investing in small & micro-cap companies for superior returns brent todd investment advisor

Investing in Small & Micro-Cap Companies for Superior Returns

Brent ToddInvestment Advisor

TODAY’S PRESENTATION

1. Risk – Why?

2. Fundamental Analysis – Why?

3. Small & Micro-cap Strategy – Why?

4.Brent Todd – Why?

2005 Recommendations

Perception of RISK

HighMediumLow

“IT’S ALL ABOUT YOU”

Risk

Reward

Goal For the Next Half Hour

RISK- WHY?

•Guaranteed returns currently net 3.8%

•$100,000 invested will net $3,800

WHY IS RISK IMPORTANT?

Due to the effect of compounding over

time, the difference in one’s ultimate

returns can be dramatically impacted by

the over all rate of return.

3.8% vs 5.0% vs 15.0%

Couple (age 40) - $100,000 to Invest

•Low – Med Risk 5.0% for 15 years = $207,893

•Med. – High Risk

•No risk – 3.8% for 15 years = $174,969

15% for 15 years = $813,706 !!!

Cornerstone of My Investment Philosophy • The surest way for a company’s share price to

appreciate is to produce an ever-increasing stream of profits that shareholders may participate in.

(3) Fundamental Analysis – Why?

If you were to buy a business, you would want to know:

• The price.• The net value of the assets (taking into account the

debt).• How much the business made last year, and

previous years.• How the company compares to other similar

businesses and what they are selling for.

Fundamental Analysis – Why?

• We need to use tools that will allow us to monitor, not only the assets of a company (what are we buying), but also we must be able to measure our share of their income, currently, and going forward.

• Fundamental Analysis is a set of measurements and ratios that allow us to do this.

• By no means the only tool – other tools include: – technical analysis (not effective with thinly traded

stocks).– growth and sector analysis.



Ratios:• Market Capitalization• Price Earnings Ratio (P/E Ratio)• Earnings Per Share (EPS)• Book Value Per Share


Market Capitalization:share price x shares outstanding

Examples:• Company A has 20,000,000 shares outstanding and is trading

at $1.00 per share – (20,000,000 shares x $1.00)– Market Capitalization = $20 million

• Company B has 5,000,000 shares outstanding and is trading at $1.00 per share– (5,000,000 shares x $1.00)– Market Capitalization = $5 million

Fundamental Analysis – Why?Market Capitalization: changes with the share price

Example: in 36 months Nortel’s share price fluctuated between $124 per share (Cdn) and $0.70 per share (Cdn).

• Nortel has over 3 billion shares outstanding.

• At their high, their capitalization was approximately $372 billion.

• At their low, their capitalization was below $5 billion.


Earnings Per Share (EPS):

net earnings ÷ number of shares outstanding

• *Net earnings is determined after giving effect to all taxes and expenses.

• Analysts look at these each quarter and annually.


Earnings Per Share (EPS):

Example:• Company A’s net earnings were $20,000,000 and they have

10,000,000 shares outstanding– ($20,000,000 ÷ 10,000,000 shares)– EPS = $2.00

• Company B’s net earning were $20,000,000 and they have 20,000,000 shares outstanding– ($20,000,000 ÷ 20,000,000 shares)– EPS = $1.00


Price Earnings Ratio (P/E Ratio):

price per share ÷ EPS

• Determined by dividing the price of a stock by the earnings per share over the past 12 months.

• The P/E for a given stock varies based on changes in price (which happen every day) and changes in earnings (which happen once per quarter).



• Company A has earnings per share of $0.50 and trades at a price of $5.00 per share: $5.00 ÷ $0.50P/E = 10 timesCompany A trades at 10 times earnings

• Company B has earnings per share of $0.50 and trades at a price of $20.00 per share. $20.00 ÷ $0.50P/E = 40 timesCompany B trades at 40 times earnings



• The P/E need not correspond between stocks.

• Some stocks may be considered under priced at 40 times earnings whereas others may be grossly overpriced at 15 times.

• It is important to determine historical P/E averages for each individual company and it’s industry sector.

*Generally, I consider the lower the p/e, the better.


Book Value Per Share:

Assets - Liabilities = Shareholders Equity

Shareholders Equity ÷ Shares O/S = Book Value


• Middlefield Bancorp Ltd.

• Shares outstanding 9,000,000• Cash in treasury $20,000,000• EPS for the 9 months $0.20/share

1999 ($0.50)

2000 ($0.10)

2001 $0.17

2002 $0.23

2003 $0.33

2004 $0.47

2005 $0.56

Computer Modelling Cash Flow Per Share

Small & Micro-Cap Investment Strategy – Why?

Computer Modelling


Year 2000• 8 million shares o/s trading at $0.50 • Market Capitalization = $4 million• Book Value $4 million – No debt

• $4 million ÷ 8 million shares = $0.50 per share Book Value

Computer Modeling – Fundamental Analysis


• By the end of 2002, the B/V per share was $0.90• EPS $0.23• P/E $1.00 ÷ $0.23 = 4.34 P/E ratio

2000 ($0.10)

2001 $0.17

2002 $0.23

Computer Modelling Cash Flow Per Share


Conclusion

• Useful tool in determining underlying values.• Can give good clues as to a company’s growth.• Limited in that the “snapshot in time” can be stale-

dated or provides too brief a period in time to tell the whole story.

• Should not be relied on solely.

Cornerstone of My Investment Philosophy

• The surest way for a company’s share price to appreciate is to produce an ever-increasing stream of profits that shareholders may participate in.

(4) Small & Micro-Cap Investment Strategy

Which Companies Are Considered?

• Ones with proven assets, real businesses, cash flow or all of the above.

• Ones that, generally, trade for less than $100 million in market cap.

• Don’t try and time or “trade” the market.

• Invest in companies that have been ignored or fallen under the radar screen of the general populace.

• In particular, look for situations where there is a positive turn in fundamentals.

• “Pick the low hanging fruit” and wait for the market to unlock their value.


(1) Diversification

• Most important tenet of all.

• Mainly due to the illiquidity of small & micro-cap stocks.

• This also increases your chances of success.

• Ideally, put no more than 10% into any one position.

Philosophy & Tenets of Small & Micro-Cap Investing

(2) Small & Micro-cap Stocks Are More Reasonably Valued Than Large-caps

• They trade at multiples that are a fraction of their large-cap or

“blue chip” counterparts.

• The average P/E multiple on the S&P 500 is currently 17x.

• We often find companies trading as low as 5 or 6 x this year’s estimated earnings.

• Some small-caps trade at a significant discount to their book value.


(3) Financial Statements are More Transparent and Easy to Follow

• Extremely complicated nature of large-cap company’s financial statements, increase their ability to hide important financial information.

• Micro-cap companies generally have, at most, two or three revenue streams so their ability to hide information is greatly reduced.

• Transparency is critical because it makes it easier to invest with confidence if one feels they have an accurate barometer of the company’s business.



(4) Individual Equities Offer the Greatest Potential for Portfolio Performance

• Within traditional investment products a truly

“portfolio changing experience” can only come from individual equities.

KOBEQUID (KQR.T) 1997 – 2000

Return 1,600%


COMPUTER MODELING (CMG.T) 2000 – 2005

Return 1,500% (includes dividends)


TUSK ENERGY(TKE.T) 2001 – 2004

Return 700%


TUSK ENERGY(TKE.UN.T) 2001 – 2005

Return 2,100 % (includes payouts)


MDI TECHNOLOGIES (MDD.U.V) 2002 – 2005 Return 1,400 %



PORTFOLIO EXAMPLE $10,000 Investment - One winner, one loser

Company A - $5,000 invested Shares appreciate 1,000% Total $50,000

Company B - $5,000 investedGoes bankrupt Total = $0.00

Portfolio Value $50,000Initial Investment $10,000Total Return = 400% return


(5) Invest Large Amounts in Fewer Companies in Order to Properly Focus on the Individual Companies

• This means monitoring the quarterly updates, news releases, talking to the C.E.O. and making site visits.

• I research 60 to 70 companies on an ongoing basis but invest, or concentrate on, approximately, 20.

• This gives greater insight into their trading patterns and, ultimately, this knowledge benefits my client’s returns.


(6) I Rely on Regular Dialogue With C.E.O’s to Attain Greater Insight Into the North American Economy.

• The C.E.O’s, whom are current clients, represent companies that are

doing a combined $600 million worth of business in North America.

• It’s imperative these head decision makers stay on top of their business environment and trends in the economy.

• They are not passing on “insider information” but are giving me their insight as to the current economic environment.


(7) Hang on to Your Winners as Long as Possible!

• … and perhaps even add to your position (if they are still undervalued).

• If management has been able to position the company and its product/services correctly, quite often the growth curve is steep and dramatic.

• Experience has taught me that often your winners remain your winners.


(8) I Invest Alongside My Clients.

• The companies I recommend, I buy myself.• Naturally, I follow them closely.

Conclusion

• Buy a basket of businesses.• Eliminate some of the risk through diversification.• Use fundamental analysis to assist in finding undervalued

businesses.• Look for companies that have been in existence for over 10

years and ones that provide a great deal of data to assess.• The companies trade at much lower multiples than their larger

counterparts.• Focus on their businesses to ensure your continued

investment is on track.• Buy companies that are at the steep end of the growth curve.

Conclusion

(5) Brent Todd – Why

Brent ToddInvestment Advisor

Canaccord Capital Inc.

Email: [email protected]: 604-643-0106

Toll Free: 1-877-643-0200

investing in small & micro-cap companies for superior returns brent todd investment advisor

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