29 Things to Look For in a Microcap Stock
Today’s infographic corresponds with the Howard Group’s Opportunity Knocks Challenge, which we are proud to sponsor. In this free challenge, investors can pick a portfolio of stocks from the public companies they represent – with play money of course. The investor with the best performing portfolio wins the trip of a lifetime valued between $11,000 and $15,000.
There are some incredible trips available:
- Head to Pamplona to literally run with the bulls
- Race Ferraris and Lambos in Vegas
- Visit exotic Vietnam and Cambodia for a river cruise
- Take a bite of a the Big Apple with a big shopping spree
- Hit the famous Wailea Golf Club in Maui for a few rounds
Definitely consider registering for this free contest today. We want to see a Visual Capitalist reader as the winner!
The Microcap Opportunity
We worked with Howard Group to come up with 29 points to consider when looking at investing in a microcap stock. The key here is due diligence. Good research can help you mitigate the risks that these stocks have.
Benefits of microcaps:
- Higher potential returns
- Small companies outperform big companies over time
- Valuation disconnect
- Lack of visibility = higher arbitrage
- Nimble companies and boards
- M&A potential
Downsides of microcaps:
- Higher risk
- Less analyst coverage = less due diligence by market
- Less trading volume
Investors who do strong due diligence can mitigate the downsides to trading microcaps and can reap big gains.
Due Diligence Checklist
Good people behind a company make a difference – especially for small companies that have big growth potential.
Here are the key things to look for:
- A proven track record in building successful businesses
- A well-established network of connections and ability to nurture strategic relations
- Ability to raise capital in a tough economic environment
- Skin in the game: ownership of shares of the company represents real stake
- Management that is respectful of shareholder funds: not spending excessive money on General and Administrative (G&A) expenses or overpaying themselves
Pro tip: Review annual Information Circular for excessive levels of management compensation or director’s fees, insider shareholdings, any past bankruptcies, and other Boards that senior officers serve on or previously sat as a director.
The structure of microcaps can tell a story on its own. Here is what to look for:
- The percentage of holdings of retail vs institutional investors, as well as insiders
- How many shares are outstanding and fully diluted
- The expiry dates and strike prices of warrants
Pro Tip: Look at previous financings. Was each subsequent financing done at a higher level than the last? Or does the company have a history of dilution?
The numbers are the meat and potatoes of this checklist. Look at:
- Working capital
- Quarterly expenses with special attention to G&A
- Debt – repayment schedule and interest rates
- Generating free cash flow, or the potential to do so in the near future
- Ability to maintain profitable margins
Pro Tip: Are revenues based on the one-time sale of a product or is there a strong recurring revenue model?
Differentiators and Catalysts
Does the company have an advantage over competitors? What catalysts are on the horizon that could potential impact share price?
- What sets the company apart from its peers?
- Product features, attributes and benefits
- Service features, attributes and benefits
- The company’s client list
- Visibility on events or milestones that will bring significant shareholder value
Pro Tip: Look at management’s past performance to see if they have done what they said they’d do. Have they met the timelines and objectives previously stated?
Relative to the market, is this company fairly valued? Check out:
- For a revenue producing company: how much future potential is built into the stock price versus the fundamental financial situation.
- For a non-revenue producing company: how much potential is built into the ultimate value of the asset and its economic viability
Tricks of the Trade:
Don’t bite off more than you can chew. Could you sell your holdings within three trading days without incurring a loss greater than 10%?
Keep an eye on the insiders. Insiders know the internal workings of the company and buying or selling could be a signal.
Watch the stock like a hawk. A sudden price drop could indicate a pending financing or negative news.
Analyze the analysts. Watch what the analysts are saying and if their opinions are shifting.
Thematic Investing: 3 Key Trends in Cybersecurity
Cyberattacks are becoming more frequent and sophisticated. Here’s what investors need to know about the future of cybersecurity.
Thematic Investing: 3 Key Trends in Cybersecurity
In 2020, the global cost of cybercrime was estimated to be around $945 billion, according to McAfee.
It’s likely even higher today, as multiple sources have recorded an increase in the frequency and sophistication of cyberattacks during the pandemic.
In this infographic from Global X ETFs, we highlight three major trends that are shaping the future of the cybersecurity industry that investors need to know.
Trend 1: Increasing Costs
Research from IBM determined that the average data breach cost businesses $4.2 million in 2021, up from $3.6 million in 2017. The following table breaks this figure into four components:
|Cost Component||Value ($)|
|Cost of lost business||$1.6M|
|Detection and escalation||$1.2M|
|Post breach response||$1.1M|
The greatest cost of a data breach is lost business, which results from system downtimes, reputational losses, and lost customers. Second is detection and escalation, including investigative activities, audit services, and communications to stakeholders.
Post breach response includes costs such as legal expenditures, issuing new accounts or credit cards (in the case of financial institutions), and other monitoring services. Lastly, notification refers to the cost of notifying regulators, stakeholders, and other third parties.
To stay ahead of these rising costs, businesses are placing more emphasis on cybersecurity. For example, Microsoft announced in September 2021 that it would quadruple its cybersecurity investments to $20 billion over the next five years.
Trend 2: Remote Work Opens New Vulnerabilities
According to IBM, companies that rely more on remote work experience greater losses from data breaches. For companies where 81 to 100% of employees were remote, the average cost of a data breach was $5.5 million (2021). This dropped to $3.7 million for companies that had under 10% of employees working from home.
A major reason for this gap is that work-from-home setups are typically less secure. Phishing attacks surged in 2021, taking advantage of the fact that many employees access corporate systems through their personal devices.
|Type of Attack||Number of attacks in 2020||Number of attacks in 2021||Growth (%)|
As detected by Trend Micro’s Cloud App Security.
Spam phishing refers to “fake” emails that trick users by impersonating company management. They can include malicious links that download ransomware onto the users device. Credential phishing is similar in concept, though the goal is to steal a person’s account credentials.
A tactic you may have seen before is the Amazon scam, where senders impersonate Amazon and convince users to update their payment methods. This strategy could also be used to gain access to a company’s internal systems.
Trend 3: AI Can Reduce the Cost of a Data Breach
AI-based cybersecurity can detect and respond to cyberattacks without any human intervention. When fully deployed, IBM measured a 20% reduction in the time it takes to identify and contain a breach. It also resulted in cost savings upwards of 60%.
A prominent user of AI-based cybersecurity is Google, which uses machine learning to detect phishing attacks within Gmail.
Machine learning helps Gmail block spam and phishing messages from showing up in your inbox with over 99.9% accuracy. This is huge, given that 50-70% of messages that Gmail receives are spam.
– Andy Wen, Google
As cybercrime escalates, Acumen Research and Consulting believes the market for AI-based security solutions will reach $134 billion by 2030, up from $15 billion in 2021.
Introducing the Global X Cybersecurity ETF
The Global X Cybersecurity ETF (Ticker: BUG) seeks to provide investment results that correspond generally to the price and yield performance, before fees and expenses, of the Indxx Cybersecurity Index. See below for industry and country-level breakdowns, as of June 2022.
|Sector (By security type)||Weight|
|🇰🇷 South Korea||0.9%|
Totals may not equal 100% due to rounding.
Investors can use this passively managed solution to gain exposure to the rising adoption of cybersecurity technologies.
You may also like
Energy3 days ago
Visualizing 10 Years of Global EV Sales by Country
Global EV sales have grown exponentially, more than doubling in 2021 to 6.8 million units. Here’s a look at EV sales by country since 2011.
Science7 days ago
Visualizing the Relationship Between Cancer and Lifespan
New research links mutation rates and lifespan. We visualize the data supporting this new framework for understanding cancer.
Energy1 week ago
Which Countries Produce the Most Natural Gas?
Natural gas prices have risen since Russia’s invasion of Ukraine. This visualization highlights the world’s largest natural gas producers.
Visualizing Major Layoffs At U.S. Corporations
This infographic highlights the accelerating pace of layoffs so far in 2022, as businesses cut costs ahead of a potential recession.
Visualizing Major Layoffs at U.S. Corporations
Hiring freezes and layoffs are becoming more common in 2022, as U.S. businesses look to slash costs ahead of a possible recession.
Understandably, this has a lot of people worried. In June 2022, Insight Global found that 78% of American workers fear they will lose their job in the next recession. Additionally, 56% said they aren’t financially prepared, and 54% said they would take a pay cut to avoid being laid off.
In this infographic, we’ve visualized major layoffs announced in 2022 by publicly-traded U.S. corporations.
Note: Due to gaps in reporting, as well as the very large number of U.S. corporations, this list may not be comprehensive.
An Emerging Trend
Layoffs have surged considerably since April of this year. See the table below for high-profile instances of mass layoffs.
|JP Morgan Chase & Co.||Financial Services||~500||June|
Here’s a brief rundown of these layoffs, sorted by industry.
Ford has announced the biggest round of layoffs this year, totalling roughly 8,000 salaried employees. Many of these jobs are in Ford’s legacy combustion engine business. According to CEO Jim Farley, these cuts are necessary to fund the company’s transition to EVs.
We absolutely have too many people in some places, no doubt about it.
– Jim Farley, CEO, Ford
Speaking of EVs, Rivian laid off 840 employees in July, amounting to 6% of its total workforce. The EV startup pointed to inflation, rising interest rates, and increasing commodity prices as factors. The firm’s more established competitor, Tesla, cut 200 jobs from its autopilot division in the month prior.
Last but not least is online used car retailer, Carvana, which cut 2,500 jobs in May. The company experienced rapid growth during the pandemic, but has since fallen out of grace. Year-to-date, the company’s shares are down more than 80%.
Fearing an impending recession, Coinbase has shed 1,100 employees, or 18% of its total workforce. Interestingly, Coinbase does not have a physical headquarters, meaning the entire company operates remotely.
A recession could lead to another crypto winter, and could last for an extended period. In past crypto winters, trading revenue declined significantly.
Brian Armstrong, CEO, Coinbase
Around the same time, JPMorgan Chase & Co. announced it would fire hundreds of home-lending employees. While an exact number isn’t available, we’ve estimated this to be around 500 jobs, based on the original Bloomberg article. Wells Fargo, another major U.S. bank, has also cut 197 jobs from its home mortgage division.
The primary reason for these cuts is rising mortgage rates, which are negatively impacting the demand for homes.
Within tech, Meta and Twitter are two of the most high profile companies to begin making layoffs. In Meta’s case, 350 custodial staff have been let go due to reduced usage of the company’s offices.
Many more cuts are expected, however, as Facebook recently reported its first revenue decline in 10 years. CEO Mark Zuckerberg has made it clear he expects the company to do more with fewer resources, and managers have been encouraged to report “low performers” for “failing the company”.
Realistically, there are probably a bunch of people at the company who shouldn’t be here.
– Mark Zuckerberg, CEO, Meta
Also in July, Twitter laid off 30% of its talent acquisition team. An exact number was not available, but the team was estimated to have less than 100 employees. The company has also enacted a hiring freeze as it stumbles through a botched acquisition by Elon Musk.
More Layoffs to Come…
Layoffs are expected to continue throughout the rest of this year, as metrics like consumer sentiment enter a decline. Rising interest rates, which make it more expensive for businesses to borrow money, are also having a negative impact on growth.
In fact just a few days ago, trading platform Robinhood announced it was letting go 23% of its staff. After accounting for its previous layoffs in April (9% of the workforce), it’s fair to estimate that this latest round will impact nearly 800 people.
Demographics3 weeks ago
Ranked: The 20 Countries With the Fastest Declining Populations
Misc1 week ago
Visualizing Which Countries Drink the Most Beer
Investor Education4 weeks ago
Countries with the Highest Default Risk in 2022
Energy2 weeks ago
Visualizing the World’s Largest Oil Producers
Personal Finance1 week ago
Mapped: The Salary You Need to Buy a Home in 50 U.S. Cities
Energy1 week ago
Which Countries Produce the Most Natural Gas?
Agriculture3 weeks ago
Timeline: The Domestication of Animals
Business2 weeks ago
Ranked: The World’s Largest Container Shipping Companies