UNBELIEVABLE…..can mean one of two things after leaving a micro cap company. I’m either amazed at where the stock is priced for what they have in house and want to buy more or I’m shocked that the company is even in business. Obviously, as micro cap investors we look at all the essentials when evaluating a company. Several questions come up while evaluating a micro cap during the due diligence period. Does the company ….have less than 75m shares out? Debt? High Growth phase? Close to breakeven? Operations producing cash? Need to raise money? High Margin recurring revenue model? Hiring….who? Management team background? These are just a few steps I like to take while evaluating a company. Taking the time and energy to travel is well worth the money spent. Just to name a few of the companies that I’ve visited over the past year have been SPIN, BFDI, RVUE, OPCO, ESPH, LBMH, TOOT, FLXT, VTNR, INMG, ZYXI, & CTDH.
When I make a company visit I literally act as a sponge and try and soak up everything I can. I always like to get a tour of the facility first and have the CEO or Operations guy give the tour. As we all know there are several different kinds of businesses so more are exciting than others. I try and communicate with several different employees while I’m visiting. Learning how the employees enjoy working in the workplace is very important. Understanding the infrastructure that is set up is very valuable. I’m an operations guy so seeing the company at work and seeing how they make product is always valuable. Companies in a growth phase are typically acquiring new buildings to expand. Sometimes it’s appropriate to visit each year to see the progress that has been made from your prior visit.
I visited Brekford (OTCQB: BFDI) last year in June at their headquarters in Hanover, Maryland. I arrived early in the morning so I could spend time with C.B. before the shareholder meeting started. C.B. gave me a tour of the facility and it was great to see the facility full of vehicles being up fitted with the right equipment. I spoke to a few of the laborers and had a good feel for what was going on. They seemed very busy and were satisfied working for Brekford. While I visited Brekford the stock was currently at $.20 and had recently doubled in price a month before I arrived. While C.B. was giving me the tour you could tell that he knew all the employees and was well respected. I met the Scott Rutherford, President of Brekford along with Maurice Nelson, Managing Director, and Travis Hudson, Director of Business Development. Attending the shareholder meeting gave me a good feeling on where the company was headed.
Last November I visited rVue (OTCQB: RVUE) and met with the CEO Jason Kates. Preparing for the visit the biggest question that I had on my mind was “How does rVue make it possible for an ad agency to prepare a DOOH campaign in 5 minutes compared to 6 weeks of time?” This question was answered very quickly when Jason decided to log in to the rVue Demand-Side Platform and demonstrate how it works. I was amazed with the automation of the platform and the amount of data aggregated. It automatically clicked for me….BINGO! I couldn’t experience that by just checking out the website…or reading several SEC Filings. It made me much more confident with their tech and I had a much better understanding for the industry problems that they are solving in the Digital Out-of-Home industry.
Tootie Pie Corporation:
I flew into San Antonio to visit with this company last summer. I flew in on behalf of another investor who holds a large position. He wanted me to go because of my experience in restaurants and Tootie Pie is trying to development fast casual cafés. My goal was to evaluate the operations and visit the head quarters. Let’s just say I was amazed at what I saw. I spent about 8 hours with the CEO that day after he picked me up from the airport. We went to 4 of the 5 café’s that day. Tootie Pie sells gourmet’s pie’s and decided to start acquiring café’s that went out of business for a good price. I thought the idea would be to sell sandwiches and grow the cafe business and sell gourmet pie’s to add additional margin and operating cash flow to build more stores. Well…It turns out they acquired restaurants that went under because of 1 reason POOR LOCATION. The operations of the kitchen and the layout of the restaurants was pathetic from my experience. You could just tell they didn’t know what they were doing. I don’t think the CEO or the other members of management have ever worked in a restaurant. You cannot continue to lose money and try and build a brand with each store selling different menu items. Great experience to say the least.
Industry Due Diligence:
Understanding the need or want for the product is very important. I know all of us have heard way too much about ZAGG, but this was one of those great micros that you could grasp how their products were being received in the marketplace. After ZAGG signed the distribution agreement with Best Buy to be in every retailer in the U.S. it turned into a research gold mine. At the time I was living in Michigan and I literally went to about 20 different Best Buys with different demographics and did my best to understand how the invisibleSHIELD was selling. I spoke to each sales rep selling the ZAGG product and said that it was the most popular screen protector. When several Best Buy workers were telling me that they were selling on average 20 a day I started to run the #’s and it clicked to me that this product had legs to be a household name. I ended up purchasing every product ZAGG made and started to hand them out to people I trusted to get their feedback and see how they liked the products.
Yes, traveling across the country to visit 1 company could really surprise you. It’s a lost art in my opinion and not enough investors spend the money or time to make company visits. Investors typically don’t have the time…but if you are taking a strong position to limit the risk profile and to better grasp what the company is doing…I would recommend a visit. If you haven’t visited a micro cap company yet, I would recommend doing so. I would advise to try and set up meeting with the CEO/Founder typically has the largest equity stake in the company. Sometimes it’s difficult to pin these guys down…..but persistence will pay off. I’ve made over 25 company visits in my career so far and each one has been a great learning experience. Leaving a company with a strong gut feeling with a smile on the face is typically a good sign.
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absolutely the best way is to visit, no question about it. That is the biggest advantage in playing the micros – – the companies with rare exceptions want the attention of a visit and rarely are there analysts or brokers visiting so the little guy has the field to himself.
I look for the little stuff. How is the office staff acting, happy, disgruntled etc. Is the ceo a smoker, a drinker, fat, does he/she listen. I have learned that most ceo’s are liars at least in part because pumping their company is part of the job, and acting like the pilot of a passenger jet is the other. Positive reassurance in other words.
Best question to ask is what can go wrong.
Biggest mistake is to not let the impressions of the visit settle before taking action. Same goes for presentations at conferences. My biggest losses have come from fantastic presentations, and the excitement of a pumped up visit.
Talk to other investors. My next biggest mistake is not to listen to those who have been invested in the company for awhile. They know and before you think you know better, listen to them and check out their complaints.
Visiting also gives one other incalculable benefit. You can establish a relationship and maintain contact. Insider info isn’t necessary, just taking the temperature from time to time will often tell you all you need to know.
More I’m sure, but thanks for the post. Great topic.
Thanks, for the comments. I’m glad you all enjoyed the write up. I could go on for hours in regards to visiting companies. It’s my favorite part of what I do and really gives you a firm decision on how to move forward.
Sharing your experiences with other investors is a valuable service. I remember when I was getting the run around by Medlink for a quick visit at the Baltimore office. I was in the neighborhood for something else, so I went to the building and talked to the property manager who informed me they had stopped coming and paying the lease. They were still showing that office on their website and gave no indication of anything wrong. I went home and sold my shares. That visit saved a much larger loss. I always pay very close attention to any first hand reports. Thanks for the great service Sean.
Well written Sean. Visiting companies is definitely a lost art. I’m looking forward to visiting a couple more companies in April. Great post.
As a person on the receiving end of your due diligence visits I really appreciate the time and genuine interest you show in our company. I live here, or so it seems, and having someone from outside come in and be genuinely interested in the minutia of our business is a lot of fun. Most of our visitors’ eyes glaze over when I get to the technical details of what a 21st century factory is and how our pulse drying technology combined with cyclodextrins is creating an opportunity that hasn’t existed before. Your attention and the insight from your other experience has been very helpful to expand the overview I have of our business. I look forward to future visits.