SWVL’s price soared as much as 405% higher to a peak price of $4.90 in the days following its December 27 earnings release, when it reported 2023 first half results showing a $2.1 million GAAP profit, translating to EPS of 25 cents.
As we go into another election year, there are certainly going to be some circumstances that will affect the financial markets, but will we be able to predict how? What will the fed position be on monetary policy? How about interest rates…will they lower them three times, as predicted by Wall Street? Will energy prices rise or fall? What will the CDC say about any new strains of Covid? What mundane things will Presidential candidates say that will sway the market one way or the other.
Peter Lynch was a huge advocate of Cliff Notes, so it’s fitting that one of my favorite video clips of 2023 was when Tim Heitman discussed his time working at Fidelity while Peter Lynch was managing the Magellan Fund between 1977 to 1990, racking up an annual average return of 29.2%. Tim talked about Lynch’s “Cliff Note” approach to quickly laying out a stock pitch.
I hope all of you enjoyed your transition into the New Year. Like I do every year, I’ll be pondering a few investing resolutions. The 2022 reset probably forced many of you to ask yourselves,
“What could I have done better to adjust to changes in the investing environment – decisions regarding sell discipline all the way to what type of stocks to hold and new ones to buy?”
While in that same frame of mind, when I reflect on the impact the great recession of 2008 had on the way I had been accustomed to investing, three things stand out.
First, holding a diversified portfolio of microcap value-themed stocks became challenging.
Some people have this idea that microcaps are all tiny development stage companies with little revenues. However, that is not the case. SMID generates annual revenue of about $50 million, employs a staff of 178 full time employees, and large manufacturing and logistics facilities.
Before I get into a reflection on the book Damsel In Distressed: My Life In the Golden Age of Hedge Funds, by Dominique Mielle, I’d like to point you to a few tweets I recently posted that I’ll parlay into the theme of today’s topic – capitalizing on market inefficiencies and how Mielle’s history of being an early investor in distressed asset classes rhymes perfectly with the edge that microcaps provides.
On December 16, I quickly commented on the aversion that people have towards microcaps, which is quite astonishing to me given that the quality gets swept into the melee of bad karma brought upon by the junk that gave the space a bad name in the first place:
There may not be a cookie cutter approach to finding multibaggers. For example, this term defines stocks that rise 2x or more. While nabbing a stock that doubles is nice, we invest in microcaps because they present lots of opportunities to find stocks that can rise 5x to 10x over time.
Still, with about 10,000 microcap stocks trading in North America, there are some traits or factors that continue to pop up in past multibaggers that you can reference during your research process to find the next one.
For example, companies that don’t issue an excessive amount of outstanding shares over time protects investors’ ownership interest in the company by limiting dilution.
Every year, on some level in our research or education, we remind you that companies have a somewhat wide latitude on how they are permitted to make adjustments to generally accepted accounting principles (GAAP) earnings per share (EPS) to report non-GAAP or “adjusted” earnings per share (EPS).
In an article we wrote in August 2016, “To GAAP or Non-GAAP, That is the Question,” we dove into this topic to highlight conservative and aggressive ways companies can make adjustments to GAAP EPS.
In the end, when analyzing EPS, we should strive to calculate a number that is most representative of a company’s everyday operations and its run-rate earnings power. This is accomplished by eliminating impacts to earnings per share that are one time in nature or generally non-recurring, as well as making adjustments to some non-cash gains/charges.