American Consequences - May 2020

1. Lack of liquidity Institutional investors struggle to allocate capital in high-quality microcaps simply because they don’t trade enough shares. Fund managers would end up with oversized stakes in tiny companies. Hedge funds have no interest in investing $10,000 in Netflix to make $13 million. They want to be able to invest $10 million and turn it into $13 billion . Back in 2002, $10 million would have been almost a 10% stake in Netflix. And once a fund’s ownership crosses the 5% threshold of a company’s stock, it needs to file a 13D – a special filing with the SEC to designate itself as a material shareholder. That means more paperwork. And the simple act of filing might prevent the fund from trading more in the company’s stock because it’s now viewed as an insider. Even worse for the fund, it would take time to get invested in the stock. It couldn’t invest all $10 million at once, or it would blow the stock up, since the average microcap trades less than $10 million worth of shares a day. That inability to get in and out of these stocks in quantity keeps institutional investors away from microcap stocks. 2. Near zero Wall Street coverage Without analyst coverage, institutional investors have to do more work on their own to find out what’s going on with microcaps. Fewer people focused full-time on the company from the sell side means there are

In the early 2010s, we did this exact type of analysis on a mobile digital advertising company one of our clients was interested in investing in. While the business looked compelling at first, our analysis of management discovered they had been involved in several previous pump-and-dump schemes. Worse still, our research on the company found that the CEO’s girlfriend’s home was listed as the company headquarters. By researching management, we were able to give our client the right advice to avoid the company. A lot of people are scared away from investing in microcaps. But by creating a system focused on making sure the financials are real... the management team is aligned with investors... and the company’s real Uniform Accounting performance and valuation are compelling, we think we can help police the microcap space and help investors find the right opportunities for significant gains. It’s something we’ve been trying to talk to our institutional clients about for years. But they typically won’t listen... THREE REASONS WHY YOU CAN BEAT WALL STREET Institutional investors shy away from microcaps for three main reasons. And because of that, smart individual investors can make significant returns if they find the right ones before money managers start to pay attention.

American Consequences


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