{"id":342,"date":"2015-05-04T17:40:25","date_gmt":"2015-05-05T00:40:25","guid":{"rendered":"http:\/\/smallcapdiscoveries.com\/?p=342"},"modified":"2022-01-11T12:47:12","modified_gmt":"2022-01-11T20:47:12","slug":"why-share-structure-tells-you-more-about-a-company-than-you-realize","status":"publish","type":"post","link":"https:\/\/smallcapdiscoveries.com\/articles\/why-share-structure-tells-you-more-about-a-company-than-you-realize\/","title":{"rendered":"Why Share Structure Tells You More About A Company Than You Realize"},"content":{"rendered":"

Why Share Structure Tells You More About A Company Than You Realize<\/h2>

Here\u2019s some smallcap statistics we shared with some fellow investors on Twitter:
\n\"\"
\nThe second stat is eye-popping. Over 60%! There\u2019s a pretty strong correlation here. Subscribers of SCD will know profitability is almost always a requirement for us. It\u2019s one of only two criteria we won\u2019t compromise on.<\/p>\n

The biggest winners we have seen have all been consistently profitable.<\/p>\n

But what could share structure have to do with this? Multiply shares outstanding by the trading price and you get the market value of the company.<\/p>\n

This is the number that matters. Who cares if a company has a lot of shares out at a low price or a small amount of shares out at a higher price? Not only should you care — share structure should be one of the key metrics you look at when analyzing stocks.<\/p>\n

Go to SEDAR<\/span><\/a> (or EDGAR for US stocks) and pull up a company\u2019s latest financial statements. Check the footnotes for shares outstanding:
\n\"\"
\nMake sure to add in options and warrants to account for dilution. Also consider any debt that could be converted to equity. You will arrive at a fully-diluted share count.<\/p>\n

This number tells you more than you think. It tells you the philosophy of the people running the company. And it can tell you a lot about the company\u2019s history.<\/p>\n

When a company raises money, they typically do one of two things: issue debt or raise equity. When a company raises equity, they do so by selling shares of the company.<\/p>\n

They may raise money to pursue acquisitions or invest in growth.<\/p>\n

They may need to sell shares just to pay the electricity bill. The share structure is often a reflection of the management team themselves. To have less than 20M shares out, you\u2019d need a management that runs a lean — even bootstrapped — operation.<\/p>\n

You\u2019d need a company that has been profitable from early on its life.<\/p>\n

If you have less than 20M shares out, you know management probably has not given themselves excess equity compensation. They probably haven\u2019t made bonehead acquisitions.<\/p>\n

And they\u2019ve proved successful in growing a sustainable business.<\/p>\n

These are all things you\u2019ll want to see when evaluating management. Share structure can also reflect how much skin management has in the game – If insiders own a lot of stock, they\u2019ll probably think twice before diluting their stake.<\/p>\n

They\u2019ll make sure any equity deal is a good one for the company. Having alignment with insiders puts the odds in your favor.<\/p>\n

There\u2019s also a technical reason to pay attention to share structure. It has to do with supply and demand. If the share structure is tight, there\u2019s less supply for investors to bid on — especially if insiders own a good chunk.<\/p>\n

Now if a company\u2019s growing and attracts the attention of an institution, the firm will start looking at ways of getting a sizable position. The first choice will often be to participate in a financing and get shares directly from the company. But if the company isn\u2019t issuing shares, they\u2019ll have go to the market.<\/p>\n

And if the share float is tight, they\u2019ll likely have to pay up to get a position. A single fund could send shares of a smallcap up 20, 30, 40%. A few funds piling in could double a stock or more.<\/p>\n

Now we would never buy a stock just because it had a tight share structure. But we\u2019re happy to buy an undervalued stock that has the potential to become very overvalued as institutions bid over a small float. Look back over the last few years at the biggest winners in the smallcap space.<\/p>\n

There have been five, 100-baggers in the last 5 years (RX.V, DAP-U.V, NHTC, PFHO, WFCF). They all had one thing in common — shares out were less than 25M. PFHO (which we invested in) had just 800,000 shares outstanding! The CEO owned over 60% of them — and was buying more.<\/p>\n

The bottom line is share structure tells you a lot more than many investors realize. It tells you how management has funded the company. How well they have done acquisitions. Whether they have run a lean operation or not.<\/p>\n

And whether or not they have built a sustainable business. Some management teams treat their shares like toilet paper. Others treat them like gold.<\/p>\n

Make sure you know which it is before investing. It could be the difference between losing your shirt and finding the next 10-bagger.<\/p>\n

Disclosure: Paul, Brandon, and Keith are long DAP-U.V<\/strong><\/em><\/p>\n<\/div><\/div><\/div><\/div><\/div><\/div><\/div><\/section>\n","protected":false},"excerpt":{"rendered":"Why Share Structure Tells You More About A Company Than You RealizeHere\u2019s some smallcap statistics we shared with some fellow investors on Twitter: The second stat is eye-popping. Over 60%! There\u2019s a pretty strong correlation here. Subscribers of SCD will know profitability is almost always a requirement for us. It\u2019s one of only two criteria...","protected":false},"author":2,"featured_media":1173,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[10],"tags":[],"_links":{"self":[{"href":"https:\/\/smallcapdiscoveries.com\/wp-json\/wp\/v2\/posts\/342"}],"collection":[{"href":"https:\/\/smallcapdiscoveries.com\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/smallcapdiscoveries.com\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/smallcapdiscoveries.com\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/smallcapdiscoveries.com\/wp-json\/wp\/v2\/comments?post=342"}],"version-history":[{"count":1,"href":"https:\/\/smallcapdiscoveries.com\/wp-json\/wp\/v2\/posts\/342\/revisions"}],"predecessor-version":[{"id":1487,"href":"https:\/\/smallcapdiscoveries.com\/wp-json\/wp\/v2\/posts\/342\/revisions\/1487"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/smallcapdiscoveries.com\/wp-json\/wp\/v2\/media\/1173"}],"wp:attachment":[{"href":"https:\/\/smallcapdiscoveries.com\/wp-json\/wp\/v2\/media?parent=342"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/smallcapdiscoveries.com\/wp-json\/wp\/v2\/categories?post=342"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/smallcapdiscoveries.com\/wp-json\/wp\/v2\/tags?post=342"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}