@shearman Plenty of examples. Maybe depends on your definition of micro and large cap I guess.
PME, HUB, ALU, DDR, DTL, SNL, OCL, HSN, A2M, JIN, AEF, TPW, NCK, etc.
Also can't ignore HIT and EOL which aren't large caps but because they both started so small (<$5m) their returns are still amazing.
Thanks @Wini and everyone
Many of the examples you list above largely listed a long time ago - or got to a decent size (say > 1-2b) a while ago
I haven't done the analysis re all the stocks you mention - but if I refine my 'hypothesis' / concern it would be go like this:
So it feels a bit like these micro caps are like small turtles trying to get to the safety of the ocean - but they keep getting picked off before they get there
So to be successful you have to now get two things right:
I think the opportunity still exists on the ASX because businesses list at such an early stage.
If you take Nearmap for example:
It was a 50bagger from the Ipernica days (circa 2012) to when it was taken private.
As others have pointed out, the fact that it is possible doesn’t make it a good bet.
There seems to be a commonly shared assumption in this community that if you invest into fast growing micro/small caps that some will eventually grow into medium-large cap and you will earn strong multibagger returns from holding for the long run due to growth and revaluation.
I also assumed this - however having observed this space over the last few years I think this isnt really true.
What seems to happen is that the better quality microcaps get bought out as they become close to cashflow positive or the model becomes more proven.
(Typically in a bear market period when prices are low)
e.g. VHT, NEA, PPH, ELO
Consequently you only get a modest return on your winners (unless you manage to buy right at the bottom of the market)
Which doesnt really make up for the losses on the losers - or at best makes for average returns
Am I wrong?
Where are the listed mid/large caps today that started as listed micro caps?
@shearman good points, i suspect that PME AD8 ALU may make the grade. what would be really interesting are some stats that show how rare these companies really are, like winning lottery tickets. how many in the micro universe succeed to that extent? secondly can you pick them? doesnt stop people trying, but i think the odds are quite daunting. imo
I think your observation lacks nuance. Lets assume these rough definitions of Microcap to Large cap $ values are correct:
So for a microcap to go to a large cap at the top end would have to 40-bag or more to become a large cap at the lower end. So, of course its very rare for a microcap to become a large cap. To become a midcap it would have to 8-bag or more still very rare. A $10m company going to a $100m company is still a microcap but now just 10-bagged. Successful investing should be irrespective of market cap space you play and more about finding the strategy where you have an edge and can consistently outperform. Putting yourself on a box of "i only invest in microcaps" or "microcaps never become mid-caps, so I never look there” or whatever, would be an ignorant and foolish thing to do in my opinion.
In any market cap sector, most people get average or less than average returns. That is not unique to microcaps. You are correct that in the microcap space there is bound to be more terrible companies because they mostly earlier stage. So, on average it might appear a bad place to play but if you know where to look the returns can be outstanding as proven by some of strawmans top members. The point of investing in microcaps or smaller market capped companies is that it reduces the chance of competition and increases the chance of mispricings. However, as you correctly point out, the hard part is finding and acting on these opportunities. I would suggest the opportunities for mispricings are far less obvious and don’t last as long the further up the market cap scale you go.
No @shearman - you're not wrong - the odds are not generally in your favour, but you can improve those odds. Some of the examples given today of small caps that HAVE made it to be mid caps or large caps have one or two things in common, or they exhibit one of the following traits:
As a general rule, #1 above (large insider ownership) is the best moat against low-ball takeovers before the company has reached its potential. If the insiders opt to sell into a takeover they clearly don't have the same conviction that us mug punters do - and they know the business way better than we do.
Where management who have plenty of insider ownership keep knocking back or refusing to consider takeover offers, I take that as a sign that the insiders believe in the potential of the company. It doesn't mean they are right, or that we are, but it's a good sign when it happens.
That's the takeover side of things. However there are HEAPS of things to look out for with microcaps that increase your odds of positive returns outside of M&A activity, including, but not limited to:
You may notice that I have put the value (valuation or price target) last, because that isn't the first thing I look at. Have a shopping list, then decide where your buy zones are, but there's no point working out if something looks cheap if it's something that screams "Danger Will Robinson! Danger!" on a bunch of other factors, or if it's not within your sphere of competence.
Additional:
So, on average it might appear a bad place to play but if you know where to look the returns can be outstanding as proven by some of strawmans top members. The point of investing in microcaps or smaller market capped companies is that it reduces the chance of competition and increases the chance of mispricings. However, as you correctly point out, the hard part is finding and acting on these opportunities.
Yeah!
A lot of people seem to overestimate the extent of the inefficiency in the smaller end of the market – especially for story based stocks. In most cases it's probably cheap for a reason or your estimates (which you based off that PP presentation management gave LOL) are way too optimistic.
The real driver of returns is low expectations. How do you find low expectations? You look where no one else is. Then you turn over rocks. The rest is mostly just pattern recognition. But you need a model or models of what it is you're trying to find – not dogmatic rules but some sort of framework – otherwise the siren song of the stock story can be overwhelming.
I've never really tested this theory, but my observation would be it's easier for a $100m company to get to $1b than it is for $10m company to get to $100m. Down at the $10m level it's mostly buying either a small cap on its way to Heaven or embryonic businesses stuck together with Gaffer tape, having not much more than an idea and a need for cash.
I agree with you @UlladullaDave that many overestimate the inefficiency of the market at the smaller end, but the market gets things wrong at both ends, it just seems to get things MORE wrong at the smaller end when it does get things wrong, and that could be because there's less broker coverage so less guidance from so-called "trusted sources" and more jumping at shadows, so I find that while the market overshoots in both directions right across the board on a daily basis, it does so MORE at the smaller end. I agree however that given time the market usually sorts out an appropriate valuation for most companies, but it's not always an immediate adjustment. I've seen announcements recently where a company announces an acquisition and the market sells them down, and then they end up well in the green by the end of the day despite releasing no further news. Admittedly one of those companies I'm thinking of has a $1.5 billion market cap, so not a microcap, but it sometimes takes the market a while (hours or days) to decide if a move by a company is a net positive or a net negative and asign a new valuation to that company - there are often (but not always) opportunities if you've already done your homework and have that company on your shopping list.
Good points there about having a good investing framework and also about not falling in love with the story. I agree also with your comment concerning the $100m company vs the $10m company and their respective chances of 10-bagging - the $100m company has likely got a much stronger business model and proven strategy compared to the nanocap that has not weathered many storms at all yet or faced many serious headwinds. If a company has grown to $100m, they are likely to be a stronger and healthier company, and such companies have superior odds to 10-bag in my view also.
As an aside, in the spirit of celebrating our small wins, Today was a rare day for me, as I hold a total of 26 different companies across 4 real money portfolios that I manage and 24 of those companies finished today with higher share prices than yesterday. Interestingly, of the two that did NOT rise, one fell by two tenths of a cent - AVA (currently valued at around $40m by the market) - and one was flat - GNG ($379 market cap) - both microcaps. Nine of the 24 that rose, rose by more than +5%, and 7 of those 9 were companies worth over $1 billion, one (NCK) was worth $970m (after today's +7.25% SP rise) and the other one, which was my biggest winner today, was EGL (the Environmental Group) which finished the day up +8.89% with a market cap of just $91.5 million, so a microcap. Microcaps at the extremes but lots of larger companies making big moves as well. My second best was NST ($14 billion market cap), up +8.12% today.
Mind you, every sector was positive today:
Still, not often I only have one company in the red in one portfolio, one company flat, and all the rest in the green - not often at all! Time for a celebratory lemonade...
Hope others here also had a really positive day!