A "Story" Stock with Red Flags: A Case Study on Brekford (BFDI)

One of the most difficult things for new investors to learn in the world of microcaps is to know when a company is nothing more than a "story" stock as opposed to a business that achieves what management says it is going to achieve, or at least makes progress in achieving such things. Speaking from my own experience, it is so incredibly easy to get excited about owning a company in which everything management tells you sounds great, and one in which the business model is exciting. However, just like with every microcap stock you own, constantly re-visiting your investment thesis is key to ensure your investment isn't stuck in something referred to as a "story" stock. Often times, "story" stocks have red flags that begin to appear more and more frequently as the business progresses, and these red flags generally mean it is time to sell the investment. 

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Insider Dynamics in Microcap Companies

Warren Buffett famously enjoys buying companies that “even monkeys could run”. His theory is that he wants a business with such a large moat that not even the company’s own management could destroy it. However, this ideology probably won’t fly in the microcap space. Microcap managers are of exceptional importance – their strategies, decisions, and intelligence essentially make or break the company, no matter how seemingly strong the business is. Almost every microcap success story is, at its core, a management success story. And because of this, you probably won’t find “monkeys” leading any sustainable multi-baggers.

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Form 4 Filings: Insider Buying 101

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In my last article about how multi-baggers hide out in “easy money” places, I discussed five strategies microcap investors can add to their tool box.  Deep “in the trenches” microcap and nanocap investors are always looking for an information edge to exploit positive or negative information and to make money or protect portfolios.  One of these Information Arbitrage (“InfoArb”) tools is tracking buy and sell stock transactions disclosed in Form 4 filings (Form 4’s) by Management, Employees, Board of Directors or 10% Owners (MEBO). 

I wrote this article for beginner investors, and for those who may still have a vague understanding of the overall layout of Form 4 filings, including related codes contained within them.

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Using Company Filings to Your Advantage: A Case Study on Alphinat (NPA.V)

One of the things that cannot be overstated enough about microcaps is how lucrative it can be to find and take advantage of information arbitrage opportunities. Don't let the term "arbitrage" intimidate you...my simple definition of it is "a disconnect between share price and publicly available information that will come to light in the near future, causing an immediate re-pricing of the stock." Company filings with the SEC (in the USA) and with SEDAR (in Canada) are incredible avenues of information that, if analyzed correctly, can provide you with a huge information advantage over other investors. While in the grand scheme of things the percentage of likely finding an opportunity based on information arbitrage is not significant, when you do you should bet big. 

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The Nature of Microcaps

Disregarding valuation, few would disagree that Amazon, Facebook, Tesla, and the like, are some of the best companies out there. They are highly defensible, rapidly growing, and run by intelligent fanatics. You really can’t really ask for more. But that’s also why they’re the biggest, most highly valued stocks in the market – they had the superior growth and execution to get them there. 

Microcaps are the opposite. There are only two ways for a company to get to microcap size: decline substantially from “larger-cap” status (“fallen angel”) or reverse merge into a public shell (“newcomer”), and neither is very promising. 

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Help! When to Sell a Position After a Big Move Up? A Case Study

Occasionally I receive questions about 'when is the right time to sell?' after a big run up in a stock, so I thought it would be helpful for everyone if I posted my thoughts on here. Quickly though...if you find yourself faced with the dilemma of when to take profits, pause for a second and congratulate yourself. Stay humble, but smile for a second and pat yourself on the back. Investing isn't easy despite what some may think or tell you. It is flat-out hard work.

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Just Getting Started with Microcap Investing? Stay in Your Circle of Competence

So you want to start investing in Microcap companies?  Where do you get started?  That is a big question to answer but lets keep it SIMPLE.  In this space there are a lot of companies with crummy management, looking to take advantage of their investors.  The absolute main starting point to investing in Microcap companies is finding your investment STYLE.

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5 Easy Money Places Where Multi-Bagger InfoArb Opportunities Hide Out

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You probably noticed that I often use the term “Information Arbitrage” (InfoArb) to highlight opportunities hidden in corners of the microcap universe that investors can overlook. An information arbitrage exists when a disconnect between stock prices and available public information on a company is noticeable, and monetarily worth pursuing. Sometimes, the mispricing of microcaps can be substantial. 

Some of my own team members criticize my use of the term “InfoArb” because they think I could lose some credibility from sophisticated investors who understand what “arbitrage” means in its most literal sense. In its purest form, a financial arbitrage refers to situations that can result in a relatively risk free profit.

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