I have alluded quite often to my Rent.com experience in some of my posts above and here above is the link. It is an important reminder that after an initial 'fall from grace', small caps that don't meet expectations will get further punished, in some cases up to 90% from its all time highs.
So when people make 'nothing has changed' sentiments to support a long term hold thesis, it is that there wasn't anything that everyone thought existed in the beginning, simply a mirage people get caught up in the exuberance of a bull market that has passed. Also when people often say 'it is for the bottom drawer' implying a very long term hold, it seems illogical IMO to continue holding steadfastly after the stock has failed to realise its potential on most fronts and the sp has slided dramatically (just like the Rent.com , YOW and EDE charts) -a downward spiral sp is the market's verdict on the failure of the stock. The reality is that 95% of all small cap 'wonders' eventually fail (not bankrupt but rely on ongoing CRs to sustain an endless negative cashflow position) and there are telling traits IMO that distinguish the ones that make it from the ones that will never realise their perceived potential.
So what are these telling traits on the ones that are mostly unlikely? I think there are a few
(1) management that put their interest ahead of retail shareholders (like paying themselves excessive performance shares which are not aligned to proper indicators of company performance like revenues or profits; I have had posted on this before in relation to MYQ/YOJ/BUD/GSW)
(2) company announcements and disclosures - how they were made, frequency, nature and if they were actually material and meaningful to eventual cashflow position or merely to spruik sp in the short term, opaque disclosures and use of reporting standards dissimilar to conventions
(3) revenue model - how sale and transactions contribute to scaling of revenues and how scalable is the revenue model including how quick they can be realised. In some cases e.g FGO it could take a while for closure and implementation before revenues can roll in., similar with GSW/YOJ, a lot of trials and pilots and questionable that reported growth in volume transactions do not actually translate into material revenues in 4C
(4) for start ups without revenues but a great and unique value proposition, market acceptance and gaining traction before international competition sets in. In some cases, they don't ever get the traction their potential suggests and within a given limited time, other rivals would have eaten their pie especially US rivals. For every great idea, we like to think there is no competition as most of these small caps don't really tell us the true competition landscape- it is far from reality , and all you need to do is google your company's competition to find out.
(5) large expenses and overheads- other than share based expenses for management compo as mentioned in (1). some outfits do not control expenses and have large losses despite having a good product and potential market- take a look at AXP's $23m loss and its sp after announcing it.
(6) if growth is too good to be true, it is likely to be so- case in example GSW/ BIG/ BLA
(7) management background - origin of founder, partnerships etc, and no need for 'celebrity' management that can promise the sky but don't walk the talk
(8) frequency of CR and what they were used for (e.g buying profits from M&A because their model is failing)
We can say ASX is on a witch hunt after the GSW and BIG debacle but I am sure there are many small cap stocks out there which have been making overpromising announcements in the past that has now come to bite them and you should be on the alert to determine if your stock is not one of them.
