The purpose of this site is to expose micro to small capitalization companies that are worthy of investment for the long term. Some rules of thumb I follow as I go about this endeavor are as follows:
- Strong balance sheets. I want companies that can thrive during times of turmoil, rather than be held captive by their bankers. I am a strong believer that there is a heavy cost of debt in that it can force companies to make irrational decisions that benefit debt holders, but not equity holders.
- Live within their cash flow. Related to point number one, I like to see companies that can fund their growth through their own cash flows. Companies that depend one equity or debt issuances to fund their growth are pooched once the market turns.
- Insiders aligned with shareholders. I like to see management teams that eat their own cooking. High insider ownership is good. Excessive stock option issuance is bad.
- Low valuations. The majority of the companies analyzed on this site will be thinly traded. This means they should trade at a better valuation than large cap peers due to the limited liquidity. I think about valuation in the context of both reinvestment opportunities and return on capital. The larger the opportunity for investment, the higher the valuation the company deserves. Same goes with return on capital. High returns on capital justify paying a higher valuation.