remain undervalued for ages, and if you're diversified, you're not dependent on one stock. On the other hand if you know a firm pretty deeply and are willing to stomach large declines, maybe a concentrated position could be good.

 

That being said, my perspective is different from others, I don't buy into the idea of "buy cheap and pray it works out", I'm more of a "moat" investor who finds large and mega caps easier to understand.

 

I've always thought Graham and Schloss had no idea what they were doing. No way that stocks primarily driven by valuation work out.

[DTEJD1997]

Guys:

 

I'm looking to buy "nano-caps" that have crossed a threshold in valuation...I'm not talking about buying at 8 P/E hoping it goes to 10.  I'm talking about buying a 2 P/E and just wait & see what happens.  Heck, I'll take these companies private if I had enough capital and could get the shares....

 

Most nano-caps are ALWAYS going to be cheap.  From time to time, they might break out, but that is not what I'm looking for.

 

I'm going to posit that CASA is not really that good a business.  It is not terrible, but certainly not GOOD.  They have not made acceptable returns on capital for a long time...BUT they are making money.  I bought my initial position at $.45/share.  That equates to about 20% of book value.  A price to sales ratio of about .03.  E/V to cash flow of about .75.  The market cap of the company was about 1.5 million.  This is for a restaurant company that has $70MM in sales and about 55 locations.

 

Let us assume this is not a GOOD business, but a SO-SO business.  They usually make money, but usually not a lot...say maybe a NET MARGIN of 1% or 2% on sales.  That would result in a return on equity of maybe high single digits, say 7% or 8% ROE in good times.

 

I got in CHEAP, but CASA got even cheaper later on...

 

So I guess it boils down to as long as you don't buy a BAD business, and you get in cheap enough, you are going to do well.

 

In the past 4 years I have seen NUMEROUS occasions where the valuations are so out of whack with nano-caps, that a knowledgeable, patient investor is going to make well above average returns. 

 

It does not matter what the market does, it does not depend on moats or quality of the business....It just depends on you being able to get into these situations at the right price/valuation.

 

Am I right?

[Packer16]

This will work as long you do not have an abusive management that is looking out for number one.  This is analogous to minority shareholder in a privately held business getting no dividends and the owner take money out of the firm for his family.  Like you say these nano can stay cheap for a long time that is why I focus on one step up (small caps).  If these firms grow then they can appear on institutions radar.

 

Packer

[bonechip1]

biaggio,

 

I agree with most of what's been said.  I think Phil Fisher in one of his books recommended not putting more than 5% of a portfolio in any one of these types of small companies.  I have gone more concentrated than this in higher conviction ideas, but it is rare that I go higher than 8-10% at cost as I have been wrong on high conviction picks before.  It is just not in my nature to get any more concentrated than this. I usually hold 30 or 40 positions, but I'll often have 50-60% of my portfolio in the top 5 positions, but some of that concentration would be due to appreciation of positions.  I'll have a number of 1-4% holdings - usually they are farm team positions where i am getting comfortable with the companies and management.  Currently I am less concentrated than normal (40% in top 5 positions), but in the past, I have let single positions ride to as high as 35% of the portfolio, but that has only happened twice in 13 years. 

 

I would define nanocaps as sub $50 million market cap and microcaps as between $50 m and $300 m.  The majority of my holdings at time of initial purchase would be nanocaps or at the lower end of the microcap spectrum.  As the portfolio grows it makes it more difficult to move the needle with sub-$10 million market cap positions but it can still be done if one is patient.  My top 3 positions currently are $120 m, $3.5 m and $17 m market cap companies.

 

Chip

 

[oddballstocks]

... I'm more of a "moat" investor who finds large and mega caps easier to understand.

 

I take it you've never worked at a large cap have you?  I've worked at a few, friends working at others, simple to understand is a far cry from the truth.  At a smaller company you have a foggy chance of at least coming close to understanding a company's motivations.  At a large cap you have fiefdoms and a ton of people all motivated by who knows what working against each other.

 

Large caps have inertia which isn't to be under-rated.  The have this slow moving momentum and brand power where they are almost invincible.  They can do anything and people still continue to use them because they're just so big.

 

I have a client (large cap but non-traded) where the CEO was more focused on having an affair then running the company.  He got into a brawl with the mistress' husband accusing the mistress of cheating on him with her husband (yes try to figure that out), he told police if they hadn't arrived so quickly he would have killed them.  Yet business has been unaffected, no harm, he resigned and things move on.  That would be a death blow to a small company, to a large company it's not even a minor knick. 

[oddballstocks]

Guys:

 

I'm looking to buy "nano-caps" that have crossed a threshold in valuation...I'm not talking about buying at 8 P/E hoping it goes to 10.  I'm talking about buying a 2 P/E and just wait & see what happens.  Heck, I'll take these companies private if I had enough capital and could get the shares....

 

Most nano-caps are ALWAYS going to be cheap.  From time to time, they might break out, but that is not what I'm looking for.

 

I'm going to posit that CASA is not really that good a business.  It is not terrible, but certainly not GOOD.  They have not made acceptable returns on capital for a long time...BUT they are making money.  I bought my initial position at $.45/share.  That equates to about 20% of book value.  A price to sales ratio of about .03.  E/V to cash flow of about .75.  The market cap of the company was about 1.5 million.  This is for a restaurant company that has $70MM in sales and about 55 locations.

 

Let us assume this is not a GOOD business, but a SO-SO business.  They usually make money, but usually not a lot...say maybe a NET MARGIN of 1% or 2% on sales.  That would result in a return on equity of maybe high single digits, say 7% or 8% ROE in good times.

 

I got in CHEAP, but CASA got even cheaper later on...

 

So I guess it boils down to as long as you don't buy a BAD business, and you get in cheap enough, you are going to do well.

 

In the past 4 years I have seen NUMEROUS occasions where the valuations are so out of whack with nano-caps, that a knowledgeable, patient investor is going to make well above average returns. 

 

It does not matter what the market does, it does not depend on moats or quality of the business....It just depends on you being able to get into these situations at the right price/valuation.

 

Am I right?

 

I think you're correct, let's be honest with ourselves, most businesses are not good businesses.  Most public companies are not good businesses, most private ones aren't either.  They all fill a need, some need, and if they don't they don't survive.  Recognizing that maybe 10% of all companies are truly good businesses is a relief, it means we're not hunting for a needle, accepting that we're just dealing with standard hay is easy.  If we happen to come across a needle while dealing with hay that's great, but it's never the expectation.

 

Gross undervaluations are where money is made in my view.  The P/E 2x companies, or the ones selling at 40% of NCAV/BV.  I think turnarounds are a slight twist on this as well, these are companies that an investor can see looking out are trading at 2x earnings but the market doesn't get it yet.  Turnarounds are tricker, I go with the easy stuff.

 

CASA is a perfect example, I never purchased, I regret it.  I was too worried about what the true value of their equity is worth, but I missed seeing how cheap they are through that.  They have a number of restaurants, and if they're just average they're worth more than $1.5m-2m.

 

I like how in some cases management will be very frank about the undervaluation.  A company I recently invested in had a great line in the annual report.  The CEO stated that he was disregarding the advice of his lawyers and wanted shareholders to understand that at the time of his letter they were trading at 50% of BV, and BV is something extremely tangible.  He then continued saying that he is positive the company is worth more than book value given their profitability and future prospects.  The company is small, investors don't seem to care, so I have shares of a company trading at 50% of BV, and 3x earnings, I'm fine being patient with it, at least the CEO and I see eye to eye on valuation.

 

Packer has a great point, avoid companies where management is working to fill their pockets at the expense of shareholder pockets.  I am aware of a company like this where employees at the company understand it's the CEO's goal to enrich himself any way possible.  The company is trading for less than 1x earnings, and well below 50% of NCAV.  If the CEO were to leave I'd buy in large, but they recently re-incorporated in Ohio, a state who's courts are famous for siding with entrenched management no matter how egregious their actions are.  I have a $200 position, it is enough for the annual reports, it will remain that small unless the CEO goes.  Sometimes it's not the whole management team that's bad, at this company it's just the CEO, even the CFO hates him, but they're powerless to get rid of him.  The CEO is the only problem at this place, other places it's the whole culture.  Inquiring minds might want to know how I can speak about this…scuttlebutt….methods have been posted all over this forum extensively, use wisely.

 

As for how many holdings?  I don't know, I'd say at least one.  I mean if you're considering buying a corner car wash it might provide a nice income, but it would essentially be a nano-cap.  I don't think in that situation it would be foolish and that someone should have say five car washes or tiny companies to be "safe".  Yet someone buying stakes in companies spread across the country or the world is in a different position.  In that case I'd say maybe 10-15 positions as a minimum.  I will buy whatever I find that fits my criteria, has a margin of safety and is cheap enough.  My criteria is simple, my limit is my capital, I'm more capital constrained than idea constrained.

[hyten1]

guys i am making a generalizations here, one of my concern with many of these micro caps are vol

 

there is hardly any vol, to build any decent size position is nearly impossible (or take a very long time), and i am concern about that

 

in case you need to liquidate for whatever reason it will take as long as it took to build the position (sometimes months)

 

many at 1k to 2k share trade per day, it very illiquid

[oddballstocks]

guys i am making a generalizations here, one of my concern with many of these micro caps are vol

 

there is hardly any vol, to build any decent size position is nearly impossible (or take a very long time), and i am concern about that

 

in case you need to liquidate for whatever reason it will take as long as it took to build the position (sometimes months)

 

many at 1k to 2k share trade per day, it very illiquid

 

This is probably the most legitimate argument against these small stocks.  If you have 10s of millions of dollars it might be hard to get in and out quickly.  Here are two thoughts, first off the volume you see on quote pages isn't accurate, it's extremely understated.  I've had many days where I get substantial fills and the stock shows 0 shares traded.  Talk to a market maker to get the true volume on these things.

 

Second if you have some serious money and you really want to get into the space you will probably need to buy blocks from existing shareholders.  Often these companies have shareholders looking to dump blocks.  They see no volume and want out, so they might have a standing order to unload so many shares at a given price.  You'll never find this out without talking to someone who makes a market in the stock.

 

So in summary, there's a lot of information flow that we as outside investors never see.  If you can connect with someone who has a toe in the water things don't look as bad.  As for being able to liquidate, Paul Sonkin's Hummingbird Value fund owned a substantial position in SPRS for a while.  They unloaded the entire thing in less than a week without moving the price, so it's possible to liquidate at good prices and quickly, unfortunately it won't happen by clicking around on E*Trade or Fidelity from home.

[Palantir]

 

Large caps have inertia which isn't to be under-rated.  The have this slow moving momentum and brand power where they are almost invincible.  They can do anything and people still continue to use them because they're just so big.

.... Yet business has been unaffected, no harm, he resigned and things move on.  That would be a death blow to a small company, to a large company it's not even a minor knick.

 

Your point is not clear to me, what you say is all the more reason for investing in a "large cap". This stability, switching costs, and inertia also gives you tremendous safety when a large cap becomes unloved and misunderstood (MSFT) and out of favor. There are a number of mediocre large caps that continue to print money year after year.

 

I work at a nontraded "micro cap".

[txitxo]

Hey all:

 

Good to finally be a member here...

 

I am starting to refine my strategy of investing in nano-caps.

 

I am looking to invest in incredibly cheap ones based off of earnings & cash flow.

 

In the past couple of years there have been several instances of me getting into nano-caps with P/E's of LESS than 3.  Assuming the business is not flawed or in a crashing terminal decline, I don't see how you can go wrong.

 

A P/E of 1 or 2?  How can that be?  It is very rare, but does happen from time to time.

 

The first example of this is "Mexican Restaurants" (CASA).  It briefly traded at a P/E of just over 1.  Hit a low of $.21/share, with 39 weeks earnings of $.20/share.

 

Another example is "Meritage Hospitality" (MHGU).  This traded as low as $1.25/share in the lat 52 weeks, and is earning $.65/share.

 

Other examples include "Rurban Financial" (RBNF) and many other small community banks.  In RBNF's case, bought at about $2.50/share.  A little over a year later, trading for $9/share and earning $1/share in net earnings.  "True" earnings are even higher than that as they have amortization expenses.  Stock has also started up a dividend again. 

 

RBNF was not the only small community bank that was left for dead by the side of the road...

 

Most of these stocks trade at a significant discount to book value, sometimes tremendously so.  They frequently have issues with them, and are thinly traded.

 

There are a few other examples, but I guess the point I'm trying to make is that if you can take the time to build up your database & knowledge of different stocks, you will see very odd pricing anomalies.  They don't come about as often as I would like, but I'm a small investor with limited capital.

 

I find these things a few times a year, and that is actually more than enough for me, as I have limited funds. 

 

I would think if you can find these companies, it almost does not matter the market does.  The valuations are just so cheap, you have an incredible margin of safety.

 

So in the future, I'm going to be on the watch for more of these things and keep my powder dry so that I'm ready to go when they come about.

 

Anybody have any experience/thoughts about doing this?

 

A typical mistake of people who start to do multiple-based value investing (and I am not saying that's your case) is to think  that, if low P/E stocks overperform the index on average (which they do) it is enough to buy a few of them to make 20% a year. That usually ends in grief. The low P/E is just a "statistical" wind behind your sails. Even if you try to do a serious, Graham & Dodd analysis, there could be many objective reasons why the company is cheap. The owner could be stealing the company away to pay for exotic dancers and you will never know it until the stock tanks. So unless you have Warren Buffet's nose, or an intimate knowledge of the company, almost as good as those of the insiders, I would never, ever hold a concentrated nano-cap portfolio.

 

  So if you are buying low P/E stocks, my advice is to make sure you buy many of them, 20-30 at the very least, and try to include some objective quality indicator to screen out the most suspicious ones. Get one stock every week or every two weeks, for instance, and sell it after a year, that will yield 26-52 stocks/year. Try to diversify by sector, country. Although it is hard to do, once you make sure that the numbers are reliable, try to cherry-pick as little as possible, most of the best things look really ugly for classical value investors (who are  Mr. Market in this niche). By buying more stocks your returns will certainly be lower on average as the overperformance will be diluted. But if you do things right you will certainly beat the market by a few percentage points and you will not blow up. But brace yourself for the volatility, specially if we get into another 2009-like crash.

 

 

[Packer16]

A typical mistake of people who start to do multiple-based value investing (and I am not saying that's your case) is to think  that, if low P/E stocks overperform the index on average (which they do) it is enough to buy a few of them to make 20% a year. That usually ends in grief. The low P/E is just a "statistical" wind behind your sails. Even if you try to do a serious, Graham & Dodd analysis, there could be many objective reasons why the company is cheap. The owner could be stealing the company away to pay for exotic dancers and you will never know it until the stock tanks. So unless you have Warren Buffet's nose, or an intimate knowledge of the company, almost as good as those of the insiders, I would never, ever hold a concentrated nano-cap portfolio.

 

  So if you are buying low P/E stocks, my advice is to make sure you buy many of them, 20-30 at the very least, and try to include some objective quality indicator (F-score, etc.) to screen out the most suspicious ones. Get one stock every week or every two weeks, for instance, and sell it after a year, that will yield 26-52 stocks/year. Try to diversify by sector, country. Although it is hard to do, once you make sure that the numbers are reliable, try to cherry-pick as little as possible, most of the best things look really ugly for classical value investors (who are  Mr. Market in this niche). By buying more stocks your returns will certainly be lower on average as the overperformance will be diluted. But if you do things right you will certainly beat the market by a few percentage points and you will not blow up. But brace yourself for the volatility, specially if we get into another 2009-like crash.

 

This is one way to do it but I think by doing this you are sacrificing performance for stability.  In looking at folks who have done this via funds, the most I have seen is an out performance of the index by a few percentage points.  My observation is you need to do something different that others either won't or can't to get performance above the 5% out performance the Graham states as making this whole effort worthwhile.  Looking at and including 26-52 stocks per year for me is impossible.  I could never understand enough of them to get comfortable.  As I see it, the magnitude and location (in term of sector) of mispricings is not very uniform most of the time.  Given  this I try to weight by holdings by where I see the greatest mispricings at any given time.  So in the early 2000's, I was weighted in cable then in the mid 2000's O&G.  After the crash in radio/TV and now I am moving into Banks. 

[SharperDingaan]

Couple of lessons:

 

Treat these investments as infinite long term options; with a 70% chance of a 50% loss or more.  Very small investments (premium), buy on adverse liquidity events, & look them over only once every 6 months or so.

 

Back in the day it was common practice amongst coastal merchants to grub-stake promising outbound ships, in return for a % of the venture (today’s venture capital). IF the premise was good, & captain/ship made it back alive, the backers & community got very wealthy. But it was a no pay - no play venture, & you half expected to never see your money again. You are doing the same thing.

 

Expect your winner to get taken out, & well before it really gets going. What should be a $10 stock might make it to $3-4 (at best), but not much more. The people who know the business will recognize its value & bid for the whole company at an early stage valuation; shareholders will sell because they can exit, & in volume.

 

Act as market maker. Throw out month long 1000 share bids @ 25% discounts, and offers @ 15% premiums. Your cash return will be the offer – bid spread, less 2 commissions, x 3-4 round trips per year. Minimal, but positive.

 

Ultimately you are betting on volatility. All boats rising with the tide, company specific catalysts, etc; but play long enough & you will eventually hit a winner. It’s the Taleb ‘Bar-Bell’ approach, but not executable unless you have patience.

 

The really successful small caps are private companies; they know their niche, do very well thank you, & do not need your money. However, they do need your talent & their owners need to progressively monetize their stake by selling to that talent. You make money by working for these companies; not by buying their public paper. 

 

If you’re a young person, been doing this for a few years, & one of your ships comes in; wouldn’t you want to be ON that captains ship in his next adventure, & not just a tourist holding a lottery ticket in that adventure? 

 

Good luck to you.

 

[infinitee00]

 

 

Gross undervaluations are where money is made in my view.  The P/E 2x companies, or the ones selling at 40% of NCAV/BV.  I think turnarounds are a slight twist on this as well, these are companies that an investor can see looking out are trading at 2x earnings but the market doesn't get it yet.  Turnarounds are tricker, I go with the easy stuff.

 

Great comment and I agree. Although, I feel more comfortable with turnarounds and feel more comfortable loading up than obscure net-nets. Not that there is anything wrong with net net nano-caps but I generally use a basket/diversified approach with them.

 

Inquiring minds might want to know how I can speak about this…scuttlebutt….methods have been posted all over this forum extensively, use wisely.

 

I was wondering the same thing. How can we know the relationship between the CEO and CFO? How can we get inputs from employees about how the company is being run. I generally use Glassdoor for bigger caps but how do you do it for nano caps? Any pointers would be very helpful.

 

 

[infinitee00]

 

This is probably the most legitimate argument against these small stocks.  If you have 10s of millions of dollars it might be hard to get in and out quickly.  Here are two thoughts, first off the volume you see on quote pages isn't accurate, it's extremely understated.  I've had many days where I get substantial fills and the stock shows 0 shares traded.  Talk to a market maker to get the true volume on these things.

.

.

You'll never find this out without talking to someone who makes a market in the stock.

 

 

How do you do talk to the market maker ? Do you call your broker and ask or is there any publicly available information on market makers? What is their motivation in talking to a guy who wants to buy (say) 5,000-10,000 shares of a sub $1 stock? Once you get hold of them what questions can you ask ?

[DTEJD1997]

Hey Guys:

 

I am not sure that what I am typically working with is just a statistical screen.  A lot of these companies don't even show up on the screens, as a lot of them are "dark".  CASA was not showing up on any screens that I was aware of.  You had to go to the company website and drill down a little to get their financial reports.  They were there though, and you could find them if you looked hard enough.  I am sure this happens with hundreds of other companies, heck maybe even thousands.

 

I've managed to do a rather extensive level of research on some of these positions.  For example, I showed up at the last annual meeting of one of these companies.  Management was VERY surprised as I was the first outside shareholder to show up in 10 years!  They wanted to take my picture!  So if I'm the first person to show up in 10 years, not many people are following the company, thus the market's inefficiency in it's pricing & valuation...

 

I think in the case of CASA, there was a very, VERY small chance of impairment of your investment...business was improving, moving from a loss to operating profits.  The bank was being difficult with their line of credit, so CASA paid it down tremendously.  In fact, I think it is LESS than $2MM now.  There is no other significant debt.  So the capital structure was good & improving.  Even after a 4X run up in price, the EV/EBIDTA ratio is now 1.7.

 

Yes, volume & liquidity is certainly a concern.  I have a very limited capital base, so a few thousand dollars profit, while not huge, is worthwhile for me...

 

If I was working with a $50MM account, yes, a 10K profit would not be worth goofing around with, maybe not even $50k....so this is suited more for individuals & the smallest funds.

 

I would very much shy away from a company where management is trying to steal it away.  Business is difficult enough, why be involved with one where people are actively working against you?  There is one possible exception to this, where the market cap of the company was (at one point) only $70k vs. $30MM in sales.  It was also selling for about 4% of book value.  That is the only time I've seen a company with hostile management, where it MIGHT have been worth taking a position in.  The risk/reward ratio was just so skewed in favor of the investor, even with the hurdles...

 

It is only with the advent of the "interweb", that I've become aware of the odd valuation levels for some of these nano-caps.    I'm talking about excellent places such as "Ragnar is a Pirate", Oddball Stocks, OTC Adventures and a couple of others.  Now that I know these situations exist, I'm working to uncover others...

 

 

 

 

[SharperDingaan]

The attraction of a nano- cap is the low price, large number of shares for an investment of $X, & a multi-bagger payoff if it works out.  For most investors it is part of the learning process, & usually not a success.

 

To speed up your learning you might want to consider the bigger, & more established companies. Consider a $1,000 gross investment in NBG:US  (National Bank of Greece), followed by second $1,000 investment 3 months after recapitalization (if there is one). NBG  ADR`s trade on the NYSE for $.89; 3 months ago they were $1.80. The major changes in those 3 months have been a stalled recapitalization (of which FFH is a participant) & the collapse of the Cypriot banks.  http://web.tmxmoney.com/quote.php?qm_symbol=NBG:US.

 

A real company, that a known value investor has been tyre kicking, with possibly a 1.5B investment (or more). No liquidity issues, a little better than two guys and an `idea` dressed up in a marketing pitch, & a straight up investment thesis; Greece cannot survive without at least a semi-public NBG. Bush league or real practice; where is your $2,000 tuition fee likely to give you the better bang for the buck?

 

Re disclosure: We do not hold a position in NBG, we refer to NBG only for illustrative reference, & we are not advising a purchase. The choice to pursue NBG further is entirely your own decision.

 

 

[DTEJD1997]

The attraction of a nano- cap is the low price, large number of shares for an investment of $X, & a multi-bagger payoff if it works out.  For most investors it is part of the learning process, & usually not a success.

 

To speed up your learning you might want to consider the bigger, & more established companies. Consider a $1,000 gross investment in NBG:US  (National Bank of Greece), followed by second $1,000 investment 3 months after recapitalization (if there is one). NBG  ADR`s trade on the NYSE for $.89; 3 months ago they were $1.80. The major changes in those 3 months have been a stalled recapitalization (of which FFH is a participant) & the collapse of the Cypriot banks.  http://web.tmxmoney.com/quote.php?qm_symbol=NBG:US.

 

A real company, that a known value investor has been tyre kicking, with possibly a 1.5B investment (or more). No liquidity issues, a little better than two guys and an `idea` dressed up in a marketing pitch, & a straight up investment thesis; Greece cannot survive without at least a semi-public NBG. Bush league or real practice; where is your $2,000 tuition fee likely to give you the better bang for the buck?

 

Re disclosure: We do not hold a position in NBG, we refer to NBG only for illustrative reference, & we are not advising a purchase. The choice to pursue NBG further is entirely your own decision.

 

Thanks for the tip, I'll take a lot at NBG maybe later tonight.

 

I was investigate the Greek scene a while back, and the best one I could think of was GOFPY.  I took an initial position in (which I am underwater), and then took a second larger position in the very low 3's.  I will take yet ANOTHER position if it goes back down into the low 3's. 

 

NBG sounds awfully speculative, GOFPY is making money even through all this mess, with a P/E of 4.  It pays a good dividend, which surely will be raised if things ever stabilize.  Of course, there are some issues with it, namely being Greek.  They also face internet competition and continuing lawsuits from other European operators over their monopoly status.  All of that is priced in I think though...

 

Do you have any suggestions of potential investments in Greece?

 

TIA

[mcliu]

Is there a tool that you can use to screen for OTC stocks?

[Hielko]

The attraction of a nano- cap is the low price, large number of shares for an investment of $X, & a multi-bagger payoff if it works out.  For most investors it is part of the learning process, & usually not a success.

 

To speed up your learning you might want to consider the bigger, & more established companies.

If someone is attracted to nanocaps for the reasons you listed above they probably should start with more established companies, but that's because I think they are all bad reasons for an investment. And it's easier to buy a terrible nanocap investment than to invest in a more established company.

 

But I think investing in nanocaps is actually easier than investing in more established companies. They are

 

1. Often less complex to understand

2. You are not competing with smart money with a lot of resources

 

I haven't looked at NBG, but analyzing the balance sheet and earnings potential of a bank is way more complicated than looking at a 'classic' small manufacturing company that could be a text-book example of a balance sheet with PPE, Inventory, receivables et cetera. It's easier to know everything there is to know about for example Solitron than NBG. I'm pretty confident that I know basically everything there is to know about Solitron, and I also know what I don't know, and I'm pretty sure that's stuff that other outside investors also don't know. With NBG there are probably people out there that will know more about what assets the bank exactly owns and how much it's worth and/or people might know more about political risks, and other issues I haven't even thought about. Doesn't mean you shouldn't invest in NBG, but the hurdle you need to clear is IMO higher: it will take more work to get your knowledge to a sufficient level/it needs be cheaper.

 

When you invest in bigger companies the probability that you are trading against someone who has insight that you don't have is getting increasingly bigger. The only reason that I have invested a lot in various small caps is because I think it's probably the easiest way to get an edge. And since I don't have a lot of money there isn't a lot of reason to try to compete in a more efficient part of the market.

[txitxo]

 

This is one way to do it but I think by doing this you are sacrificing performance for stability.  In looking at folks who have done this via funds, the most I have seen is an out performance of the index by a few percentage points.  My observation is you need to do something different that others either won't or can't to get performance above the 5% out performance the Graham states as making this whole effort worthwhile.  Looking at and including 26-52 stocks per year for me is impossible.  I could never understand enough of them to get comfortable.  As I see it, the magnitude and location (in term of sector) of mispricings is not very uniform most of the time.  Given  this I try to weight by holdings by where I see the greatest mispricings at any given time.  So in the early 2000's, I was weighted in cable then in the mid 2000's O&G.  After the crash in radio/TV and now I am moving into Banks.

 

  Well, if you run a mutual fund, you'll have trouble investing into only 25-50 nanocaps, you'll probably have to buy many more stocks, perhaps hundreds, in which case you will only beat the indexes by a few percent with something as simple as low P/E + capitalization. Markets do tend to be efficient. Most of the overperformance is concentrated on a few stocks at the bottom. 

[Tim Eriksen]

The attraction of a nano- cap is the low price, large number of shares for an investment of $X, & a multi-bagger payoff if it works out.  For most investors it is part of the learning process, & usually not a success.

 

To speed up your learning you might want to consider the bigger, & more established companies.

If someone is attracted to nanocaps for the reasons you listed above they probably should start with more established companies, but that's because I think they are all bad reasons for an investment. And it's easier to buy a terrible nanocap investment than to invest in a more established company.

 

But I think investing in nanocaps is actually easier than investing in more established companies. They are

 

1. Often less complex to understand

2. You are not competing with smart money with a lot of resources

 

I haven't looked at NBG, but analyzing the balance sheet and earnings potential of a bank is way more complicated than looking at a 'classic' small manufacturing company that could be a text-book example of a balance sheet with PPE, Inventory, receivables et cetera. It's easier to know everything there is to know about for example Solitron than NBG. I'm pretty confident that I know basically everything there is to know about Solitron, and I also know what I don't know, and I'm pretty sure that's stuff that other outside investors also don't know. With NBG there are probably people out there that will know more about what assets the bank exactly owns and how much it's worth and/or people might know more about political risks, and other issues I haven't even thought about. Doesn't mean you shouldn't invest in NBG, but the hurdle you need to clear is IMO higher: it will take more work to get your knowledge to a sufficient level/it needs be cheaper.

 

When you invest in bigger companies the probability that you are trading against someone who has insight that you don't have is getting increasingly bigger. The only reason that I have invested a lot in various small caps is because I think it's probably the easiest way to get an edge. And since I don't have a lot of money there isn't a lot of reason to try to compete in a more efficient part of the market.

 

Couple of thoughts.  First - it is important to distinguish between quality nano caps and speculative companies.  Those who are pointing out the risks are neglecting to note the potential.  There is a reason Buffett says he can generate 50% returns on $1 million.  He would be in nano caps not mega caps.  None of us are Buffett but we can do the same on a lesser scale.  Second - if you are not comfortable investing in nano caps don't.  Third - liquidity is a concern but Buffett did quite well in illiquid stocks like Sanborn Map and Dempster Mill in the early years.  The key is knowing when you can get stuck and when you most likely will not.  Fourth - the simplicity factor and the potential to have superior knowledge are very important. 

 

Here is an example in asset managers.  Would you rather own Gamco (GBL) a 1.3 billion market cap with an 18 trailing P/E managing 36 billion, or Teton Advisors (TETAA) a 20 million market with a 13 P/E managing $1.3 billion.  Some would rather pay a higher valuation for the liquidity and stability of a larger company.  I prefer the smaller company at the lower valuation that is growing faster and is much more likely to continue to grow faster.  A few weeks back the bid on TETAA was $20 and the ask was $90 a share.  A week later there were thousands of shares trading under $20.  I can either be a slave to liquidity or use it to my advantage.  I am not looking at a six month time frame.  I am looking at a six year time frame.   

 

I purposely chose this pairing since the ownership is the same.  GBL spun TETAA off in 2009 thus there really is little difference in management.  You do have know if management is working for you or for themselves.  When you find them working for you and a low valuation, that is when you need to dig deeper.  (I would also note that I would rather have Mario Gabelli as a shareholder than as a manager since he seems to look out for himself). 

[chmith]

So in summary, there's a lot of information flow that we as outside investors never see.  If you can connect with someone who has a toe in the water things don't look as bad.  As for being able to liquidate, Paul Sonkin's Hummingbird Value fund owned a substantial position in SPRS for a while.  They unloaded the entire thing in less than a week without moving the price, so it's possible to liquidate at good prices and quickly, unfortunately it won't happen by clicking around on E*Trade or Fidelity from home.

 

A bit off topic, but did you look into SPRS yourself? Clearly not a perfect business, no real growth prospects and will probably fade and die eventually, but could be ten years away or more. Also, they don't seem keen on paying out any of the cash on hand, but the fact remains, it's very cheap..

[CorpRaider]

 

 

 

"Not to derail this into a discussion on taxes, but I'm not sure the advantage is as great as expected.

 

In the US an IRA is tax deductible when someone contributes but all withdrawals are taxed as normal rates.  So if I'm in the 25% tax bracket now and when I'm old and gray I'm in the 15% tax bracket it works out.  A Roth IRA is after tax money now, but everything grows tax free, and all withdrawals are tax free.  So the Roth works better in theory is one is in a low bracket now and expects to be in a higher one later, or if they think taxes will rise.

 

Then there's the whole taxable account issue.  A taxable account isn't terrible if you buy a stock and hold it for more than a year, then taxes are 15% on that holding, a capital gain tax.

 

So let's assume with a company that you buy it and have to hold it 15 years before it pops.  You invest $1000 today, and in 15 years can withdrawal from an IRA.  The stock sells for $3k which is about 13% a year:

 

The person is in a 25% bracket when they start and when they quit.

 

Traditional IRA: $1000 contributed from $1000 in earnings.  Sell at $3000 and pay 25% on $3000 for a net gain of $2250.

Roth: $1000 invested, but $1333 earned to contribute the $1000.  Sell at $3000, no tax, net gain of $2667

Taxable: $1000 invested, but $1333 earned to contribute: Sell at $3000, 15% capital gain tax, net gain of $2217

 

Buying and holding in taxable is almost equal to the traditional IRA, clearly the Roth is the best deal going.  But given the choice of a taxable with a long holding period, and a traditional IRA (or whatever it's called up there) I would go with the taxable if you intend to hold a long time and you have more options.  The tax hit isn't terrible all things equal."

 

 

Oddball,

 

Its probably not material for you, but in an effort to sort of try and return the favor of your many interesting contributions on investment ideas, let me suggest that you revisit the IRA versus Roth analysis.  It seems to me you are favoring the Roth in your analysis by "grossing up" the pre-tax contribution so that the after tax invested amount equals the pre-tax invested amount in the traditional IRA.  If the tax rates are the same at the time of contribution and the time of withdrawal then there should be no advantage to either of these accounts due to the transitive property of equality (i.e. (1 x 3) x .75 = (1 x .75) x 3).