Value Creation In Microcaps Through Constructive Activism

We believe microcap stocks are an attractive asset class offering the opportunity to deliver outsized returns to investors and that they should be an important part of a diversified investment portfolio.

Made up of approximately 4,500 companies with market capitalizations of less than $250 million, microcaps are an underestimated and overlooked slice of the investment pie. They have small floats and low trading volume, which makes investing large amounts of capital practically impossible for funds with larger asset bases.

While most microcaps are listed on a national exchange such as the NASDAQ or NYSE, some companies trade over the counter, or OTC. For many funds and brokers, internal rules limit the ability to invest in stocks that do not have up-to-date financial statements, are not listed on a national exchange, and/or have stock prices that trade below $5 per share.

In short, the number of investor eyeballs digging into the businesses, financial statements and other important aspects of these microcap companies are significantly less than of companies with larger market capitalizations.

The same is true on the bank analyst side. Nearly 75% of companies in the microcap space are followed by fewer than three analysts. Our experience suggests that a vast majority of these names are not covered by any analyst. Why? The majority of analysts and institutional investors are simply unable to spend the requisite time to familiarize themselves with these opportunities due to position size limitations, liquidity restrictions, and overall capacity constraints.

This dynamic creates a compelling opportunity for microcap investors to be at the forefront of discovering overlooked, orphaned stories and to benefit from the forthcoming value/size appreciation that can follow if these companies can execute their businesses.