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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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Visualizing the Rise of Investment Tech

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Visualizing the Rise of Investment Tech

For the high resolution version of this infographic, click here.

Investors and wealth managers are always looking to capitalize on their investments—and the latest innovations are arming them with more efficient tools to get there.

Fintech solutions are increasingly being adopted among the digitally active population, as 64% of surveyed wealth managers consider digitization essential in 2019.

Today’s graphic from Raconteur highlights the benefits of investment technology, and touches on shifting sentiments in human vs. digital interactions. Where do investors and wealth managers see the next epoch of investment fintech heading?

Fantastic Features: Top Benefits

According to a TD Ameritrade survey of 1,000 investors, a whopping 90% consider getting tailored investing advice to be the most important feature of any tech tool. In second place, 52% place value in easy access to their data.

Here are the other benefits at top of mind for investors when it comes to investment tech:

  • 45% seek the best possible returns
  • 44% look for customized, quick, and simple analysis
  • 39% are interested in customized portfolios
  • 39% want the benefit of personalized budgets
  • 38% desire regular suggestions for optimizing financial health

But how well are these applications being adopted in everyday investment scenarios?

The Fintech Boom by the Numbers

Investment apps such as RobinHood have drastically risen in popularity, but still lag behind more mainstream segments in the fintech space:

Fintech Categories Ranked by Adoption Rate, 2015 to 2019

Category2015 Adoption Rate2017 Adoption Rate2019 Adoption Rate
Money transfer and payments18%50%75%
Insurance8%24%48%
Savings and investments17%20%34%
Budgeting and financial planning8%10%29%
Borrowing6%10%27%

Source: EY

Borrowing apps have the lowest global usage rates—only 27% of the digitally active global population—whereas nearly 75% have adopted money transfer and payment apps.

Human vs Machine: The Customer Experience

Do humans or machines have the edge in managing your investments?

The aforementioned survey by TD Ameritrade also asked investors which of the following are performed better by each group, with mixed results:

👨 Humans perceived as better  🤖 Robots perceived as better
• Ability to chat about questions or investment concerns• Info in one place that can be accessed at any time to inform best solutions
• Investment experience
• Best returns
• Affordable investment solutions or advice
• Ability to optimize returns and minimize taxes
• Regular suggestions on how to optimize financial life• Quick, simple analysis tailored to unique financial situation
• Personalized budget development• Custom portfolio with regular updates

When it comes to managing tasks such as calculations, updates, and portfolio optimization, the majority of investors consider a computer to be better suited to the tasks at hand. However, when they are discussing investment concerns, personalization, or financial advice, the majority of customers prefer a human opinion.

Interestingly, 81% of U.S. investors believe that investment technology could never replace the “human touch”, compared to 70% of European investors or 64% in Asia.

Wealth Managers are Going Digital

Over time, wealth managers have grown to embrace the digitization of their industry.

The proportion of surveyed high-level executives who see digitization as essential to the industry jumped from just 25% in 2016 to 64% in 2019.

In another recent survey about views on most impactful types of fintech apps, more than 68% of wealth managers agreed that robo-advisors are among the most important developments, with AI-based investing apps following closely behind at 45%.

Towards a More Personalized Future

At the end of the day, investors want better, more personalized advice at their disposal—and for that advice to generate more profitable returns. Along with their wealth managers, investors are increasingly interested in solutions that can simplify portfolio management.

Digitization and automation of manual processes have been a welcome change for many industry professionals. While investment technology is still in early stages, wealth managers can personalize investor experiences through the adoption of tech─and increase their chances of future success by maintaining a seamless customer experience.

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China

The People’s Republic of China: 70 Years of Economic History

How did China go from agrarian economy to global superpower? This timeline covers the key events and policies that shaped the PRC over its 70-year history.

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Chart: 70 Years of China’s Economic Growth

View a high-resolution version of this graphic here.

From agrarian economy to global superpower in half a century—China’s transformation has been an economic success story unlike any other.

Today, China is the world’s second largest economy, making up 16% of $86 trillion global GDP in nominal terms. If you adjust numbers for purchasing power parity (PPP), the Chinese economy has already been the world’s largest since 2014.

The upward trajectory over the last 70 years has been filled with watershed moments, strategic directives, and shocking tragedies — and all of this can be traced back to the founding of the People’s Republic of China (PRC) on October 1st, 1949.

How the PRC Came to Be

The Chinese Civil War (1927–1949) between the Republic of China (ROC) and the Communist Party of China (CPC) caused a fractal split in the nation’s leadership. The CPC emerged victorious, and mainland China was established as the PRC.

Communist leader Mao Zedong set out a few chief goals for the PRC: to overhaul land ownership, to reduce social inequality, and to restore the economy after decades of war. The first State Planning Commission and China’s first 5-year plan were introduced to achieve these goals.

Today’s timely chart looks back on seven decades of notable events and policies that helped shape the country China has become. The base data draws from a graphic by Bert Hofman, the World Bank’s Country Director for China and other Asia-Pacific regions.

The Mao Era: 1949–1977

Mao Zedong’s tenure as Chairman of the PRC triggered sweeping changes for the country.

1953–1957: First 5-Year Plan
The program’s aim was to boost China’s industrialization. Steel production grew four-fold in four years, from 1.3 million tonnes to 5.2 million tonnes. Agricultural output also rose, but it couldn’t keep pace with industrial production.

1958–1962: Great Leap Forward
The campaign emphasized China’s agrarian-to-industrial transformation, via a communal farming system. However, the plan failed—causing an economic breakdown and the deaths of tens of millions in the Great Chinese Famine.

1959–1962: Lushan Conference and 7,000 Cadres meeting
Top leaders in the Chinese Communist Party (CCP) met to create detailed policy frameworks for the PRC’s future.

1966–1976: Great Proletarian Cultural Revolution
Mao Zedong attempted to regain power and support after the failures of the Great Leap Forward. However, this was another plan that backfired, causing millions more deaths by violence and again crippling the Chinese economy.

1971: Joined the United Nations
The PRC replaced the ROC (Taiwan) as a permanent member of the United Nations. This addition also made it one of only five members of the UN Security Council—including the UK, the U.S., France, and Russia.

1972: President Nixon’s visit
After 25 years of radio silence, Richard Nixon was the first sitting U.S. President to step foot into the PRC. This helped re-establish diplomatic relations between the two nations.

1976–1977: Mao Zedong Death, and “Two Whatevers”
After Mao Zedong’s passing, the interim government promised to “resolutely uphold whatever policy decisions Chairman Mao made, and unswervingly follow whatever instructions Chairman Mao gave.”

1979: “One-Child Policy”
The government enacted an aggressive birth-planning program to control the size of the country’s population, which it viewed as growing too fast.

A Wave of Socio-Economic Reforms: 1980-1999

From 1980 onward, China worked on opening up its markets to the outside world, and closing the inequality gap.

1980–1984: Special Economic Zones (SEZs) established
Several cities were designated SEZs, and provided with measures such as tax incentives to attract foreign investment. Today, the economies of cities like Shenzhen have grown to rival the GDPs of entire countries.

1981: National Household Responsibility System implemented
In the Mao era, quotas were set on how many goods farmers could produce, shifting the responsibility of profits to local managers instead. This rapidly increased the standard of living, and the quota system spread from agriculture into other sectors.

1989: Coastal Development Strategy
Post-Mao leadership saw the coastal region as the potential “catalyst” for the entire country’s modernization.

1989–1991: Post-Tiananmen retrenchment
Early 1980s economic reforms had mixed results, and the growing anxiety eventually culminated in a series of protests. After tanks rolled into Tiananmen Square in 1989, the government “retrenched” itself by initially attempting to roll back economic reforms and liberalization. The country’s annual growth plunged from 8.6% between 1979-1989 to 6.5% between 1989-1991.

1990–1991: Shanghai and Shenzhen stock exchanges open
Combined, the Shanghai (SSE) and Shenzhen (SZSE) stock exchanges are worth over $8.5 trillion in total market capitalization today.

1994: Shandong Huaneng lists on the NYSE
The power company was the first PRC enterprise to list on the NYSE. This added a new N-shares group to the existing Chinese capital market options of A-shares, B-shares, and H-shares.

1994–1996: National “8-7” Poverty Reduction Plan
China successfully lifted over 400 million poor people out of poverty between 1981 and 2002 through this endeavor.

1996: “Grasp the Large, Let Go of the Small”
Efforts were made to downsize the state sector. Policy makers were urged to maintain control over state-owned enterprises to “grasp the large”. Meanwhile, the central government was encouraged to relinquish control over smaller SOEs, or “let go of the small”.

1997: Urban Dibao (低保)
China’s social safety net went through restructuring from 1993, and became a nationwide program after strong success in Shanghai.

1997-1999: Hong Kong and Macao handover, Asian Financial Crisis
China was largely unscathed by the regional financial crisis, thanks to the RMB (¥) currency’s non-convertibility. Meanwhile, the PRC regained sovereignty of Hong Kong and Macau back from the UK and Portugal, respectively.

1999: Western Development Strategy
The “Open Up the West” program built out 6 provinces, 5 autonomous regions, and 1 municipality—each becoming integral to the Chinese economy.

Turn of the Century: 2000-present

China’s entry to the World Trade Organization, and the Qualified Foreign Institutional Investor (QFII) program – which let foreign investors participate in the PRC’s stock exchanges – contributed to the country’s economic growth.

Source: CNBC

2006: Medium-term Plan for Scientific Development
The PRC State Council’s 15-year plan outlines that 2.5% or more of national GDP should be devoted to research and development by 2020.

2008-2009: Global Financial Crisis
The PRC experienced only a mild economic slowdown during the crisis. The country’s GDP growth in 2007 was a staggering 14.2%, but this dropped to 9.7% and 9.5% respectively in the two years following.

2013: Belt and Road Initiative
China’s ambitious plans to develop road, rail, and sea routes across 152 countries is scheduled for completion by 2049—in time for the PRC’s 100th anniversary. More than $900 billion is budgeted for these infrastructure projects.

2015: Made in China 2025
The PRC refuses to be the world’s “factory” any longer. In response, it will invest nearly $300 billion to boost its manufacturing capabilities in high-tech fields like pharmaceuticals, aerospace, and robotics.

Despite the recent ongoing trade dispute with the U.S. and an increasingly aging population, the Chinese growth story seems destined to continue on.

China Paving the Way?

The 70th anniversary of the PRC offers a moment to reflect on the country’s journey from humble beginnings to a powerhouse on the world stage.

Because of China’s economic success, more and more countries see China as an example to emulate, a model of development that could mean moving from rags to riches within a generation.

Bert Hofman, World Bank

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