The Micro Cap Investor

The Micro Cap Investor

Learn how today's smartest investors are discovering opportunities--and reaping profits--ahead of the Wall Street pros

Micro cap stocks are all but ignored by professional investors who can't risk losing their companies' clients--and their own careers--to the sudden volatility and price swings that are common to the micro cap market. But it is just that volatility, plus their proven record for outperforming large cap stocks over the long term, that makes micro caps perfect for independent investors looking for market-beating returns.

The Micro Cap Investor takes a behind-the-scenes look at this exciting sector to:
* Detail a market-tested process for uncovering and investing in micro caps with the greatest potential to outperform the market
* Reveal the ten key catalysts that take under-the-radar micro caps and propel them into the public spotlight
* Explain how smaller investors can use the "information advantage" to actually gain a sizable edge over institutional investors


Let The Micro Cap Investor show you how to uncover today's most promising companies, and use the power of micro cap investing to dramatically improve your long-term investment performance.

Preface ix

Acknowledgments xi

Chapter 1 Characteristics of Micro Cap 1

The Nebulous Micro Cap (What Is a Micro Cap Stock?) 1

The Micro Cap Dilemma (Why Do They Exist?) 5

Chapter 2 The Information Advantage 13

Understanding the Information Advantage:

Efficient Market Theory 13

Weak-Form Efficient Market Theory 15

Semi-Strong-Form Efficient Market Theory 16

Strong-Form Efficient Market Theory 16

The Random Walk Theory 17

The Practical Answer 19

Venture Capital Theory 21

The Public-Private Bridge 22

Conclusion 24

Chapter 3 Micro Cap Stocks as an Asset Class 25

Investment Performance: Small versus Large Stocks 25

A Survey of Modern Portfolio Theory 26

Asset Allocation and Modern Portfolio Theory 33

Asset Allocation and Micro Caps 34

Economic Linkage 39

Venture Capital and Private Equity 39

Micro Cap versus Venture Capital 41

Chapter 4 The Micro Cap Asset Class and Portfolio Construction 45

Micro Caps in the Portfolio Asset Allocation 46

The Portfolio Contribution of Micro Caps 47

Conclusion 50

CHAPTER 5 Using the Information Advantage 51

Methods to Evaluate Principal Agent Actions 51

Management, Management, Management 52

Who’s Doing What: Insider Information 53

Management Style 59

Strategy and Planning Systems 59

Management Changes 61

Management Reputation 62

How the Company Develops and Promotes Employees 62

Conclusion 63

Chapter 6 Corporate Governance 65

The Company’s Social Relationships 67

Information Resources 68

The Company 69

Competitors 70

Customers 70

Suppliers 70

Trade Associations 71

Industry Professionals 71

Legal Documents 71

Public Company Federal Filings 72

SEC Reports 73

Annual Report Form 10-K 74

Quarterly Report Form 10-Q 77

Material Current Events Form 8-K 77

Not All Reporting Is Equal 78

CHAPTER 7 Micro Cap Stocks and the U.S. Domestic Economy 81

Why Micro Cap Stocks Appear Cheap Relative to Large Stocks 82

Fundamental Valuation Techniques for Micro Cap Stocks 89

Basic Financial Analysis of Micro Cap Companies 90

Price-to-Book Ratio 91

Price–to–Free Cash Flow Ratio 92

Low Price-to-Earnings Ratio 93

Conclusion 93

Chapter 8 Micro Cap Case Study: A Company with All the Indicators 95

Smart-Money Owners 96

Cheap Valuation 96

Skin in the Game 98

The Transaction 101

Chapter 9 Consolidating Industry Case Study 107

Case Study of Suiza Foods 108

Other Opportunities 116

Chapter 10 Gehl Company Case Study 133

Chapter 11 Pozen Company Case Study 147

Chapter 12 Private Investments in Public Equities (PIPEs) 155

Tracking PIPE Transactions 159

A Brief Case Study of a PIPE Transaction: Ptek Holdings 161

Chapter 13 A Framework for Investor Action 167

Chapter 14 Micro Cap Fund Investing 173

Index 181

RICHARD IMPERIALE is President and founder of Forward Uniplan Advisors, a Milwaukee,Wisconsin–based investment advisory holding company. Forward Uniplan and its affiliates manage and advise over $300 million in client accounts. Forward Uniplan specializes in providing clients with consistently superior risk-adjusted returns managing equity, REIT, and micro cap specialty portfolios.

Are you looking to trade a little security and stability for the opportunity to get in early on the next Microsoft? Study after study reveals that investing in micro cap stocks has generated greater long-term returns than investing in blue chips. Yet because micro caps are by nature more volatile than their blue-chip counterparts, and often trade out of the public eye on the OTC “Pink Sheets,” they are shunned by investment bankers and conservative buy-and-hold investors.

All of this makes the uncharted micro cap wilderness one of the last classic profit opportunities for independent investors.

The Micro Cap Investor gives you everything you need to know to carve out sizable positions in small, yet-to-be-discovered companies, and gain a huge advantage over mainstream analysts accustomed to focusing only on the “General Electrics” of the world. Outlining a detailed investment strategy designed—and proven—to work best in turbulent markets, this results-driven book will show you how to:

• Access little-known, but valuable resources to uncover and research potential micro cap investments
• Adapt fundamental valuation techniques and financial analysis tools to see which micro caps are poised to move up
• Use micro cap stocks to provide a valuable portfolio hedge against the general trends of the market

Micro cap stocks are the classic Catch-22. Because of their small size and relative anonymity, they usually fly under the radar of investment bankers and professional traders. However, these same factors make micro caps ideal for investors looking to leverage limited investment dollars into substantial profits. Let The Micro Cap Investor show you how to exploit the information advantage embedded in micro caps, uncover stocks that stand poised to become “ten-baggers,” and make micro cap investing an integral and profitable component of your overall investment strategy.