I know there are a lot of microcap/penny stock investors here. But which of you are value investors? If you are one, what are the key metrics you look at? Is price-to-book-value a good metric to use to value these companies, or can that be misleading? What websites/blogs/etc do you use?

I'm expanding my investing universe to include microcaps and penny stocks, so I would like some tools from value investors...

Originally posted in thread: 10861

I think that statement is an oxymoron! Contradictory in terms.
Larry

Originally posted in thread: 10861

NOTOLDTOBOOGIE: " think that statement is an oxymoron! Contradictory in terms."

I don't think so. If you look at guys like Warren Buffett, they started out with small-caps, microcaps, and penny stocks. I'm not saying it has to be a tiny company; it can be a small-cap that's worth a couple of hundread million. I think if Buffett had a small portfolio today, he would be looking at the smaller companies.

Originally posted in thread: 10861

He didn't take small positions in small companies. There is a big difference here. I own a microcap, but I run it and I make decisions every day that either adds or detracts from its value.
When he bought the mobil home manufacturer a couple of years ago, he got several of his other companies involved with the new entity to turn it around. They now finance the purchase and furnish components to the new entity. There are synergies at work that a simple investment in a company could not do. IMO

Originally posted in thread: 10861

portfolio but PENNY STOCKS are a different matter altogether as it has little to do with the size of the company though penny stocks are usually SC. Rather it has to do with the health of the balance sheet and the viability of the business model. And on those two points penny stocks more often than not fail to be a serious consideration for investment for all but the least risk averse and even then prudence would dictate that they would be a very small part of a diversified portfolio.


Having said THAT your point about the potential of A FEW of these companies is valid and I'd also agree that 'value' investing would be the prudent way to go. So here's what I would look for:

A business model that's survivable, i.e., a unique product or service which has little market penetration and most importantly little prospect of being easily, quickly or cheaply duplicated by potential competitors.

Sound, honest and transparent management which has 'skin in the game', i.e., the managers have their own money (NOT STOCK OPTIONS ONLY, please!) tied up in the business AND they have oversight from an independent board of directors.

Preferably more than one product or service currently marketed and profitable with a healthy dose of R & D to
fill the pipeline in order to grow the business down the road. This is especially crucial in the health care and tech sectors.

Abundant free cash flow, excellent profitability, high margins and little or no debt on the balance sheet are paramount. If a dividend is paid that's so much the better.

The stock is priced below its peer group and/or below its historical range of valuations.

Not rocket science here, NTTB, as these are characteristics of any sound 'value' investment regardless of company size or market sector.

I hope this helps you.

Peace and love,

Flakey

Originally posted in thread: 10861

If you're going to buy penny stocks (and I don't), value investing is far more prudent that chasing after stories of potential growth. I have no doubt that there are hundreds of penny stocks that are great values, but the reason that they are that way and will stay that way is because it is very difficult to research them. Information is limited on many of them and you're really going to have to go out of your way to find as much data as you can. Even then, there may be a lot of pieces missing and the insight as to whether the stock is a buy has to come from you, not outside opinions.

Originally posted in thread: 10861

there's little reliable info available for penny stocks, which makes it hard to determine a fair value. in that sense, it's hard to be a penny stock fair value investor.

now, there's exceptions: Angiotech pharmaceuticals (ANPI) used to be in the $30s, now trades aroun $7, and M* has a fair value of about $14 (I can say that, because the fair value was given on the video profile, which is available to everyone).

Originally posted in thread: 10861

How can you find the value of a stock/class of stocks which

A. Dont provide financial information
B. The information if provided is unreliable?

The whole concept of value investing is based on the premise that you can come up with a reasonable valuation of a stock and have a margin of safety. If you cant determine the value, how can you invest?

Unless you have the financial might or the know how of Warren Buffet, quoting him as a example to justify your process is wrong. Can you sprint like an olympic champion? If not, whats the point of saying because the champ did it in 9 seconds flat, you can do it as well?

If you are quoting Warren Buffet as an example, here is a quote from him "In my early days as a manager, I, too dated a few toads. They were cheap dates - I've never been much of a sport -- but my results matched those of acquirers who courted higher priced toads. I kissed and they croaked"

A little later in the same report he says "And thereafter I revised my strategy and tried to buy good businesses at fair prices rather than fair businesses at good prices"

Do your own DD.
Onemore!

Originally posted in thread: 10861

OneMore: "A little later in the same report he says "And thereafter I revised my strategy and tried to buy good businesses at fair prices rather than fair businesses at good prices""

I'm not sure how valuable his quote is. Buffett's returns during his partnership dates were far higher (I think it was in the 30%+) compared to with Berkshire Hathaway (20%+).



"Unless you have the financial might or the know how of Warren Buffet, quoting him as a example to justify your process is wrong. Can you sprint like an olympic champion? If not, whats the point of saying because the champ did it in 9 seconds flat, you can do it as well? "

The goal is not to become a billionaire but just make a few hundread thousand. If you go with Buffett's view, one can't be certain that they can or cannot be successful until they try it...

Originally posted in thread: 10861

The goal is not to become a billionaire but just make a few hundread thousand.

Hey Koala, at the rate of returns you get every year it'll take you 100 years just to get to the first 100k

Originally posted in thread: 10861

OH: "Hey Koala, at the rate of returns you get every year it'll take you 100 years just to get to the first 100k"

LOL maybe true... but at least it isn't 200 years. Then I would really have given up... but 100yrs ain't bad ;)

Originally posted in thread: 10861

and the Nasdaq (less than $5 per share is a penny stock). However, I agree most are risky and tend to do reverse splits to keep their listing.

OHOH, I haven't seen one in years that I wanted to invest in.

Originally posted in thread: 10861

The only one I owned was a stock named Lumera. Its still listed on Nasdaq. It was my first and last. I got out of the stock and even made a decent profit. But it was only because greater fools jumped in!

The company started with "we are the best mangement ever" slogan, buy the end of my holding period, they would make multiple press releases about the same crap. As years passed and success eluded and still eludes them, they kept burning through cash. The trouble was that even with clean financial info available, one couldnt rely on what was said in it. The strategy kept changing day after day.

What increased my confidence in the stock was the fact that both cisco and intel owned big chunks of it. Later I realized, a 24 Mil. investment for cisco isnt even an ass wart. For me, it was the largest position.

Then came the lucky press release and the stock jumped from 1.80$ to close to 10$!!!! Sold all the way up and out :) but it was an investment I learnt a lot from.

The suckers who got in at the top are still waiting for a payout.

They had good technology but had no muscle to actually implement the vision. If one had enough money and resources, the company can be turned around. But small investors like us dont have much pull. Not worth losing sleep over.

As far as Buffets quote, what I was pointing towards was investments like the Berkshire (textile) company and a few others. A similar discourse by him about junk bonds is worth reading as well, what he indicated was when buying riskier investments, he has always bought fallen angels. Where the underlying business is not watered down. He never bought bonds which were junk to begin with. I would extend the same logic to penny stocks as well.

Just some thoughts
Onemore!

Originally posted in thread: 10861

I do agree with almost all the answers that you have received, including the sarcastic ones. But still you are one of the very and I mean very few who has asked an intelligent question about penny stocks.

My answer to you is to read the Intelligent Investor by Ben Graham. It was out of print for the longest time, but Jason Zwieg has recently updated and released it. Ben Graham is referred to by many to be the Father of Value Investing. So whatever size company you buy, you'll be better equipped having read this book.

Good luck.

Ben Graham

Originally posted in thread: 10861

And, I did okay with it. "Played it" a couple of times and made pretty good money, but got tired of the whiplash.

Originally posted in thread: 10861

Thanks for the response Maurice (and others). I'm actually reading The Intelligent Investor right now. I agreee with most of you here that value investing is the way to go with small-caps and microcaps (in contrast to many other penny stock investors here, like MunchkinMan and others, who seem to be into concept and growth investing).


Also one other thing to note is that microcaps don't necessarily mean that their financial statements are unreliable or they trade on pink sheets only. One of the companies that I am seriously looking at is Shoe Pavilion (ticker: SHOE). It has a market cap of $30m but its financials aren't as unreliable as one may think (although one can never be sure of anything). But I agree with those that say it's hard to get information on these companies. Other than the SEC filings (and message board postings, if lucky), there is little one can find out...

Originally posted in thread: 10861

If you are looking at SHOE, I would suggest you to look at FINL as well. Not because I think its better but the understand the problem the industry faces.

Mall based retailers of shoes and other sports apparel have to deal with low margins and lack luster products (Nike and others have their own stores, they dont supply these retailers with the best of the stuff in enough numbers)

I had owned FINL at one time before realizing that they had no power over their own business. Got out before the bottom fell off.

Onemore!

Originally posted in thread: 10861

Thanks for the FINL info OneMore. The Shoe business definitely has low margins. That's one of the big risks. I think the whole sector is going to face some near-term issues, especially if the economy slows. Although shoes are considered consumer staples, consumers may cut back slightly.

One thing about FINL, SHOE, and others, is that they have been sold off so sharply that they are attractive as value plays. They are trading below book value now so things look a bit different. Nevertheless, thanks for hte info. I'll do more comparison between FINL and SHOE...

Originally posted in thread: 10861

Look into UFPT if you are looking for a value play in micro caps. They have nice cash flows and are run well. They have no moat to speak of, but what micro cap does? Overall they have operated their buissness profitably even in tough times, and at 12 times earnings with growth ahead, it looks cheap.

Originally posted in thread: 10861

Greetings KoalaBear33!

The Munchkin Man is delighted to read of your interest in penny stocks.

The Munchkin Man has been keeping silent on this thread because the Munchkin Man really did not know what to say.

The Munchkin Man has never looked upon types of penny stock investing by "value" or "growth" before.

Your following comment was very interesting to the Munchkin Man:

"I agreee with most of you here that value investing is the way to go with small-caps and microcaps (in contrast to many other penny stock investors here, like MunchkinMan and others, who seem to be into concept and growth investing)."
_____

The Munchkin Man has no argument with the above.

The Munchkin Man likes to invest in the "concept" of given penny stock, and with the potential for "growth", with the hopes that the penny stock will follow through with that "growth."

On the other hand, the Munchkin Man would not invest in a penny stock unless the Munchkin Man thought it was undervalued.

Sometimes there is not enough financial data to determine the "value" of a penny stock.

This is where the Munchkin Man's "concept" approach comes into play.

If the Munchkin Man likes the "concept" behind a company and its penny stock, the Munchkin Man may decide to invest in it, in spite of the lack of sound financial data.

A prime example is the Munchkin Man's number one penny stock pick -- 3D Icon Corporation (TDCP.OB).

This is purely a "concept" play. The link to the company web site will tell you what this "concept" is:

3D ICON CORPORATION

The company's product line is still in the research, development, and patent stage.

Most people like to invest only in what they can see, measure, and quantify.

Sometimes the Munchkin Man likes to invest in what he cannot see, measure, and quantify.

The Munchkin Man likes to invest in a company's future and not its past.

Only the future will tell whether TDCP.OB proves to be a "value" play and a "growth" play as well.

In closing, the Munchkin Man would like to thank you for your very interesting comments.

Good luck to you.

Best Wishes,

Munchkin Man

Originally posted in thread: 10861

where are they predicting their growth? Are they dependent on a few companies for sales?

Originally posted in thread: 10861

TDCP.OB

Thanks for the mention MunchkinMan. I took a quick look and it's not my type of investment. 3D Icon is clearly a growth play based solely on whether the product will succeed or not. If you are pretty confident that the product will take off, go for it. But I don't want to gamble on such a scenario.

---------



UFPT

Took a quick look at UFPT. It's not the type of investment I'm trying to specialize in. It is not contrarian (my primary criteria), but it's not too bad from a value investing point of view.

The stock isn't contrarian because it is not out of favour or trading near its 52wk low or anything. It is trading above book value.

However, UFPT does have a low price/sales and p/e (trailing: 11; forward: 7) ratios. Debt/equity looks to be low (good) with good balance sheet. It is trading net-net (net current assets > all other liabilities i.e. rough liquidation value positive (depends on what those receivables are worth)).


Here are a couple of issues that pop up into my mind (it doesn't rule out the stock but one should think about them):

* as EagleTed says above, where will growth come from? Margins are low (ok for a microcap) but growth will be hard to come by. If there is no growth (or the growth is extremely low), and given that the stock is trading above book value (i.e. not out of favour or extremely cheap), the stock may not go up (it can go flat). This is a problem with many microcaps (even if they don't go down, they may not go up because the business doesn't growth much)...

* How about foreign competitors (particularly from cheaper places like China or other places)? I only took a quick look but these guys sell packaging with their manufacturing done in the US. What's to stop cheaper competitors from offering the same thing?

* Although you said that their cash flow has been positive through bad times, I'm not so sure. If you look at this M* long-term table you'll note that they didn't make money in 2003 and 2004. So it's not necessarily safe during tough times. Also (read my next point)...

* This company looks like it's very cyclical. If you go with the theory that I follow, cyclicals trade with low P/Es during a peak and with high (or negative) P/Es during a trough. You should buy when P/Es are high! This certainly looks to be the case if you look at the link I mentioned above. P/E was low in late 90's and price was high. Then P/E kept dropping and the stock hit a trough in 2002(?). The company lost money and P/E was undefined when the stock price was at the bottom. Then the stock went up. During this time, the P/E ratio kept declining. I think we are near a top since the P/E ratio is low. So, this company looks cyclical (most industrial manufacturers are (except some true growth companies)).


I don't find this company very attractive because, in adition to it not being out of favour (my preferred investment style), I think it is cyclical and the low P/E ratio may be misleading... Just some views from a newbie investor...take it for what it's worth...

Originally posted in thread: 10861

This company is still a buy here. I did not hear the CC and I am anxiously awaiting the 10-Q. I am in the process of making a DCF for this company. Will update when I have it.

Therye

Originally posted in thread: 10861

UFPT does not have conference calls.  I don't know what I was talking about.  Anyways looks like the stock is up nearly 100% since this post.  Maybe it was a pretty good value play after all.

Therye 

UFPT is a perfect example of where insiders and workers have an advantage over the rest of us, especially when it comes to microcaps. It still looks interesting, but the ability to get info on it is hard. Their recent M&A may be prudent and a good investment, without knowing anything about the acquired company the rest of us are in the dark.

Oh I definatly agree with your assesment.  I actually bought at around 4.75 and sold around 6.75 after about a year because I was becoming frustraited with the lack of info.  I have  a feeling that this acquisition will weigh on earnings since the company has not said that it will add to earnings.

 

Tam 

I believe that value investing in penny stocks is an oxymoron. If they have been beaten down to pennies, the story is usually over and if they are starting out as pennies the risks are significant. I am a deep value investor so maybe I am just prejudiced against pennies.