Guide to Microcap Stock Analysis – Introduction

If you’re reading this, you’ve just started on my article series on how to analyze a microcap stock! This introduction article will provide you with a brief introduction to the series and give you a sense of my method for analyzing any microcap stock.

I’ve broken my series into different steps, so we’ll go through each of those here and then go through how I tie them all together. From there, you should have a good sense of the bigger picture as you read through my more detailed steps. Let’s get into it!

Introduction Notes

The entire purpose of this guide is to take dense finance topics that are very poorly written, and unnecessarily confusing, and boil them down into simple terms. So, this guide is not going to redefine the valuations industry. But what it will do is give someone who is a beginner to the field the basic tools to navigate the murky waters that are microcaps.

Let’s use a metaphor. I am hoping this guide becomes the basics of your first toolbox. This is going to be your hammer, wrench, and screwdriver for your home improvement projects. This isn’t going to be a $5,000 table saw.

After reading my article series, you should be able to go through the OTC, NASDAQ, wherever, sift through the garbage, and find yourself some companies with some real potential. Like counting cards, this isn’t going to find you winners every single time. But what this guide can do is tilt the odds more in your favor by discarding bad companies and focusing your attention on the good companies.

Outline of my Method

My microcap stock analysis follows these steps:

  • Introduction
  • Step 0: Rules of the Road
  • Step 1: Exclude Blacklisted Companies
  • Reflection Period 1
  • Step 2: Understand the Industry
  • Step 3: Understand the Company
  • Step 4: Analyze the Financials
  • Step 5: Determine Growth Prospects
  • Reflection Period 2
  • Step 6: Valuation Methods
  • Step 7: Trading Characteristics
  • Step 8: Model
  • Reflection Period 3
  • Step 9: Cruise Control – Update, Monitor, Trade

The way I break down my analysis is in a series of shorter analysis steps with a few “reflection periods” throughout the process. What this means is, you perform each of the analysis steps up until a reflection period. At this time, you go back through your hard work in the prior steps and decide if it’s time to continue or not.

Now, let’s get into the steps briefly.

Steps 0-1

Step 0 is the first and most important step which provides your ground rules for analyzing a company throughout the process. These include basic rules and tips for when looking at companies.

Step 1 will list out my companies that I always, 100 percent of the time, avoid. I call them by “Blacklist” companies.

Steps 2-5

If you’ve decided to continue after Reflection Period 1, you can now move onto the next block of steps. Steps 2-5 are really the core of your analysis and will likely take the most time. Here is where we do some detailed research on the industry your company operates in, determine a detailed understanding on the company itself (such as management, the products, vision, etc.), analyze financial statements, and determine its growth prospects.

Steps 6-8

If, after Steps 2-5, you still like the company, it’s time to model out a fair price for the company. Here we get into the various valuation methods you can apply, understand how the company trades (not technical analysis), and lastly, we select the appropriate valuation methods and make our first set off models giving us a range of intrinsic values.

Step 9

After we’ve completed our modeling exercise, we now enter the “cruise control” stage. As we now know our intrinsic value of a company, we can then monitor ongoing price fluctuations versus or intrinsic value, update our model as more information is released, and monitor the ongoing performance of the company.

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