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Last week, I engaged in a Skull Session/Investor Insights podcast with Tim Heitman, an investor of over 40 years who transitioned from investing in larger companies to focusing on micro and nano caps. His pivot was driven by the greater potential for alpha generation due to market inefficiencies and fewer analysts covering these stocks.

Among the many things we discussed, we tackled analytical approaches to investing in smaller companies and the challenges and opportunities presented by the OTC market. We also discussed the importance of qualitative analysis, management change, and the need for adaptable strategies in this space.

We also touched on the significance of CEOs having a stake in the company, the impact of capital structure on stock performance, and the value of cash flows in assessing a company’s financial health.

Below are some of the notable clips from the Investor Insights session.

Tim Heitman on His Background and Investing Journey

Tim shares his background and journey as an investor. Having been in the business for 40 years, starting in 1983, his interest in business and numbers stems from his father’s employment in the marketing department at John Deere, where Tim was exposed to a professional business environment and ultimately became obsessed with numbers. 

Tim discusses his educational path, obtaining a finance degree from Miami, Ohio, and working for Fidelity Investments during the era of Peter Lynch’s leadership, emphasizing the significance of research at that time.

He details his subsequent roles, including working for a private broker-dealer and then joining a hedge fund led by David Tice, where he honed his analytical skills by assessing companies from a short-selling perspective. Tim also mentions his second career as a sports photographer, providing him with a creative outlet.

He recounts his transition to working as the Director of Research and a partner for a hedge fund called Manalapan Oracle, which dealt with the challenges of the 2008 financial crisis. He expresses burnout from the demanding period and shares how his photography work served as a balance and distraction.

Maj and Tim Discuss The Importance of Key Metrics in Analyzing Companies

Maj Soueidan and Tim Heitman discuss the importance of quickly assessing key financial metrics when analyzing companies.

Maj mentions focusing on margins, debt, and other crucial indicators on the income statement, balance sheet, and statement of cash flows. They describe a method of efficiently gathering essential information from SEC documents, conference call transcripts, and press releases to form a comprehensive evaluation, suggesting that this streamlined approach can lead to effective decision-making.

In response, Tim recalls his time working with David Tice and a technique called the “One Hour Analysis.

This method involved consistent pattern recognition and a systematic review of critical factors in a short timeframe. Tim explains that this approach was particularly useful when dealing with a large number of stocks within limited time constraints.

He contrasts his analogue approach with digital methods of screening, expressing his belief that computer-based screens might not necessarily provide a competitive edge due to widespread access to such tools.

Maj Soueidan and Tim Heitman Talk About Their Experiences With Turnaround Stocks

Maj discusses his experience with a company where he noticed a press release about the company’s stock buyback and a reduction in authorized shares.

Despite the stock trading at around 10 cents, the company’s active communication of these actions seemed to signal significant developments. They discuss how such seemingly minor yet important changes can go unnoticed by the market until they matter, leading to substantial shifts in stock prices.

Tim adds to this by referencing another case with Four Corners Inc (OOTC:FCNE), a formerly family-run company specializing in bingo cards in Texas on which he wrote an article for GeoInvesting in March 2021.

Despite the company’s slow growth prospects, Tim explains how new management was able to  turn the company around by focusing on profitability over just running the company as a family business with little bottom line earnings. The CEO also committed to dividends that were at one point yielding 20% when the stock was trading near $1.00 per share, and still today pay out over 10%.

Tim emphasizes the notion that a company’s true potential and value might not be immediately apparent and how understanding the company over time can give returns even in boring industries.

Maj Soueidan and Tim Heitman Talk About CEOs and CFOs

Continuing their discussion, Tim and Maj delve into aspects of evaluating management, particularly when it comes to CEOs and CFOs. Tim points out that having a CEO who can demonstrate past success in solving problems and learning from mistakes adds to their credibility. He also highlights that CFOs provide a more rational and financial perspective that complements the CEO’s vision.

They discuss the importance of examining proxies and annual reports to understand a company’s board, compensation, and ownership structure. They discuss the significance of understanding cash flows and the impact of working capital changes on the cash flow statement. They also discuss the interplay between sales growth and gross profit, explaining how growing gross profit dollars faster than expenses can lead to leverage in a business model. Tim suggests that people often become overly focused on changes in margins, while what truly matters is the net result on the company’s financial health.

Tim Heitman On An Interesting Microcap in the Casual Dining Industry…

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