In yesterday’s GuruFocus article “Warren Buffett: How to Make 50% a Year in Micro Cap Stocks”, I mentioned this Ben Graham quote:
The chief practical difference between the defensive and the enterprising investor is that the former limits himself to large and leading companies whereas the latter will buy any stock if his judgment and his technique tell him it is sufficiently attractive…The field of secondary stocks cannot be delimited precisely. It includes perhaps two thousand listed issues and many thousands more of unlisted ones which are not generally recognized as belonging in the category of "large and prosperous market leaders"…The intelligent investor can operate successfully in secondary common stocks provided he buys them only on a bargain basis.
So how do you find these secondary common stocks?
Here are 6 places to start:
2. Cheap Stocks – Jon Heller writes this equally great blog about Ben Graham net current asset bargains. Actually, as Toby mentions, Jon was part of what inspired him to write his own value investing blog. I also interviewed Jon last year.
3. Interactive Investor Blog – Richard Beddard writes this U.K. centric Ben Graham style value investing blog. He runs a model portfolio called The Thrifty 30. “It’s thrifty because the shares are all cheap, usually in comparison to their average profits over the last ten or-so years.” The Thrifty 30 is a double whammy of off the beaten path stocks for American investors since Richard focuses on secondary stocks and he focuses on the United Kingdom. Most American investors aren’t even familiar with leading U.K. companies. They’re totally clueless about the ones Richard covers.
4. Value Uncovered – This value investing blog covers “mostly small-cap, obscure stocks trading at a large discount to intrinsic value” as well as “merger arbitrage, going private transactions, self-tender offers, (and) bankruptcy plays”. Things you won’t see covered by financial journalists or stock analysts.
5. Shadow Stock – This is a micro cap value investing blog. It gives you a steady steam of quick posts about almost totally unknown value stocks. No matter how much you think you know about micro caps, you’re bound to find a couple stocks here you’ve never heard of.
6. Whopper Investments – This is another value investing blog that often features micro caps. Last year I was searching for any mentions of some micro caps I owned and twice found this blog was one of the only places that mentioned the stock. Whopper Investments often covers stocks you won’t hear about elsewhere.
The other reason a stock can be neglected is because of a special situation. A good example is Ascent Media (ASCMA) – a John Malone investment – selling one business and buying another, all while remaining the same publicly traded stock. That can cause investors to misprice the stock. Other examples of special situations include spin-offs and companies coming out of bankruptcy.
Here are 3 places to find special situations:
The place to go for any micro cap stock is OTCMarkets.com. This is the pink sheets website. Type in a ticker symbol and see the bids and asks for that stock. There’s also a detailed day-by-day price and volume history, so you can plan how many shares you can buy and how long it’s likely to take you to build the position you want.
Finally, since these are unknown and uncovered stocks, you’ll be doing all the company research yourself using EDGAR.