Discover the investing strategy of a well-known micro-cap investor
29-Sep-2023 •Hemkesh Khattar
Do you want to know which micro-cap stocks can become a multibagger? Ian Cassel is the man to follow.
Famous for launching the 'MicroCapClub' in 2011, Ian Cassel has been investing in micro-cap companies since 2008. Over the last 15 years, Cassel and his team have discovered numerous multibagger investment opportunities. As a result, Cassel has become a celebrity in the investing industry, with more than 11,000 members in his MicroCapClub.
We recently came across a podcast exploring his investment style and philosophy. Here are a few snippets from it.
Cassel explains successful investing in a multibagger micro-cap as a 'lightning in a bottle' phenomenon. These investment opportunities are scarce and hold the potential for explosive returns to investors. However, discovering these opportunities takes work. He explains a combination of three key elements that can lead to a 'lightning in a bottle' kind of investment:
He adds, "So when you combine all three of those things — a small company, a unique, one-of-a-kind business with a higher organic growth rate or a highly leveraged business combined with not very many outstanding shares—it creates explosive earnings per share growth. And that's what I've seen over 20 years: those companies that can go from zero earnings per share to a dollar or even two dollars per share in like one or two years, that captivates, mesmerises the investor base."
An important factor before making an investment decision is the company's leadership. Cassel stresses the importance of quality leadership and a healthy culture in the company. The major red flags for Cassel are any fraudulent past of top management, unnecessary and substantial party transactions, and a complex capital structure.
"The leadership obviously matters, and I spend a lot of time on the leadership side. I'm very quality-focused and have co-authored two books on intelligent fanaticism. Uh, really trying to fine-tune my lens for finding great leaders. Because that's the key, I mean, to find great companies early, you got to find great leaders early. And so just fine-tuning that qualitative lens."
Beyond rigorous research, Cassel strongly believes in continuous due diligence. He believes creating a 'Coffee Can' portfolio of micro-cap companies is difficult because of a lack of proven track record and higher risk. An investor needs to remain updated regarding the company's performance and business strategy after investing in a company. A timely exit strategy is crucial if the company isn't performing well.
"As soon as you make that investment decision, especially with a small company, they're kind of like teenagers. You don't really know how they're going to turn out. You have an idea, but you kind of have to watch them. And so the maintenance due diligence and research are really important, I think, for micro-cap and small-cap investors, just because these companies are small and they're evolving, and quite honestly, most times they're not going to evolve in good ways. It's going to be bad... I probably have owned 40-50 companies, and I probably own three from that period of time. So that shows you, you know, this is a higher turnover type proposition."
Another critical aspect that Cassel discussed was investing in small companies during economic slowdowns. He underlines the importance of investing in companies that create irreplaceable products and can survive harsh economic conditions. A small company with a strong market hold in a niche product segment can be a highly profitable investment opportunity during economic downturns.
"I think a good place to start is with a small company. If a company has a great product, you know, it only has a small revenue base, it doesn't take a lot to grow. It just takes two or three customers to have that thing grow even through a bad period. And so, I like the idea of investing in small companies in recessionary periods.
...A lot of the really, really good and interesting microcap companies dominate niche markets where they might sell their products into areas of the market that aren't cyclical. And so you can find these smaller companies where not being global can benefit you."
Cassel strongly believes in networking and building industry connections. A strong network of experts, business owners, auditors, and investment enthusiasts is essential for an investment professional. Networking becomes even more important when investing in small and micro businesses as the research and discovery process requires more attention to detail and verification than large-sized companies.
"Your ability to quickly get to the truth on a stock is really, really important when you know who to go to or who to ask for specific questions, whether it's about the company itself or an industry question. That's a huge advantage. Building out your network helps you find the truth quickly, and for me, it's one of the reasons why MicroCapClub was started back in 2011...
The ultimate goal, I believe, for any stock picker, and if you talk to any successful stock picker who has been investing for over a decade, they would say that their personal network of investors and relationships is probably their greatest asset. The high point of anybody's network or relationships is when you are the first call they make. When someone in your network reaches out to you and shows you an idea, that's when you know you've made it — when your network pulls you into great situations because they value your involvement."
Suggested read: Value investing with Tobias Carlisle