WSR's Investment Philosophy:

WSR focuses on micro-to-small capitalization companies because its principals believe it's the most underserved and inefficient sector of the market. These inefficiencies create opportunities for speculative investors willing to assume above average risks to achieve above average returns. Illiquidity and lack of analyst coverage combined with an ever-increasing force of short-term investors and market volatility often push prices to extreme highs and lows. Sophisticated investors with the appropriate financial capacity, risk tolerance and time horizon can exploit these extreme price movements to their advantage.  These beliefs are supported by the Thompson Financials' Early/Seed VC statistics, which state that the VC market has outperformed every other market class over the 10 and 20 year periods posting 38.30% and 20.50% average returns respectively.  However, past performance is no guarantee of future results.


Why are the micro-to-small capitalization markets so inefficient?

No Traditional Analyst Coverage - Micro-capital companies (companies with a market capitalization less than $250 million) have virtually no traditional analyst coverage from major Wall Street firms and small capital companies (companies with a market capitalization between $250 million and $1 billion) have limited coverage. Economic forces drive the void in traditional research coverage and it is very unlikely this will ever change. Providing research coverage on any company takes a tremendous amount of time and effort, which must be performed by an experienced analyst. These analysts must be compensated and other divisions in an investment company, such as retail brokerage or investment banking, must cover their salaries. 

Since it takes the same amount of effort to cover a multi-billion dollar company as it does to cover a $100 million company, it is not economically feasible for traditional investment firms to cover micro-capital companies. It is not feasible because the investment banking and trading fees that can be generated from covering micro-to-small capital companies cannot support the cost of coverage. As a result of this economic challenge, quality information is not readily available on these companies and many investors make uninformed decisions pushing the price too high and too low. 

Inefficiencies Create Opportunities - One of the most recognized market philosophies is referred to as the Efficient Market Hypothesis, which simply states that all information is readily available to all investors. Thus, no investor has an advantage over another and market equilibrium efficiently prices all stocks at their correct value. While this hypothesis may be relevant when applied to large and well-known companies covered by numerous Wall Street firms, under followed micro-capital company investing is an exception to the hypothesis. 

It is not easy to obtain information on micro-to-small capital companies so investors must dedicate a significant amount of time to analyze these companies. Because many investors to not have the time, discipline, experience or skills to perform proper analysis of these companies those who do can gain a distinct advantage. Investors must remember that understanding a company and correctly calculating its intrinsic value is only part of the battle. Investors must be able to hold on to their position until the market recognizes the company’s fair value and the intrinsic value cannot drop before it reaches that level. 

How can investors increase their chance for success?

Watch Earnings Results - On a daily basis investors must review the earnings reports issued by publicly traded companies. Pay special attention to companies that report sales and earnings growth over 50% or companies that reported revenue growth exceeding 50% and reported a profit versus a loss over the same period in the prior year. This task helps investors discover growing companies and identify fundamental industry trends. 

Watch Companies with Significant Insider Buying - While there are many reasons why insiders may be selling their stock, there is basically only one reason why insiders would be buying stock.  They are buying because they feel the business is doing well and the stock price is going to rise.  Tracking insider buying is a good way to identify investment opportunities.

Watch Companies Breaking out to New Highs - Another technique followed by successful investors is to identify companies breaking out to all time or even 12-month highs.  The theory revolves around the premises that companies reaching new highs must be performing well and that once a company reaches a new high all of its investors have a profitable position.  If all of the investors are at a profit, then selling pressure from investors waiting to sell when their investment reaches "break-even" diminishes.

Watch Companies Breaking out of Long-term Bases - Companies that have traded in a tight pattern for a long period of time (for example a stock might trade between $2.00 and $2.50 for a year or longer) and then break out of the pattern (to the upside) with higher than average volume have a better than average chance of going higher.

Track Industry Price Trends  - Against common logic, a company’s stock price may not follow its fundamental performance. Sophisticated investors are consistently attempting to predict future sales and earnings to move out of companies that may report disappointing results in the future and move into companies that may report better-than-expected results. Investors can gain valuable insight on future market expectations by reviewing industry and index price charts on a daily basis. This process may confirm fundamental trends and non-confirmation may tip investors to future weakness.
 

How should investors determine when to buy or sell?

Pick an Ideal Entry Point - Once investors have done their homework and identified an undervalued company, in an attractive industry fundamentally and technically they should chose an ideal entry point. This is done most effectively through technical analysis (the study of historical price and volume charts). Investors must learn to identify key support and resistance levels, breakout patterns, gaps, blow-off tops, etc. 

Buy on Weakness/Trade on Strength - To further puts the odds in their favor sophisticated investors will monitor numerous companies waiting for them to hit ideal entry points and exit points. While core positions should be maintained while the company implements its business plan, investors can lock in profits and enhance returns by trading part of their position. After following multiple companies for extended periods of time, investors will likely identify companies that regularly hit specific highs and lows. Buy when companies drift near lows and sell when they climb towards highs. Investors should be patient to get in near the low, but not wait for the top or be afraid to take a profit.

What do WSR's clients and subscribers have to say?