Ian Cassel is a professional micro cap investor and founder of MircoCapClub.com. Micro Cap Club is an exclusive investing forum where experienced investors discuss micro caps on US and Canadian equity markets. They also cover some UK and Australian small caps.
A micro cap is defined as a company with a market cap of less than $300 million. Out of the 20,000 public equities in North America, about 50% are micro caps and very few investors follow them.
Cassel developed a keen interest in micro cap stocks when he was a sophomore at college. In high school his parents gave him control of a $20,000 college fund and he opened up a brokerage account. This was in 1997 when the dot-com bubble was in full swing, the perfect time to start trading. Back then it was near impossible not to make money investing in tech stocks. Young Ian rode the wave and made big returns investing in technology companies.
When it came time to choosing a college, he selected a local university that allowed him to work full-time and continue investing. Working for a financial advisor as a receptionist, he experienced the high and lows of the market. When the tech bubble burst, a $120,000 portfolio quickly shrunk to $8,000. During this time Ian was still working as a receptionist and was taking calls from disgruntled clients. This negative experience led him away from becoming a financial advisor towards becoming a private investor and not having the stress of managing clients money.
Later he got involved with micro caps because when some of those tech companies collapsed they became penny stocks. After the crash, his first major investment was XM Satellite Radio which back then was heavily indebted and close to filing bankruptcy. He invested the remaining $8,000 into XM at $1.78 per share, they refinanced their debt and signed OEM agreements with GM and Ford. Over the next 14 months, shorts covering their positions helped it spike to $34! This initial success spurred on his interest in the micro cap space, enjoying the fact he could meet with management teams face-to-face.
Why Invest in Micro Caps?
Historically investing in small high-quality businesses has been proven to be one of the best ways to accumulate wealth. CSRB data from 1927 to 2016 revealed stocks under $114 million market cap significantly outperformed all other market cap classes. These companies are so small and illiquid that institutional investors can’t invest. This gives small astute investors the opportunity to buy early and capture huge returns. Once a micro cap starts executing their business model, stock price increases with liquidity. Later institutional capital can buy shares and that’s where the magic happens. The key is getting in early before institutions.
While the average investor avoids illiquid investments, Ian Cassel embraces them. For example a micro cap worth $50 million on the OTC could trade $20,000-$25,000 worth of shares per day with zero analysts. While on the other hand, a company with a market cap of $500 million would trade a few million shares every day and have a handful of analysts covering them.
How Does he Find Micro Caps Worth Buying?
There’s no secret to finding hidden gems. You’ll need to put in the hours to locate the best long term investments. Some investors use stock scanners while Ian prefers to go through every micro cap from A to Z. Micro caps under $50 million will have no analyst coverage for guidance so investors need to perform their own due diligence – reading SEC filings, financial reports and talking with management. The whole process of going through every company is tedious work but your ability to sift through all the shit to find a needle in a haystack is your edge. When Ian started all the activity online around micro caps was on message boards but that later moved to Seeking Alpha and private investing forums like MircoCapClub.com.
Main Criteria for Investing
- Intelligent Fanatic – company is run by a visionary leader who acts as an owner-operator with intense focus, integrity and intelligence.
- Market leaders – dominate a small niche that is growing.
- Sustainable, profitable and growth – rapidly growing company that can scale their business and self-fund their operations. Share dilution is the biggest fear every penny stock investor faces.
- Little or no debt – debt can impede growth, normally it comes through high-interest dilutive convertible debt.
- Clean Capital Structure – low number of outstanding shares, all common shares and a low amount of warrants/options as a percentage of outstanding shares.
- No Institutional Ownership – discovering great companies early before institutional investors is key to massive upside gains.
- Immediate Upside – invest when the business is fundamentally undervalued to reduce risk and leverage multiple expansion.
Intelligent Fanatics Capital Management
In 2019 Ian launched his own fund – Intelligent Fanatics Capital Management. IFCM strategy focuses on investing in intelligent fanatic-led businesses with a market cap of less than $150 million. IFCM investors have to sign up for an account at Interactive Brokers. They will manage the account on your behalf – this is known as a separately managed account. The fund is seeking only accredited investors with a minimum of $100,000 to deposit. To my knowledge the fund currently has one holding, Biomerica, Inc.
For those interested in joining MircoCapClub.com, you can join by pitching a 2/3 page investment thesis on your favourite small cap idea or pay $497 for 12 months access. Make sure to follow Ian Cassel on Twitter to get some daily investing wisdom, his quotes are very insightful for aspiring stock traders.