Today’s post is a guest article from our good friends at Espace Microcaps.
We’ve said many times before our dream situation is when we call a microcap CEO and he tells us we are the first investors to call in 6 months<.
Well the truth is that rarely happens… sometimes Espace Microcaps calls before we do.
Creating 1000% gains in your portfolio means knowing your investments inside out.
And that means talking with and interviewing the CEO or President.
Interviewing a CEO is a true art form—knowing what to ask, what not to ask, and how to ask—is one of the best skills you can develop as an investor.
It’s even better if you can do it in person, where you can watch body language.
You can glean so much information—usually much more ‘color’ or details than appears in press releases or quarterlies.
Our good friends at Espace Microcaps are pros at doing this. And below, they share their expertise in developing a rapport with company management.
These guys are masters of due diligence. They have conducted hundreds of management calls and meetings at conferences.
Their results show it too. They have been in ground floor with us in some of our biggest winners. Companies like Pioneering Technology (PTE.V) and Immunoprecise Antibodies (IPA.V).
Trust us these guys have done very well over the last few years.
They are also professional poker players. And gamble on everything from rounds of drinks to expensive dinners. Somehow we always get stuck with the bill with these guys..
They are here today to talk about interviewing microcap management teams. Interview CEOs is an art form. And one of the most valuable skills you can build as an investor.
They will also share how they used their methods to score big profits in an undiscovered smallcap recently. It’s more than doubled before we ever heard about it.
Enter Mathieu.
How to interview a company executive
As a stock market investor, do you think it’s possible to have access to the management teams of the companies you invest in? My answer would be: it depends. I would be surprised if Tim Cook, Apple’s CEO, took your call if you tried to communicate with him. On the other hand, if you try to get in touch with the CEO of a small emerging company listed on the TSX Venture, chances are that he will be more than happy to talk passionately about his company with you.
Most publicly traded microcap companies are unfortunately in a situation where they receive little or no analyst coverage and are ignored by banks and investment funds because they are too small. This ecosystem provides an opportunity for the individual investor to gain privileged access to management teams who want to tell their story.
At Espace MicroCaps, like our good friends at Smallcap Discoveries, we believe it is very important to speak with management before investing. This is how we deepen our knowledge about the company and get a head start on other market participants. We mainly use 3 ways to get in touch with company CEOs: sending emails, making phone calls and attending conferences.
1. Emails
In general, we use an email to initiate the first contact with a company executive. We begin by introducing ourselves and letting him know we have an interest in learning more about the company. We explain that talking to management is part of our due diligence process. We then ask the executive if he is open to answering a few questions either by email or phone later.
We lean towards emails when we only have a handful of questions that do not require lengthy explanations. Otherwise, we prefer phone calls. In our experience, the success rate with an email introduction is very high.
2. Phone calls
We rarely cold call to initiate a first contact. One exception is a private placement opportunity we need to act quickly on. We like to plan the phone call ahead of time so we can be well prepared when the time comes.
We have much respect for the time that these busy CEOs give us so we make sure we are ready. Our goal is to maximize the information we are able to get but also to make our interviewee feel that we have done our homework and that we are serious.
3. Conferences
Microcap conferences are perfect opportunities to meet many companies in a short time. These events are usually divided into two parts: public presentations and 1-on-1 meetings. We always prefer 1-on-1 meetings since this format allows us to introduce ourselves and interact directly with management.
On a typical conference day, we can meet with as many as 10 to 15 companies. We always make sure to leave with business cards and follow up with the companies we thought were most interesting. The upcoming Smallcap Discoveries Conference on October 4th, for instance, is a great opportunity to meet with dozens of the most promising companies in Canada right now. High quality events like this don’t come around often so don’t miss it!
How to prepare for an interview with management
Interviewing management teams is more art than science. The more you do it, the more you will get comfortable and know the right questions to ask. Here are some general guidelines you can use to help you get the most out of your interviews with microcap executives:
1. Be ready: Do several hours of research on the company before thinking about talking to the CEO. Do your homework and prepare good questions. If you are unsure about what questions should or should not be asked, take a look at Paul and Brandon’s recaps on the Smallcap Discoveries forum for examples of what experienced investors look for. We usually aim for a list of 6 to 12 questions that cover most of the important topics for us. If necessary, we will follow up with more questions on a subsequent call.
2. Introduce yourself first: Company executives always like to know who they are talking to. If you are a banker who wants to organize a multi-million dollar financing, the discussion will not be the same as if you are an individual investor seeking to know more about the competitive advantages of the company. Briefly describe your occupations, your investment criteria and what sparked your curiosity about this particular company. Exchange business cards!
3. Let the executive briefly describe the company: Unless we know the business extremely well and want to dive into questions right away, we prefer to get an overview of the business first. Hearing a quick presentation from the CEO is often quite different from reading the investor deck or formal company documents. The executive will usually focus on the most important elements of the business, which can help you focus on the company’s competitive advantages or most promising product lines.
4. Ask the right questions: A good question should be simple and open. Ask questions that allow the interviewee to elaborate in detail rather than simply answer yes or no. Also, be careful not to ask questions that will prompt the executive to talk about information that has not been disclosed publicly beforehand. There are legal implications with trading on non-public information.
5. Listen carefully: Show the interviewee that you are listening to what he says by nodding occasionally and showing that you are attentive. Take advantage of opportunities to deviate from your list of questions from time to time when the executive discusses an interesting topic that you had not thought of during your preparation.
6. Thank him and suggest a follow-up: When we finish a conversation, both in person and on the phone, we always make sure to thank the executive for his time. We let him know that we will review our notes, continue our due diligence and contact him by email if we need to clarify something. This leaves the door open for a follow-up in the future, be it for more questions during our due diligence or after we’ve invested in the company.
Case Study: Imaflex Inc. (TSX Venture: IFX)
Every time we listen to Paul and Brandon’s signature ‘’Discovery Process’’ presentation, we laugh when they say they get really excited when the CEO of a microcap company tells them they are the first investors in 6 months to call. That is very true and has happened to us a few times as well. Here is a quick story of how we were able to profit from such an occurrence:
Imaflex is a company based in Montreal (Canada), right in our backyard and was introduced to us by a fellow investor from Toronto. We got in touch with the CEO by email and quickly scheduled a meeting at the company’s head office a few days later.
When we got there, we sat with CEO Joe Abbandonato in the conference room and the first thing he said was: ‘’So what are you guys here to sell me?’’ We told him we were private investors looking to invest in the company and he was shocked that investors actually came to meet with him. He was convinced we were service providers trying to sell him something. At that point, we knew the company was undiscovered.
After that first meeting, we concluded that the company didn’t meet our criteria yet but offered Joe to stay in touch and talk again in a few months. Six months later, the company announced an order from a major new customer and Joe called us for a follow-up. This order was an important validation for their newest product and had us thinking this could now meet our criteria. We met again at the company’s office. And that’s when we got to understand the hidden potential materializing before our eyes.
At this point, the company was still undiscovered and the trading liquidity on the stock was extremely low. We quickly called up people in our network to find if some large owners would be willing to sell a block of shares to us. We were fortunate enough to initiate a sizeable position at $0.55 and profiled it on Espace MicroCaps at the same time.
It took little time for our investment thesis to start unfolding as the company announced another significant order from their major customer a few weeks later. Then Q1 2017 financial results came in much better than expected which lit fire under the stock. Less than 5 months after we profiled the company, the stock is sitting at $1.16 and we still see more upside. The only analyst currently following the company initiated coverage in May with a price target of $2.25. If we hadn’t established a relationship with the CEO in the first place, this opportunity would probably never have come our way.
This is only one example of the importance of reaching out to management teams. There are many more examples and this is why we keep going through the process described above. This process will be put to good use again on October 4th for the Smallcap Discoveries Conference and we hope it will help you to achieve similar results.
We are very excited to take part in this event and look forward to meeting many fellow SCD members there!
For more investment theses, case studies and educational articles, please visit our blog Espace Microcaps.
Disclosure: Mathieu Martin and Philippe Bergeron-Bélanger own shares of IFX.V.
Espace MicroCaps is a community of microcap investors with a growth-value philosophy. Their in-depth research and due diligence aims to put their growth capital at work for the most promising public firms in Quebec and Canada with a long-term investment horizon. To help their members improve their investment knowledge and skills, expand their network and grow their portfolio, Espace MicroCaps publishes educational articles on microcap investing and organizes networking events in Montreal. Find out more at www.espacemc.com.
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