Markets
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.
Markets
U.S. Debt Interest Payments Reach $1 Trillion
U.S. debt interest payments have surged past the $1 trillion dollar mark, amid high interest rates and an ever-expanding debt burden.
U.S. Debt Interest Payments Reach $1 Trillion
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The cost of paying for America’s national debt crossed the $1 trillion dollar mark in 2023, driven by high interest rates and a record $34 trillion mountain of debt.
Over the last decade, U.S. debt interest payments have more than doubled amid vast government spending during the pandemic crisis. As debt payments continue to soar, the Congressional Budget Office (CBO) reported that debt servicing costs surpassed defense spending for the first time ever this year.
This graphic shows the sharp rise in U.S. debt payments, based on data from the Federal Reserve.
A $1 Trillion Interest Bill, and Growing
Below, we show how U.S. debt interest payments have risen at a faster pace than at another time in modern history:
Date | Interest Payments | U.S. National Debt |
---|---|---|
2023 | $1.0T | $34.0T |
2022 | $830B | $31.4T |
2021 | $612B | $29.6T |
2020 | $518B | $27.7T |
2019 | $564B | $23.2T |
2018 | $571B | $22.0T |
2017 | $493B | $20.5T |
2016 | $460B | $20.0T |
2015 | $435B | $18.9T |
2014 | $442B | $18.1T |
2013 | $425B | $17.2T |
2012 | $417B | $16.4T |
2011 | $433B | $15.2T |
2010 | $400B | $14.0T |
2009 | $354B | $12.3T |
2008 | $380B | $10.7T |
2007 | $414B | $9.2T |
2006 | $387B | $8.7T |
2005 | $355B | $8.2T |
2004 | $318B | $7.6T |
2003 | $294B | $7.0T |
2002 | $298B | $6.4T |
2001 | $318B | $5.9T |
2000 | $353B | $5.7T |
1999 | $353B | $5.8T |
1998 | $360B | $5.6T |
1997 | $368B | $5.5T |
1996 | $362B | $5.3T |
1995 | $357B | $5.0T |
1994 | $334B | $4.8T |
1993 | $311B | $4.5T |
1992 | $306B | $4.2T |
1991 | $308B | $3.8T |
1990 | $298B | $3.4T |
1989 | $275B | $3.0T |
1988 | $254B | $2.7T |
1987 | $240B | $2.4T |
1986 | $225B | $2.2T |
1985 | $219B | $1.9T |
1984 | $205B | $1.7T |
1983 | $176B | $1.4T |
1982 | $157B | $1.2T |
1981 | $142B | $1.0T |
1980 | $113B | $930.2B |
1979 | $96B | $845.1B |
1978 | $84B | $789.2B |
1977 | $69B | $718.9B |
1976 | $61B | $653.5B |
1975 | $55B | $576.6B |
1974 | $50B | $492.7B |
1973 | $45B | $469.1B |
1972 | $39B | $448.5B |
1971 | $36B | $424.1B |
1970 | $35B | $389.2B |
1969 | $30B | $368.2B |
1968 | $25B | $358.0B |
1967 | $23B | $344.7B |
1966 | $21B | $329.3B |
Interest payments represent seasonally adjusted annual rate at the end of Q4.
At current rates, the U.S. national debt is growing by a remarkable $1 trillion about every 100 days, equal to roughly $3.6 trillion per year.
As the national debt has ballooned, debt payments even exceeded Medicaid outlays in 2023—one of the government’s largest expenditures. On average, the U.S. spent more than $2 billion per day on interest costs last year. Going further, the U.S. government is projected to spend a historic $12.4 trillion on interest payments over the next decade, averaging about $37,100 per American.
Exacerbating matters is that the U.S. is running a steep deficit, which stood at $1.1 trillion for the first six months of fiscal 2024. This has accelerated due to the 43% increase in debt servicing costs along with a $31 billion dollar increase in defense spending from a year earlier. Additionally, a $30 billion increase in funding for the Federal Deposit Insurance Corporation in light of the regional banking crisis last year was a major contributor to the deficit increase.
Overall, the CBO forecasts that roughly 75% of the federal deficit’s increase will be due to interest costs by 2034.
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