Top 50 Microcap Investor List
Throughout the past year, we have compiled a top-50 list featuring some of the best microcap investors in the industry. Our analysts have learned something from each and every manager along the way and wish to express their gratitude. Thank you all and congratulations!
Read our Complied List Featuring the Top 50 Microcap Investors
Those In Charge
“Those who have just finished being smart are sometimes the dumb ones in the next part of the cycle. The scarred sit, frozen by memories, through the ebullient markets, and the unscarred are sliced apart by the Black Horsemen of greed at the end. Only a longer time span reveals the truly Prudent Man, who knows that the first rule of making money is not to lose it.” —George Goodman (“The Money Game”)
Downside volatility returned to the markets this past week. Both the S&P 500 and the Nasdaq fell by over 5% on the week. The S&P 500 is once again approaching “bear market territory” as it’s now down about 19% from its early January high. The Nasdaq is firmly in a bear market.
This week’s worries once again centered around inflation and the Fed. The May inflation number came in hotter than expected, and concerns about its affect on the economy and the Fed’s desire to cool it by raising rates faster took center stage.
As we wrote last week, the Fed’s language has changed recently, and it’s worth paying attention to. Even for those investors focused solely on investing in individual companies, understanding the climate and cycle can be beneficial. As investor Howard Marks once wrote:
“I think it is unrealistic and maybe hubristic to say, ‘I don’t care about what is going on in the world. I know a cheap stock when I see one.’ If you don’t follow the pendulum and understand the cycle, then that implies that you always invest as much money as aggressively. That doesn’t make any sense to me. I have been around too long to think that a good investment is always equally good all the time regardless of the climate.”
We have a climate where the Fed is tightening to fight inflation, after years and years of easy and easier money. Profit margins likely peaked at the end of 2021. Geopolitics and the supply chain problems remain major issues of the day—as does the faith in the current leaders to solve all the above.
That faith is no small thing, and history is replete with examples of its importance. George Goodman, writing under the pseudonym Adam Smith, made this point in The Money Game, which was first published in the late 1960s:
“In the longer run, the actions of all the investors, individual and institutional, professional and nonprofessional, have to be based on the belief that leadership knows what it is doing and that rational men are handling the nation’s business rationally. If that belief fades, then so do the markets.”
This is also similar to what Ben Bernanke wrote in his new book:
“In everyday life, we judge the credibility of promises more by the reputations of the promise-makers than by the exact words they use. The same principle applies to central-bank promises. Central-bank credibility depends in part on the personal reputations and communication skills of key policymakers, but since policymakers cannot irrevocably bind themselves or their successors, institutional reputation is important as well. Because of concerns about institutional reputation, policymakers have an incentive to follow through on promises, even those made by their predecessors.”
The leaders in charge have made promises, especially in regard to fighting inflation. Their success—and the ebb and flow of the people’s faith in their ability to succeed—will go a long way in determining the degree and depth of the downturn at hand.
“A series of market decisions does add up, believe it or not, to a kind of personality portrait. It is, in one small way, a method of finding out who you are, but it can be very expensive. That is one of the cryptograms which are my own, and this is the first Irregular Rule: If you don’t know who you are, this is an expensive place to find out.” —George Goodman (“The Money Game”)
Investor Education: Price to Earnings Ratio
What is it?
A Price-to-Earnings ratio (P/E) is a way to measure how expensive or cheap a company is trading at its current market price. P/E ratios can be used to compare similar companies to one another, the same company in different time periods, or individual companies to their respective sector or the market as a whole. The ratio can be estimated for either forward-looking (over the next twelve months) or backward-looking (over the past twelve months) timeframes. The P/E ratio gives investors an idea as to how much they are spending for each dollar of earnings a company produces.
How to calculate a P/E ratio?
Calculating the P/E ratio for a company is a simple calculation found on many different websites. The trailing P/E ratio is calculated by taking the company's current market price and dividing it by the EPS over the past twelve months. For example, if the current market price of XYZ is $100 and the company has EPS of $2.50 for each quarter over the last year, the trailing P/E would be $100/($2.50*4) = 10. To calculate a forward P/E ratio, we must take the estimated EPS for the company over the next twelve months and then perform the same equation as above. Forward P/E ratios are not used as often because there is an element of estimation, whereas the data in a trailing P/E is an accurate measure.
When comparing investment alternatives, it’s also helpful to inverse the P/E ratio to get the earnings yield. Using our example above, if we use E/P instead of P/E, then we get $10 in EPS / $100 market price = 10%. This is the return we’d get for that year if all the earnings were paid out to owners in the form of a dividend and can be used to compare to potential returns on other investments.
Issues with P/E ratios?
P/E ratios can be adversely impacted by the stock's market price or by the earnings that the company releases. If the stock price goes up exponentially while earnings remain relatively flat, the company will have a high P/E ratio that fundamentals may not support. We have seen this play out in the market over the last few months, where companies with little-to-no earnings have been falling due to not having enough earnings to support where the stock prices ultimately went. When there are low P/E ratios, investors should look to the earnings to see whether they are continuing to grow or are falling. If negative earnings are anticipated, the market could have already priced in the future earnings by discounting the stock price.
A low P/E ratio may not necessarily be a good buy and a high P/E ratio may not necessarily be a bad buy. The value of a stock depends on the long-term cash flows of the business, which can move substantially up or down over time. So, while one year’s worth of earnings isn’t enough to judge the quality of the business and stock price as a potential investment, the P/E ratio is a useful rule-of-thumb. It’s especially useful if an investor can gain a truly good understanding of the sustainable earning power of a business and its prospects for growing that earning power over time, as the investor can then substitute a durable earnings number in place of the earnings a business earned over the last twelve months when calculating the ratio.
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