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Three Microcap Investments That Deserve A Second Look 4 comments

Finding good microcap investments can be challenging, to say the least. You may find a company that looks great from looking at a few key metrics (EV/EBITDA, EV/REVENUE and low P/B), but after doing deeper due diligence, you come to find that the company you did think was a hidden gem, was just hidden junk. Other times you run screen after screen after screen and just find terribly valued companies that really just don't catch you eye. Then there are the times when the debt outstanding scares you so much that you run as fast away from that company as you can.

If you are a microcap investor, and more importantly a microcap investor who does their own personal due diligence, then you can contest to the feeling you get when you find that hidden gem (I know you have felt it before). In this article we will be taking a look at three hidden gems that I have found over the past three months. Before we take a look at these hidden gems, we will first be looking at what I like to see in a company before I spend time researching their given security.

My Personal Criteria before Researching

I spend the majority of my day researching investments. When I am looking for a company to dig into there are a few criterion that need to be met for me to continue the due diligence process. The first thing I look for is if there is an undervaluation present in the share price. There are a few different ways I spot an undervalued security. These ways are discount to NCAV, low EV/EBITDA and EV/Revenue, and an undervaluation compared to the future valuation (more speculative in my opinion though).

I love finding a great company that is trading lower than its NCAV (I know, is there even such thing as a great company trading below its NCAV, pun intended). What I mean is, I love finding a great investments in the NCAV realm (if you find a great company in the NCAV realm let me know). Every week I look for investments that are trading for a significant discount to their NCAV. They are very limited and hard to find (especially in the US markets). But when you do find a NCAV stock, investing in it can be very rewarding. I have listed below some NCAV stocks I have written about this year.

  1. Surge Components (OTCPK:SPRS)
  2. Deep Down (OTCQX:DPDW)
  3. Emerson Radio (NYSEMKT:MSN)
  4. STR Holdings (NYSE:STRI)
  5. Richardson Electronics (NASDAQ:RELL)
  6. Universal Power Group (OTCPK:UPGI)
  7. JLM Couture (OTCPK:JLMC)
  8. Echo Trading (7427)
  9. Solitron Devices (OTCQB:SODI) - published on

Currently I have only taken a position in one NCAV stock and that would be SPRS. One NCAV stock that looks very interesting is eRoomSystem Technologies (OTCPK:ERMS). The company is trading for ~$0.08/share and its current cash position is $0.05/share (it has zero debt as well). For being a ~$1.94mm market cap company, it actually trades decently (avg. 9,455 past three months). ERMS may be a company that I end up digging into this month.

The second metric that I look for, when finding a good microcap stock to invest in, is a company that has a low EV/EBITDA and EV/Revenue. One company that is interesting that has low EV/EBITDA and EV/Revenue is inTest Corp. (NYSEMKT:INTT). INTT's EV/EBITDA and EV/Revenue is a low 3.19 and 0.45, respectively. The company also has $23.47mm in cash (the market cap is $42.78mm), they have zero debt and insiders own a decent amount as well (27.59%). I have done research on INTT as well and can be found here for investors who find INTT's metrics interesting.

An undervaluation compared to a company's future valuation is a little more speculative to invest in, at least in my opinion. An example of this kind of investment would be the following. Let's say you find company XYZ and you realize it is not overvalued but at the same time it is not undervalued, thus it would be moderately valued. As you dig a little deeper into this company you come to realize...