The Security Analysis Podcast

The Mikro Cap: Global Micro Cap Investing

Wed May 15 2024

microcap investingvalue investingstock analysisilliquiditydownside protectionglobal investingpotential sale

Description

This episode covers various aspects of microcap investing, including insights from experienced investors, strategies for success, and potential investment opportunities. Topics discussed include the journey into investing, factors contributing to investing success, investing in microcap stocks, strategies for microcap investing, key insights on investing, and the potential sale of Paramount. The episode provides valuable information for both novice and experienced investors interested in microcap stocks.

Insights

Investing success is determined by where you do your investing work and the analysis you conduct.

Jeff Gannon's work offers comprehensive insights into various topics and industries, making it valuable for stock picking and investing.

Illiquidity in microcap stocks can provide an analytical edge and help avoid intense competition in the market.

Focusing on illiquidity involves considering factors like low free float adjusted market cap and low share turnover.

Low beta and low turnover stocks indicate less impact by market flows, making them attractive for stable performance.

Focus on minimizing downside risk and buying with a margin of safety to tilt odds in favor.

Paramount investment case based on potential asset value and possible sale, not fundamental analysis

Private valuations estimate that Paramount could be sold for three to five times its current price.

Summary

Transcript

David's Journey into Investing

00:04 - 07:24

David, a microcap investor from Croatia, shares his journey into investing starting at a young age.
He gravitated towards value investing and focused on analyzing businesses rather than trading or shorting stocks.
Initially, David struggled with finding great businesses in the larger cap space and later shifted his focus to smaller companies with high potential.
David's major investing influences include Joel Greenblatt, Warren Buffett, and Devganon.
Lessons learned from Joel Greenblatt include estimating normalized earnings and focusing on less explored parts of the market like spinoffs and microcaps.

Investing Success Factors

06:55 - 14:13

Investing success is determined by where you do your investing work and the analysis you conduct.
Jeff Gannon's work offers comprehensive insights into various topics and industries, making it valuable for stock picking and investing.
Stephen Christ emphasizes the importance of finding opportunities where a lot has to go wrong to lose money, rather than betting on great businesses at high prices.
Illiquidity in microcap stocks can provide an analytical edge and help avoid intense competition in the market.
Focusing on illiquidity involves considering factors like low free float adjusted market cap and low share turnover.

Investing in Microcap Stocks

13:58 - 21:24

The speaker prefers investing in stocks under 100 million with low share turnover, low beta, and low institutional ownership.
They avoid stocks with many mentions on Twitter, high institutional ownership, analyst reports, and those not reporting in English.
Preference for secondary stock exchanges and companies with ugly investor relations that are overlooked by analysts.
High insider ownership is preferred to ensure management alignment but can be risky if mismanaged.
Focus on stocks with low turnover as an indicator of illiquidity and less volatility in microcaps.
Low beta stocks are favored as they are less impacted by market flows.

Investing Strategies for Microcaps

20:55 - 28:52

Low beta and low turnover stocks indicate less impact by market flows, making them attractive for stable performance.
Focus on minimizing downside risk and buying with a margin of safety to tilt odds in favor.
Preference for undervalued stocks below 15 times earnings, aiming for value over growth at higher multiples.
Emphasis on downside protection through cheap and neglected microcap stocks with potential for multiple expansion.
Valuation criteria include asset value, low PEs, and dividend yield as forms of downside protection.
Portfolio typically consists of 5 to 10 positions with top three holdings comprising a significant portion of the portfolio.
Global investing approach involves seeking opportunities in countries with undervalued markets and small-cap companies while avoiding dictatorships or communist regimes.

Insights on Investing

28:28 - 35:37

Investing in certified democracies and capitalistic economies, avoiding dictators and communists
Using Twitter for idea generation in investing, following good investors and looking out for groupthink
Importance of strong capital allocation by management teams for long-term success in investing
Paramount investment case based on potential asset value and possible sale, not fundamental analysis

Potential Sale of Paramount

35:21 - 42:10

Sherry Redstone, the controlling shareholder of Paramount, shows indications of selling the company.
Changes at Paramount, like a Golden Parachute package for CEO Bob Bakish and dropping dividends, suggest a potential sale.
Warren Buffett's investment banker is involved in financing Sherry for a possible sale of Paramount.
Private valuations estimate that Paramount could be sold for three to five times its current price.
Recent offers for Paramount include $21.5 per share and an $11 billion bid for the studio alone.
Speculation suggests Paramount may be acquired or sold in parts within one to two years at a higher price.
Lessons learned from investing in Big Lots highlight the importance of management competency in retail industries.