Opportunity & Philosophy
The objective of our Microcap Equity strategy is long term, absolute capital appreciation. Our philosophy is based upon the notion that microcap companies are a neglected asset class; providing ample opportunities for research-minded investors. Our goal is to capitalize on this anomaly by maintaining a nimble capital base, conducting rigorous due diligence on all companies under consideration, performing thorough channel checks, and maintaining regular dialogue with management teams.
The microcap segment of the public equities market – businesses with market capitalizations of $200 million or less – is a target rich environment. This layer of the market tends to sit beyond the reach of many institutional investors given the liquidity constraints and utter lack of a research coverage. We believe the experience of our team provides us with a distinct advantage in this asset class. This is a buy and hold investment strategy that has been extremely tax-efficient.
Investment Strategy
Our investment process is predicated upon deep-dive fundamental research. We are in pursuit of quality businesses with strong balance sheets, which typically equates to little or no debt, and net cash. From a portfolio perspective, our holdings tend to be self-funding, generating positive free cash flow. We purchase shares of these businesses when they are relatively unknown and selling at very low multiples to cash flow (generally less than 5x 1 year out EV/EBITDA), but growing operating income at approximately 10% annually or better. Moreover, we look to incorporate investment themes within our work, which leads us to businesses benefiting from a sustained undercurrent of capital spending, such as fiscal expenditure initiatives, changes in government regulation, or highly disruptive technological advances. Given our orientation toward companies with solid balance sheets, strong financials and low valuations, our work is highly focused on a subset of the microcap universe that does not suffer from quantitative or qualitative opacity.