The Intelligent Investing section on Forbes.com featured an interview Steve Forbes conducted with low-priced stock expert Marc Gerstein titled “Outsmarting Mr. Market”. Mr. Gerstein feels that although “The market is wiser than ever… there are still opportunities to be found.”
A low-priced stock by Mr. Gerstein’s definition is one trading below $3.00 per share. One reason why Gerstein feels there are more opportunities in this space is there are fewer eyes on microcap stocks. “If you want to try to get the opportunities, you have to go where the crowd isn’t”, forbes says Gerstein. The best stocks are not always the widely publicized ones we hear about in mainstream media and Gerstein feels this is a common mistake investors make.
The first thing Gerstein says he looks for is business legitimacy. “I just have to look at the company and see: Does this look like it’s a real business? Is this an honest business? Does this have numbers that make sense that I can actually evaluate?”
Other criterion Mr. Gerstein looks for is trading legitimacy, dani-info preliminary indications of business competence, and decent corporate quality; meaning margins, returns, balance sheet, that sort of thing, or cash flow. He goes on to say, “I give a lot of choices here. And I’m not that picky. The reason being, conservatism sounds nice, but taken to an extreme it can become troublesome.”
Another important thing Gerstein points out when ranking very small companies is that fixed costs are a much bigger part of their operating picture than a large company, meilleurscasino so a lot of these companies are in the red. “Now one thing Mr. Market does very, very well” says Gerstein, “is he recognizes that diminishing losses can be every bit as positive as growing profit. And a lot of people don’t realize this. They’ll see red ink and they’ll go, “Oh my god. It’s like internet stocks 1999. I can’t do that.” Gerstein feels you can if it’s a real business with real sales, and you can see the progress as well as where, over time, the company can outgrow its fixed costs.
Mr. Gerstein did state in this interview that he currently stays away from pink sheet stocks, however, he also said he won’t rule it out forever. Many professional analysts will stay away from pink sheet stocks due to a lack of readily available public information such as audited financial statements and reports filed with the SEC. While the SEC.gov website does state that “many of the microcap companies that don’t file reports with the SEC are legitimate businesses with real products or services”, they caution potential investors to do their research and ask questions.
There are many small companies out there who elect to be fully reporting with the SEC which gives them public transparency and establishes business legitimacy. However, due to the significant costs involved in taking a company public, their stock may initially begin trading on the OTC Markets which has different tiers, including the pink sheets.
If you receive an email alert, newsletter or phone call regarding a little known microcap company, consider the source. Did you receive this information from a professional investor relations firm, such as Guardian, or did it come from a promotional company? Do they have a website complete with business address, phone number, and management bios? Has a complaint ever been filed about them with the SEC?
Never use the above types of communications as your sole basis for investment decisions. For companies which Guardian provides investor relations services, we publish links on our website and in our email alerts to external resources that can be verified. These include links to our client’s website, stock information, news releases, financial statements, and SEC filings, if applicable. If you are working with a registered investment professional, we encourage you to ask them to provide written information about any company you may be considering investing in.
There are a lot of great companies with real products and sound management emerging in the microcap space. And, as Mr. Gerstein pointed out, they present opportunities for good gains. As an investor relations firm, it is Guardian’s job to make the investment community aware of such companies who do not receive attention in mass media. Like Mr. Gerstein has done, determine your criteria and get the facts about the company’s management, products, services, and finances. Ultimately, only you can decide what may be a good investment for you and how much risk you are willing to take.