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Roderick MacIver Co. Inc. studies the profitability, balance sheet and intrinsic value trends of the 2000 public companies in the US with market caps of between $5 and $100 million. Companies to research in more depth are primarily selected utilizing proprietary Python software that identifies emerging trends and unusually favorable price-to-intrinsic value relationships in these companies.

Based on interviews of management, major shareholders, and a review of available research and website forums, we produce three types of reports:

    • The NanoCap 2000 Database: All 2000 companies listed in order of overall attractiveness based on profitability, trends in profitability, balance sheet (strength and trends), cash flow statement trends and value.
    • Six Page Summary Reports: A page of conclusions, two pages of financial statement data and three pages of graphs (so that the conclusions can be understood in a glance). These reports are posted on Google Drive and are accessed via links under company names in the weekly Database.
    • What's Interesting: Weekly or bi-weekly company profiles on one particularly interesting company. Example below.
    Approximately eighty reports are published each year and sent via email.

     

    NanoCap 2000 reports consist of six pages of summary conclusions, financial statement data and graphs. Once a week we produce a more in-depth report on one particularly interesting situation with two or three more pages of notes and conclusions.

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    We apply a cautious, conservative investment approach to a somewhat risky, highly-volatile area of the financial markets. NanoCaps -- companies with market caps of under $100 million -- have the highest long-term returns of any market cap sector despite the number of frauds, no-revenue companies and rip-off managements in this sector. In other words, the extraordinary returns are concentrated in a relatively small number of high-quality and/or high-growth companies.

    For more on the performance of NanoCap stocks, see an article entitled The Excessive History of MicroCaps by Mark Vonderwell (published on the MicroCapClub website). In addition to the superior returns, this area of the market offers several other attractive characteristics:

    • inefficient pricing due to the lack of research. Very few analysts cover this area because it is uneconomic. We've spent years developing software that makes this practical.
    • the sector is volatile, offering the patient, cautious investor frequent opportunities to accumulate quality companies at extraordinary value. All it takes is a significant shareholder deciding to liquidate a position. The negative of course is that the share price of a holding can sometimes decline significantly despite the improving performance of the company.
    • small companies with a competitive advantage have huge growth potential in percentage terms because of their small size
    • the sector is less sensitive to bull/bear market cycles. Performance is more related to individual company performance and prospects. I'm not good at predicting the overall market. Few investors are.
    Each week our Python software combs through two thousand NanoCap stocks searching for the optimum combination of competitive advantage, financial statement strength, improving financial performance and value. Each company is compared against all other NanoCaps. We send subscribers an Excel spreadsheet every week containing a link to a six page report on every NanoCap stock that falls within our parameters (has revenues, trades at least five times a week and has a market cap of at least $5 million).  

    The premise of this research is that growing, low-debt companies with expanding margins and improving capital turnover that sell at reasonable values in relation to free cash flow, dividend yield and long-term relationship to book value, outperform no-growth or shrinking companies with lots of debt, contracting margins, declining capital turnover, and high prices in relation to intrinsic value. Over time. Of course, anything can happen in any single day or week. In fact, in the short term, illogical things are continuously happening, driven by emotion and enthusiasm. Emotional swings are an intelligent, patient investor’s ally. By emphasizing facts instead of conjecture, our research capitalizes on those swings.

     

    In particular, the software focuses on:

    • Companies with a demonstrable competitive advantage as evidenced by long term return on equity, quality of earnings, debt levels and trends, and capital expenditure growth in relation to free cash flow growth. 
    • Companies in cyclically-depressed sectors or industries with strong balance sheets and high average return on assets. We place a premium on quality.
    • High growth stocks.

    • Companies selling at particularly low prices in relation to book value with emerging positive financial statement trends.

    The first step of our research  the "Moneyball" step — is the search. The Python software we use was created in-house. It utilizes credit analysis ratios employed by Moody's and Standard & Poors, with additional influences from the Piotroski F-Score, the Altman Z-Score, and Graham & Dodd's Security Analysis, but with more emphasis on trend than on current situation. The return on capital/equity DuPont model as applied by General Motors in the first half of the last century also plays a role.

    The emphasis of this research:

    • trend, as opposed to current condition, although both are considered, and in the case of companies with no trend of improvement or deterioration, the assessment focusses on current condition

    • free cash flow, as opposed to reported net income

    • quality of earnings (growth rate of free cash flow as compared to growth in debt, capital expenditures, receivables, inventory, payables and S,G&A). Only the highest quality companies can grow with minimal capital expenditures and without increasing debt

    • the intrinsic value of the company's common stock (calculated several different ways including free cash flow adjusted for growth, and historic relationships of price to free cash flow. long term average yield -- if any -- and book value per share)

    • no emphasis on EBITDA because, as Buffett and Seth Klarman have repeatedly pointed out, EBITDA assumes that depreciation and amortization are not real expenses. They are. Visit here for more.

    The final step in the preparation of our reports is the interviews of anyone with an informed perspective: major shareholders, current and former directors and executives, competitors, suppliers and customers. In particular we are looking to gain an understanding of a particular company's competitive position, what is unique about the company, what is causing the fundamental changes that a particular company may be experiencing as evidenced by its financial statement changes and trends.

    In addition to the narrative description of our findings, The NanoCap 2000 reports contain links to graphs of financial statement trends so that they can be reviewed and understood in a glance. We strive for simplicity, clarity and brevity in our reports.

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    Individual subscriptions ($975 a year), visit here.

    Professional subscriptions -- advisors, portfolio managers, hedge funds, corporations with assets of over $5 million -- ($4,750). The objective with this subscription is to contribute as much to our subscribers' efforts as a full-time analyst would. Visit here.

    For a sample report, visit here.

    For more on the analytical approach of Roderick MacIver & Co. Inc. see Methodology.