Arohan’s investing life

To find some of the best value opportunities, it becomes necessary to look at the small and micro capitalization companies. It is then important to note that the following two conditions will be present for most of your time of investment in these positions

1. The stock remains mis-valued for a long period of time
2. The more illiquid the stock is, the more the prices will move in either direction over short periods of time, often without any apparent reason

This is certainly true for one of the micro-cap stocks we own and have highlighted here before. Express 1 (XPO) released earnings about a week ago, and in this investor’s view, they were great. The company is able to maintain its 20-25% growth rate in sales. The company PE ratio is still around 9. And the fact remains that starting in Q1 2008, the company will start accumulating cash at a good clip once the management earn-out payments no longer need to be made

So what happened after the earnings release?
1. The stock was undervalued before. After the earnings the stock price declined further (10% or so on average)
2. The number of shares traded every day were quite high compared to a typical day for this stock
3. The stock prices have been very volatile even within one day of trading

Does this mean anything?
Not really if your investment thesis is still intact and you have a long term horizon.

But how can the market bear the price to go down so much? And the volatility?
If the markets were efficient, there would be no value investing

All this means is that Mr Market, for whatever reason, keeps providing these opportunities for a shrewd investor to buy $1 for less than $1. These opportunities are more frequent and more amplified in stocks of small/micro capitalization companies since their shares are likely to be less liquid and more volatile.

The shrewd investor generally does well to take advantage of these opportunities. Please note that this calls for the investor to be confident in his or her investment thesis and buy when the general market sentiment on this stock seems to be negative (and similarly sell when the market is euphoric).

Yours truly did add to his position in the example stock mentioned above. It remains to be seen if he was a shrewd investor. Please check back in 6 months or so

Related posts:

1. WSI Industries could be a long term winner
2. Citigroup, the sky is falling …
3. Micro/small cap investing can be rewarding but risky