The Microcap Investor

CHAPTER 1 Characteristics of Micro Cap 1

The Nebulous Micro Cap (What Is a Micro Cap Stock?) 1

The Micro Cap Dilemma (Why Do They Exist?) 5

CHAPTER 2 The Information Advantage 13

Understanding the Information Advantage:

Efficient Market Theory 13

Weak-Form Efficient Market Theory 15

Semi-Strong-Form Efficient Market Theory 16

Strong-Form Efficient Market Theory 16

The Random Walk Theory 17

The Practical Answer 19

Venture Capital Theory 21

The Public-Private Bridge 22

Conclusion 24

CHAPTER 3 Micro Cap Stocks as an Asset Class 25

Investment Performance: Small versus Large Stocks 25

A Survey of Modern Portfolio Theory 26

Asset Allocation and Modern Portfolio Theory 33

Asset Allocation and Micro Caps 34

Economic Linkage 39

Venture Capital and Private Equity 39

Micro Cap versus Venture Capital 41

CHAPTER 4 The Micro Cap Asset Class

and Portfolio Construction 45

Micro Caps in the Portfolio Asset Allocation 46

The Portfolio Contribution of Micro Caps 47

Conclusion 50

CHAPTER 5 Using the Information Advantage 51

Methods to Evaluate Principal Agent Actions 51

Management, Management, Management 52

Who’s Doing What: Insider Information 53

Management Style 59

Strategy and Planning Systems 59

Management Changes 61

Management Reputation 62

How the Company Develops and Promotes Employees 62

Conclusion 63

CHAPTER 6 Corporate Governance 65

The Company’s Social Relationships 67

Information Resources 68

The Company 69

Competitors 70

Customers 70

Suppliers 70

Trade Associations 71

Industry Professionals 71

Legal Documents 71

Public Company Federal Filings 72

SEC Reports 73

Annual Report Form 10-K 74

Quarterly Report Form 10-Q 77

Material Current Events Form 8-K 77

Not All Reporting Is Equal 78

CHAPTER 7 Micro Cap Stocks and the

U.S. Domestic Economy 81

Why Micro Cap Stocks Appear Cheap Relative

to Large Stocks 82

Fundamental Valuation Techniques for Micro Cap Stocks 89

Basic Financial Analysis of Micro Cap Companies 90

Price-to-Book Ratio 91

Price–to–Free Cash Flow Ratio 92

Low Price-to-Earnings Ratio 93

Conclusion 93

CHAPTER 8 Micro Cap Case Study: A Company

with All the Indicators 95

Smart-Money Owners 96

Cheap Valuation 96

Skin in the Game 98

The Transaction 101

CHAPTER 9 Consolidating Industry Case Study 107

Case Study of Suiza Foods 108

Other Opportunities 116

CHAPTER 10 Gehl Company Case Study 133

CHAPTER 11 Pozen Company Case Study 147

CHAPTER 12 Private Investments in Public Equities

(PIPEs) 155

Tracking PIPE Transactions 159

A Brief Case Study of a PIPE Transaction: Ptek Holdings 161

CHAPTER 13 A Framework for Investor Action 167

CHAPTER 14 Micro Cap Fund Investing 173