I thought I would give everyone a high level view of my strategy.
I look for under loved, under researched turnaround stocks that are run by directors who need the company to succeed as much as I do.Let’s look at those four individual factors at a high level;
Under loved: I’m looking for companies that have really frustrated and fed up shareholders. You find these situations where companies haven’t been performing and the share price has been decimated for whatever reason. I find in these situations shareholders generally are willing to let go of their shares at heavily discounted prices.
Under researched: I focus on the really low end of the micro-cap space, I’m talking $30m mc and below. In this end of town, you really only have retail investors, very niche brokers and some full time micro-cap investors. There are thousands of companies in this space and you don’t have that many people who dedicate themselves to analysing these stocks. Hence the competition is low.
Turn around stocks: this goes back to point 1. You’ve got this company which hasn’t been performing, directors have been around for a while and getting a good salary and consequently they kind of tick the boxes but don’t do much to turn around the company. Then suddenly a new management team comes in, changes the direction slightly, starts managing their resources etc and you have a turn around story. Most stale shareholders don’t buy it and just use the new liquidity as an event to exit. This is where I like to come in.
Directors shareholdings: I need the people running the company to need to want the company to be as successful as I do. Not want to but need to. If they don’t have a significant shareholding in the company then in the micro-cap space that’s a huge red flag for me.
I’ll give you an example. I was researching a particular company which ticked a lot of the boxes in my investment strategy.I started digging a little further into the CEO and found that he was originally appointed in 2011 when the share price has hit a high of roughly $1.70.
I moved on to how many shares he owned and he had roughly 9 million shares, of which he didn’t buy any on market. That was really disappointing because that’s kind of a deal breaker for me but I thought I’d keep finding more out about this CEO.To my surprise I found that he was taking home a packaged salary of $400,000 a year in 2019.
Even if we account for inflation he still took home over $3,500,000 in pay over his tenure as CEO. At the time of writing this course the share price for this particular stock stands at $0.006.So during his tenure the share price had dropped 99% and he still took home $3.5m.I also generally find that my sweet spot for holding is about 24 months.
The key isn’t to holding blindly for 24 months though. These aren’t large caps where you can buy and forget them. You have to be on top of everything that’s happening in the company and the sector.
