Like many cash-strapped investors just starting out, I was
convinced I could "maximize" my tiny investment account by
dipping my toes into the micro-cap end of the stock market
Did it make me a millionaire overnight?
Put gently: not even close.
I was left with a dwindling account balance and worthless
shares of companies that had long-since imploded.
In the investing world, we call the sacrifice of those
beginner funds a "grudge" account. I prefer to think of it as
tuition paid into an investing career that would live on much
longer than most of the stocks I traded back then.
Although my initial investments were long-gone, one thing that
did remain was a passion for finding healthy companies with
smaller capitalizations and real business plans.
Fortunately, there are some real gurus in this space -- one,
in particular, reigns as king.
Chuck Royce, of Royce & Associates, has over four decades
of experience in capital markets, making a name for himself in
primarily small-cap investing.
His methodology seems simple: find stocks that are relatively
undervalued with low debt and above-average returns.
The Royce Funds manage about $38 billion today, keeping their
focus on micro-, small-, and mid-cap companies. The firm's
definition of a small-cap is between $750 million and $2.5
billion. For the purposes of my screen, I bumped up the low end
to $1 billion to try and increase the safety factor.
Out of the 102 new purchases the fund made this past quarter,
I've singled out the three that received the biggest investments
from Royce & Associates and met my small-cap cutoffs.
Civeo Corp. (NYSE: CVEO
may ring a bell for some of my astute StreetAuthority.com
readers. I covered the workforce lodging company
in early July
as one of Jana Partner's new energy-related plays.
Royce's $37.5 million position is a fraction of Jana
Partner's, but both are in good company. Billionaires David
Einhorn and David Shaw also snagged $213.5 million worth of CVEO,
Why is CVEO so popular among gurus? Many are betting that CVEO
will be converted into a real estate investment trust (REIT)
soon. The change would mean CVEO has to pay at least 90% of its
taxable income to shareholders. Expect that unlocked value to pad
some portfolios nicely if the conversion goes through.
Generic drug maker
Lannett Company, Inc. (NYSE: LCI
earned a $16.8 million investment from Royce last quarter. If you
don't have an iron stomach, I would not mirror his move -
"volatile" is the best way I'd describe LCI's trading so far this
Pharmaceutical stocks with smaller caps are usually subject to
wild swings due to FDA approvals/rejections, smaller catalogues
of products and extensive R&D expenses.
In LCI's case, a July subpoena from the Connecticut Attorney
General claiming antitrust violations is enough to keep me away.
Lannett says it complies with all laws and plans to cooperate
fully; I'd park my capital elsewhere though, just to be on the
Paylocity Holding Corp. ( NASD: PCTY
was Royce's third-largest new small-cap position, receiving
nearly $15 million. Using an innovative cloud-based approach,
PCTY provides payroll services for growing businesses.
Paylocity IPO'd in March at $17 and has run up 34% since. But
August earnings revealed a net loss for fiscal year 2014. My pick
in the same space would have to be
Paycom Software, Inc. (NYSE: PAYC
, which has already bested PCTY on earnings and revenue for the
past two quarters. Watch for a pullback, though, as PAYC is up
nearly 30% since the beginning of August.
Risks to consider:
Small-caps carry their own specific risks. Metrics like P/E
ratios and book values do not hold the same weight as they do
with more established companies. You may also find that analyst
commentary is hard to come by, so keep that in mind before diving
Action to take-->
Stocks with smaller capitalizations can be a gold mine for
investors looking to find the next big thing - as long as they
can stomach the risk. Out of this round of Royce's latest picks,
I'd take a deeper look at CVEO while staying on the sidelines for
LCI and PCTY.
If the risk of small-cap stocks scares you, how about a
few investments in stocks that will likely never fail
? I'm talking about "Forever" stocks - companies so strong that
you can literally buy shares, forget about it and hold that
position forever. These are the best, most profitable companies
in the world. To learn the name and ticker symbols of some of