Micro Cap: The Wild West

Ian Cassel Blog Leave a Comment

Micro Cap has always been and hopefully will continue to be considered the “wild west” of the stock market.  Just in the last week, thirteen people were charged with micro cap kickbacks.  The SEC is also aggressively targeting affinity and micro cap fraud more than ever.  On top of this, most brokerages and clearing houses make it almost impossible to buy “penny stocks” or deposit certificates.

I would say that the micro cap landscape is shrinking not expanding.  As more scrutiny is brought on the micro cap market in addition to less brokers being able to buy micro caps on behalf of clients, the result is decreased liquidity in many micro cap stocks and decreased interest in PIPE transactions.

I’ve always said, the fact that so many retail and especially institutional dollars shy away from micro cap is why there is such opportunity for irrational gains.  Micro Cap is one of the last investment classes that are truly inefficient.  You can find real companies, profitable companies, growing companies, that trade at half or even a third of the multiple of their mid cap or large cap big brothers.

I just returned from LD Micro 2011 where over 100 micro cap companies told their tale.  Many of these companies are growing revenues and earnings 20-50-100% year over year but trade at 5-10 PE’s.  As I walked around the conference mingling with other investors, many were complaining of the illiquidity of the markets and “stupidly cheap” valuations of many of the presenting companies.

The one and only thing my Economics degree taught me is inefficient markets where irrational gains can be found do not last long.  Sooner or later more investment dollars flow into the investment class increasing the competition for those irrational gains.  Sooner or later I expect this to happen to micro cap.

Micro cap stocks get a bad rap because 50% of them are either frauds or shouldn’t be public in the first place.  I’ve been investing in micro cap for ten years, and I’ve even visited companies that have ended up being complete frauds.  I’ve been in the middle of Texas being shown a companies oil wells that weren’t even theirs.  I’ve been in a headquarters of a technology company whose “command center” looked like something out of NASA, and it was all a fraud.

Past experiences dealing with the slimy underbelly of micro cap didn’t push me away from this asset class, it made me hone my craft even more.  There are few areas that when you can find the right companies early, you can make 2x – 50x on your money in a period of months to years.

Here at MicroCapClub we try to find, discuss, and evaluate the best micro cap companies on the planet.

The MicroCapClub (mc2) is an exclusive micro cap forum focused on micro cap companies (sub $500m market cap). The MicroCapClub was created and founded by Ian Cassel as a way to share ideas and to learn from other seasoned like-minded micro cap investors. Our goal at MicroCapClub.com is quality membership and quality stock ideas.  If you are an experienced micro cap investor, feel free to Apply today.

About the Author

Ian Cassel

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Ian is a full-time microcap investor. He is the founder of MicroCapClub, CIO of Intelligent Fanatics Capital Management, and co-founder of IntelligentFanatics.com. Ian started investing as a teenager and learned from losing his money over and over again. Microcap companies are the smallest public companies that exist, representing 48% of all public companies in North America. Berkshire Hathaway, Wal-Mart, Amgen, Netflix, and many others started as small microcap companies. Ian’s belief is the key to outsized returns is finding great companies early because all great companies started as small companies.

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