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29 Things to Look For in a Microcap Stock

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29 Things to Look For in a Microcap Stock

29 Things to Look For in a Microcap Stock

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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

The People

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.

Capital Structure

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

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?

Valuation:

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.

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Demographics

How Different Generations Think About Investing

Each generation was shaped by unique circumstances, and these differences translate directly to the investing world as well.

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How Different Generations Think About Investing

View the full-size version of the infographic by clicking here

Every generation thinks about investing a little differently.

This is partially due to the fact that each cohort finds itself on a distinct leg of life’s journey. While boomers focus on retirement, Gen Zers are thinking about education and careers. As a result, it’s not surprising to find that investment objectives can differ by age group.

However, there are other major reasons that contribute to each unique generational view. For example, what major world events shaped the mindset of each generation? Also, what role did culture play, and how do things like economic cycles factor in?

Finding Generational Discrepancies

Today’s infographic comes to us from Raconteur, and it showcases some of the most significant differences in how generations think about investing.

Let’s dive into some of the most interesting data:

1. Investment Outlook

The majority of millennials (66%) are confident about investment opportunities in the next 12 months. This drops down to 49% when boomers are asked the same question.

2. Volatility

How did different generations of investors react to recent bouts of volatility in the market?

  • 82% of millennials made changes to their portfolios
  • 69% of Gen X made changes
  • 47% of boomers made changes
  • 32% of the Silent Generation made changes

3. Knowledge and Ability

In terms of investment knowledge, 42% of millennials considered themselves to be experts in the field. On the same question, only 23% of boomers could say the same.

4. Financial Goals

Back when they were 27 years old, 45% of Gen Xers said their primary goal was to buy a home. Compare this to just 23% of millennials that consider a home to be their primary investment objective today.

5. Managing Investments

The majority of millennials (66%) saw the ability to manage all aspects of personal finance, including investments, in the same app as being important. Only 35% of boomers agreed.

Similarly, 67% of millennials saw recommendations made by artificial intelligence as being a basic part of any investment platform. Both Gen Xers and Baby Boomers were more hesitant, with 30% seeing computer-based recommendations as being integral.

6. Impact Investing

Millennials are twice as interested in ESG (environmental, social, and governance) investing, compared to their boomer counterparts. In fact, the majority of millennials (66%) choose funds according to ESG considerations.

Reasons for Not Investing

While generations may have varying investment philosophies, they seem a little more in sync when it comes to having reasons not to invest.

StatementMillennialsGen XBoomers
Recognize future outlook would be better if they start investing72%73%57%
Want to try out investing with a low money commitment35%31%25%
Afraid of losing everything42%29%28%
Too worried about current financial situation to think about future49%46%32%
Find information about investing difficult to understand63%59%55%
Don't have enough money to start investing55%59%56%

There are some similarities in the data here – for example, non-investors of all generations seem to have an equally tough time learning about investing, and similar proportions do not believe they have the funds to start investing.

On the flipside, it seems that millennials are more worried about their financial future, while simultaneously seeing a risk of “losing everything” stemming from investing.

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Business

Here’s How Much the Top CEOs of S&P 500 Companies Get Paid

Does high pay for CEOs translate into company performance? See for yourself in this visualization featuring the top CEOs of companies on the S&P 500.

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How Much the Top CEOs of S&P 500 Companies Get Paid

How much do the CEOs from some of the world’s most important companies get paid, and do these top CEOs deliver commensurate returns to shareholders?

Today’s infographic comes to us from HowMuch.net and it visualizes data on S&P 500 companies to see if there is any relationship between CEO pay and stock performance.

For Richer or Poorer

To begin, let’s look at the highest and lowest paid CEOs on the S&P 500, and their associated performance levels. Data here comes from a report by the Wall Street Journal.

Below are the five CEOs with the most pay in 2018:

RankCEOCompanyPay (2018)Shareholder Return
#1David ZaslavDiscovery, Inc.$129.4 million10.5%
#2Stephen AngelLinde$66.1 million3.1%
#3Bob IgerDisney$65.6 million20.4%
#4Richard HandlerJefferies$44.7 million-14.9%
#5Stephen MacMillanHologic$42.0 million11.7%

Last year, David Zaslav led top CEOs by taking home $129.4 million from Discovery, Inc., the parent company of various TV properties such as the Discovery Channel, Animal Planet, HGTV, Food Network, and other non-fiction focused programming. He delivered a 10.4% shareholder return, when the S&P 500 itself finished in negative territory in 2018.

Of the mix of highest-paid CEOs, Bob Iger of Disney may be able to claim the biggest impact. He helped close a $71.3 billion acquisition of 21st Century Fox, while also leading Disney’s efforts to launch a streaming service to compete with Netflix. The market rewarded Disney with a 20.4% shareholder return, while Iger received a paycheck of $65.6 million.

Now, let’s look at the lowest paid CEOs in 2018:

RankCEOCompanyPay (2018)Shareholder Return
#1Larry PageAlphabet$1-0.8%
#2Jack DorseyTwitter$119.7%
#3A. Jayson AdairCopart$203,00082.2%
#4Warren BuffettBerkshire Hathaway$398,0003.0%
#5Valentin GapontsevIPG Photonics$1.7 million-47.1%

On the list of lowest paid CEOs, we see two tech titans (Larry Page and Jack Dorsey) that have each opted for $1 salaries. Of course, they are both billionaires that own large amounts of shares in their respective companies, so they are not particularly worried about annual paychecks.

Also appearing here is Warren Buffett, who is technically paid $100,000 per year by Berkshire Hathaway plus an amount of “other compensation” that fluctuates annually. While this is indeed a modest salary, the Warren Buffett Empire is anything but modest in size – and the legendary value investor currently holds a net worth of $84.3 billion.

Finally, it’s worth noting that while J. Jayson Adair of Copart was one of the lowest paid CEOs at $203,000 in 2018, the company had the best return on the S&P 500 at 82.2%. Today, the company’s stock price still sits near all-time highs.

Maxing Returns

Finally, let’s take a peek at the CEOs that received the highest shareholder returns, and if they seem to correlate with compensation at all.

RankCEOCompanyPay (2018)Shareholder Return
#1A. Jayson AdairCopart$203,00082.2%
#2Lisa SuAMD$13.4 million79.6%
#3François Locoh-DonouF5 Networks$6.9 million65.4%
#4Sanjay MehrotraMicron Technology$14.2 million64.3%
#5Ken XieFortinet$6.8 million61.2%

Interestingly, three of highest performing CEOs – in terms of shareholder returns – actually took home smaller amounts than the median S&P 500 annual paycheck of $12.4 million. This includes the aforementioned A. Jayson Adair, who raked in only $203,000 in 2018.

That said, there is a good counterpoint to this as well.

Of the five CEOs who had the worst returns, four of them made less than the median value of $12.4 million, while one remaining CEO took home slightly more. In other words, both the best and worst performing CEOs skew towards lower-than-average pay to some degree.

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