Lead-Lag Live

Alejandro Yela on Microcap Stocks, High-Risk Investment Strategies, and Global Market Dynamics

• Michael A. Gayed, CFA

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Unlock the secrets to high-reward, high-risk microcap investments with Alejandro Yela, a polymath in law, economics, investment banking, and real estate. Alejandro reveals the nuanced world of microcaps, sharing his incredible journey from restructuring companies to managing separately managed accounts. Through his global lens, including firsthand experiences in Japan, Hong Kong, Vietnam, and Europe, he details the unique opportunities and challenges that lie in microcap stocks, which range from $1 million to $300 million in market cap.

Alejandro breaks down his high-conviction investment in Carlytics, explaining how the company's monopoly on bank data for targeted advertising creates a robust competitive moat. Learn practical strategies for identifying promising microcap stocks and managing liquidity challenges, including how to navigate sector-specific dynamics and anticipate growth potential as companies transition from micro to mid-cap. Alejandro’s long-term investment horizon and qualitative analysis offer a refreshing take on microcap investing, emphasizing the importance of understanding market dynamics and the true measure of risk.

Discover the value of patience and strategic thought in microcap investments, and dispel common misconceptions about their volatility. Alejandro shares how heritage and consolidation within micro-cap firms are crucial, along with the impact of interest rates and leverage. Engage with Alejandro's Substack for in-depth analyses, portfolio strategies, and educational content that will elevate your investment knowledge. This episode offers a comprehensive discussion to enhance your approach to microcap investments, blending practical advice with Alejandro’s rich, storied expertise.

The content in this program is for informational purposes only. You should not construe any information or other material as investment, financial, tax, or other advice. The views expressed by the participants are solely their own. A participant may have taken or recommended any investment position discussed, but may close such position or alter its recommendation at any time without notice. Nothing contained in this program constitutes a solicitation, recommendation, endorsement, or offer to buy or sell any securities or other financial instruments in any jurisdiction. Please consult your own investment or financial advisor for advice related to all investment decisions.

 Sign up to The Lead-Lag Report on Substack and get 30% off the annual subscription today by visiting http://theleadlag.report/leadlaglive.


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Speaker 1:

I'm doing quite a few of these live streams, if you haven't noticed every single week with various guests. This one's going to be a special treat because I often don't talk about microcaps, even though I always say small caps hold the key, and we've got a real expert. I happen to connect to Alejandro via Substack. He's got a great following and a great leadership there. Looked at some of his content, figured you know what he'd be a good guest to have on Lead Lag Live. If any of you want to engage during this live conversation, whether you're on YouTube, X, LinkedIn, I can see your comments, which means let's make this interactive. I want to make sure that my job is easier by getting some of your questions in during this roughly 45, 50-minute conversation. So, with all that said, my name is Michael Guy, a publisher of the Lead Lag Report. Joining me for the rough hour is Mr Alejandro Yella, from Spain, making his debut here. Introduce yourself to the audience. Who are you? What's your background? What have you done throughout your career? What are you doing?

Speaker 2:

currently. Yeah Well, thank you very much, michael. This is absolutely fantastic. This is, technically, my first live stream, even though I've done podcasts, but no, a bit of a different experience, at least thus far.

Speaker 2:

I'll give you a bit about my background so you can sort of place me within the finance realm. On the non-related side of finance, I do have a bit of a non-conventional background. I studied law and economics. On the law side, I managed to restructure a company in 2017 that we sold and I sold last year actually July 2023. And I also sort of dabbled in the real estate sector, failing miserably three times. So I'm not going to talk about that part, but it was definitely part of the learning process. On the more conventional side, I did do a bit of investment banking. I worked in a petite investment bank that was focused on the tech sector. I did stuff related to data analytics and enterprise software. Enterprise software would be like CRMs, customer relationship management, erps, a bunch of logistics, hr, payrolls, all that kind of stuff. That's sort of doing the work in the backgrounds of companies nowadays.

Speaker 2:

I also did a little attach in Canada. I worked over there for a spinoff of Canadian Pacific, a large train company, and the spinoff was essentially consulting for project finance, so large projects, mainly World Bank, electricity generation and that sort of thing, sustainability-related projects. I'll give you an example, because these projects, you know they sound like nothing but they were mostly in the billions. So, for instance, I was a project manager engaged in essentially setting up a hydrodome. This was like a 1.3 gigawatt hydrodome in Ecuador and this hydrodome was set to essentially provide energy for like 700,000 households and a bunch of industrial uses. So you know, that sort of large scale projects where you have models that are. You know it'll take you like 10 minutes to open the exhale.

Speaker 2:

And the last and probably most most pertinent part of my experience, or my background, is I work for a family office. This was more of like an on and off job. I debuted here as my mentor is essentially the manager of the family office but I sort of gave him uh, equity reports, uh when, whenever I I was able to sort of research companies, you know, in the different places I lived at Um. And this family office is a family office with with, uh, a head who started trading in 1983. So you could figure out the age yourself a fairly old gentleman who has probably the worst specialization ever.

Speaker 2:

If you're finance, you don't really want this. He is a specialist in Argentinian debt. So, yeah, he essentially went through 30 years of nothing, well, other than losing money, which is not a great experience, if you ask me. But yeah, this guy and I sort of work on equity research and eventually I managed part of that and that has led me to where I am. I'm essentially managing separately managed accounts at the moment and setting up shop which, hopefully, will be set up by the end of the year. At the moment, and setting up shop which hopefully, of course, will be set up by the end of the year, and at the same time, sort of writing my I'm going to call them adventures, but they're probably more misadventures on software. Why go with the?

Speaker 1:

Hermit as a way of writing yourself.

Speaker 2:

It's actually sort of a shout out for my brothers, because I call my brothers Hermes. Hermano is the word for brother and it's sort of it has a duality. One is that and the other one is I'm a big fan of a Basque painter. His name is Ignacio Publa and he drew this amazing, amazing artwork where there's this hermit at the top of a mountain just sort of thinking about life, and I sort of want to aspire to be that. You know, I want to think about stuff and eventually execute All right.

Speaker 1:

So your sub-sec, which you've grown to a very nice number, is obviously very focused on the micro-cap side of things, which is interesting because micro-caps we'll get into it can be incredibly rewarding or kind of the public market way of being, maybe a little bit like a VC investor, because these are smaller companies with huge upside and a lot of failure rates. But why turn your attention to micro caps? I mean, as I hear your career progression law, economics, some real estate you did on your own the investment banking and then you know other activities it sounds like you've kind of run the gamut as far as different sizes of companies you've interacted with. Why?

Speaker 2:

focus on the microcap side. Well, the family of his manager was mostly focused on the macro side, so he'd be more into your other guests and when I was managing or co-managing part of it, I ended up managing about 15 to 20% of the assets he had. He just had very different creative views of things and I haven't really seen obvious place in any other space but the micro. And when I say obvious place I mean stuff that can, like 10x or 100x. You look at nvidia or apple or any large app, you'll get analysts making predictions and those predictions would be like you know this is 20 undervalued or something like that, which is fine, and you know there's a lot of people looking at that. So the information is there. But that's not really the case in the microcap world because no one is actually looking at that. And you get these super, super good, super asymmetric returns, I'd say, where the people with information can sort of make that and the rest of the people don't. And this is only offered because there's essentially no coverage in this space. So if you look at the nano and microcap space, so 1 to 50 and 50 to, let's say, 300-ish million market cap USD you'll get super low volumes super illiquid stuff that institutional managers cannot buy because it won't move the needle for them. So they just won't play in that arena. And because they don't play, there's no real coverage. Even though the information is there, you just don't get. You know people don't execute their plays based on that information because you know it's out of their interest.

Speaker 2:

And there's a second part to the story, which is I can talk to managers, because managers don't usually. You know, if I'm trying to speak with like, they'll be like yeah, yeah, buddy, you home, they'll pack my bag and and that'll be the end of the story. However, if you look at my phone right now, like I'll have what's like 20 or 30 ceos. Sure, there will be like ceos of smaller companies, but they're people who are experts in their field and and I can just talk to them, and not only the companies I'm invested in. But I don't know if I'm interested in like some industrial play and probably I've probably met a guy who manages in micro cap in that space, so I can just talk to him and be like what do you think about this or that? And that information is invaluable, so I pay off of that information.

Speaker 1:

All right, so you defined it there. You said $50 million to $300 million-ish is kind of the range you're looking at.

Speaker 2:

My average right now is about $65 million $65 to $70 million, so on the lower end of it and that's only a product of my inability to gather assets, because the more assets you have, the larger the market.

Speaker 1:

And only US, or are you looking at other countries? No, no worldwide, worldwide.

Speaker 2:

The first foreign well, the first country I sort of covered is rather funny, I'd say is actually japan. I have been in japan for a couple years so I covered, like hong kong and japan mainly. I did some stuff in vietnam as well, but but mostly those countries. In europe it's a bit different because there's sure there's like language barrier, but there's also like a culture barrier. So if you talk about europe, there are some places where I venture, some others I wouldn't. Uh, for instance, uh, there's a lot of interesting stuff in cyprus, but cyprus, especially the banks, so if you want to invest there you have to go through there. They're mostly dominated by, by russians, so it's very, very hard to sort of gauge whether the legal framework and the financing, the financial world of a place like Cyprus is actually a place where I want to go and make money consistently.

Speaker 2:

I had to travel to four different countries in Africa, for instance. I had to redo the entire train network of Rwanda. So that type of project does give you and it marks you when it comes to searching for those opportunities, for the good and for the bad, because like Rwanda for instance crazy example here but like the CEO had 30 chauffeurs. So if you look at their statements and you're like, why does your entire family work for this company? And they are all your chauffeurs Well, what's the point of that for this company? And they are all your chauffeurs, like, well, what's the point of that? But yeah, so you do need to understand the framework of each country and by living there, you sort of experience that.

Speaker 1:

So yeah, that's pretty much it. Do the micro-cap stocks of different countries in general somewhat move with those countries' own large-cap averages, or are there some countries where there's even more of a differential between the micro cap side and the bigger public?

Speaker 2:

equities. There are usually barriers, but I wouldn't say they move with the country. For instance, there's this thing in Africa called Mpessa I think they're Nigerian based and that sort of spread like wildfire. It's a transaction via phone company, so you send like an SMS and they will send money to someone else who's receiving the SMS. That sort of thing can catch on and it'll just explode.

Speaker 2:

But there are some barriers, like funnily enough, for instance, spain has massive, massive barriers when it comes to transitioning from small to large entities. Just to give you some explicit examples the report thing once you have a 10 million euro business to get to 50 people, you need to hire people that are essentially working for the government. You will need like an esg department and stuff like that. So there's a barrier there. And then there's there's the If you own a business in Spain that's worth 10 million bucks or more and you leave the country, not even sell a company, you leave the country, you are classified by the government as someone who sold the company, so you're forced to pay taxes on them. So it creates this incentive for people who don't exceed 10 million to leave before they exceed 10 million. So they don't want to pay taxes and those incentives create a massive barrier when it comes to transitioning.

Speaker 1:

Yeah, that's actually very interesting and nuanced In terms of your portfolio. Are you primarily US micro-gap or what's sort of the mix globally?

Speaker 2:

Well, I am U US-based at the moment, but that's only because few of my companies exploded recently and they're US-based. A few weeks ago, for instance, I published a report about PLC the Children's Place, which is a specialty retailer. They sell kids clothes between 12 months and, I think, the age of 14. And these guys who were extremely shorted 56% of the free product was shorted were not going to go bankrupt anytime soon, because management took over A Saudi group, essentially with a lot of money. They took over and they had restructured it. I wouldn't call it restructuring. They had changed the company in a similar situation in the past and people were still pricing that as if it were going to go bankrupt. And so, for instance, on that company, I sent my portfolio into that and that just exploded in the past two weeks I'm out two and a half X-ish and so it went from 8% to like 20%. And the same thing happened to another company that I have in the portfolio. So at the moment I'd say 40%-ish. Of my portfolio, 40 to 50% is US or Canada.

Speaker 1:

I think it's interesting that you mentioned short interest, because when I think about very small companies, micro cap companies, I would think it's very hard to get a borrow to begin with. So now, right. So is the implication there then that if there's high short interest in a very low market cap company, that the illiquidity squeeze can be a lot more vicious? It's crazy.

Speaker 2:

This company popped up like 100% in a day and it's exactly because of that, half of it is already out of play because it's owned by the Saudi group that entered. So not only is it a microcap and it's by nature illiquid, but half of the total available shares are not there. So the free float is just like we were shorting 30-ish percent of the total amount of shares, but because only 50% less than 50% was available, then you just have this explosion because they all have to essentially buy it up.

Speaker 1:

Let's go to a question off of YouTube from Danny Lemieux. If I'm pronouncing that right, across sectors slash industries do success? Variables for microcaps diverge favorably for them versus dominant companies within their sectors, except offering a low cost product or service cost. So I guess the question at the core is when you think about very big companies, they're big because often it's a pricing advantage or it's some large data dominant driven position. What drives the success of micro-cap companies when you don't have those economies of scale and scope that the large companies do?

Speaker 2:

They're usually misunderstood and that's probably what causes the biggest price gap between them. But in most cases when I go for one of these, they're either oligopoly or like a monopoly status, so they won't have a very large market, but they're the leader in their very niche thing and they're very niche, like POC. Once again, they are essentially the leader or among the top three brands when it comes to this very specific part of retailing, which is the infant and preteen retail, and because they have that positioning power, if they don't go beyond that scope, they should perform quite well. This is like since I worked in tech. This is the case for most of tech companies out there. If you look at the constellations of the world, they're buying up niche players because only local players are winners, so you'll get I don't know web hosting winners that will only succeed in this very specific region where there's like 100,000 people that live it Because it speaks to them, to their culture. They just went and you get a lot of that.

Speaker 2:

I'll talk about another position which is technically my highest conviction I've been in it since 2019, but went really big last year and that's Carlitics. Carlitics is essentially a monopoly on bank data usage. They don't own the data, but they use it to target people. If you look at the scale, carlitics is at about 200 million users and then probably the closest competitor is Cash App with 50 million users. The thing with that sort of play is that you are a cash burning machine unless you have scale. Play is that you are a cash burning machine unless you have scale.

Speaker 2:

And because a cash app will never get the data from JP Morgan, that's not going to happen. It's like Google asking for the data of Bank of America. It's not going to happen. Because they don't get the scale, they will never be profitable. They'll just consistently lose money Unless you get the scale, unless you go back to 2008 and convince all the banks to give you the data, which is the case for Carlytics Carlytics has Wells Fargo and there's Bank of America, there's JP Morgan, there's Lloyds Bank in the UK. They just have a bunch of people that they can funnel these offers to and that money-losing dynamic will eventually be surpassed. But unless you go once again back to 2008 and you can convince them convince the max, I mean to give you your take that it's extremely, extremely hard to surpass that barrier of entry. I hope that explains why these niche players are very strong.

Speaker 1:

Correct me if I'm wrong, but the universe of microcaps has got to be huge, right? I mean there's got to be far more number of companies than not. How do you even go about identifying the ones to focus on? I mean, I can't imagine it's as simple as well. Look for those that have a PE or whatever, right?

Speaker 2:

I mean, there's much more nuance than that, that's actually a really, really good question, because I do waste a lot of time finding companies. Funny, you know, I've been doing the whole writing for probably four to five years now, obviously anonymously. But I did a lot of seeking alpha and medium, a bunch of other content sites. I use them to sort of transmit my message. But at the same time that I was sort of pushing that out, a lot of pushing that out, a lot of people just came to me with pretty good ideas. So there's a natural funnel in you know, networking with these types of people. For instance, I have spoken with a lot of people from the Micro Club. Even though the Ian Castle venture, even though I'm not really part of it, I do have connection with some of the people that you know publish stuff in their site and their insights are completely, they're, invaluable. If you can talk to those people, you usually get good ideas. Most of them aren't good ideas, but some of them are, and it's a much easier way to sort of shift through these.

Speaker 2:

On the non-network basis, though, I do look at companies. From time to time I do a bunch of screeners. They're mostly not quantitative. Why, you may ask. Well, the quantitative stuff, the PE ratio, stuff that's already priced in, that's already bought. People are not mispricing stuff that is making a lot of money. Where people are mispricing stuff is where they're missing the fact that there's this qualitative factor, there's this extraordinary CEO, there's this extraordinary product in the making that is going under the radar. So you usually have to sift through those.

Speaker 2:

I'll give you a very good example. For instance, in Sweden there's this company that I haven't bought yet Hopefully I will someday because I think the product is fantastic which has a very niche product. They do these stickers where you put them on your skin and they're only made for people in the north part of Europe. You have to be extremely white in order to use this properly, but they love it. You add these stickers where you go to the beach and you rub sunscreen on and you have the sticker on and the sticker will sort of change color as you need more sunscreen. And they're nothing. They're like pennies. They'll cost you like 10 cents or whatever, but they avoid so many injuries.

Speaker 2:

That sort of product which is not commercial, like if you go to the States, for instance, no one one will buy that. But there's this region up north, you know, maybe canadians that go to the beach. I'm not sure, but you need to happen. Whether in order for that to happen, I live there and I show you. You know, six months of intense winter. Anyway, that sort of product is very unique, but in order to get a sense of it you need to sort of feel it, because you won't see that in the numbers. Eventually you will, but by the time you see it it's already priced in.

Speaker 1:

One thing and actually I've interviewed Ian Castle in the past, some time ago, on microcaps but one thing that I think is interesting about this style of investing is we're always taught and told you have to let your winners run. Is we're always taught and told you have to let your winners run. And, of course, the issue there is that, well, if a micro cap becomes a small cap, a mid cap, a large cap, that's great, but now it becomes your entire portfolio, right? So relative to the other micro caps which maybe have not had that kind of return. So when do you know when to sell or to reduce Bit, struggling with that If you ask Ian, he would probably tell you.

Speaker 2:

You know the life of a microcap is a couple of years at most. Hence I disagree. My time horizon is eight to 12 years and I know this sounds rough, but let me explain. Carnalytics, for instance once it surpasses the barrier of breaking even and has a proper pricing model and has automated fund, it's a money printing machine, so it'll get something like 80 cents out of every dollar in net profit. I'm not even exaggerating that. That'd be the ratio and because that's the case and there are no real competitors, it'd take like a decade to build a proper competitor. There's no real barrier for it to go from.

Speaker 2:

I don't know what the market cap of it is at the moment like 200 million or something like that all the way up to like 20 billion. Like if it goes to 2 billion. There's no cap for that to go to 20 billion. That's not usually the case. Most microcaps don't do that, but in the case of something like analytics, you can just wait for it to get to a large size and then sell it off. That being said, as it grows you are losing the informational advantage, so that asymmetry of you having personal contact with management or suppliers or clients. That fades away and your informational advantage is extremely, extremely important. So sure, there's a point where you have to sell. On the flip side there's some stuff that just doesn't scale. So you do need to understand what that total addressable market is.

Speaker 2:

For instance, I hold a company called ReadyShredcom, which is a Canadian company that does SMB paper and data destruction. They go around with these vans and they essentially ask whether you need something to be destroyed. So they all like proper security and proper means. You raise your hard drive or just a bunch of paper that is sensitive, that you don't want other people, you don't want to share with other people. That there's a point where it's not really scalable.

Speaker 2:

The only reason it's scalable right now and the only reason it works is because it's extremely fragmented. But once it's consolidated, these companies they'll get to like 10 million and then they'll professionalize that they won't have the guy with the truck coming over to you know, erase their hard drive. They'll hire someone else who does like six or seven additional services and that person will take over. So there's this hard cap to some of the companies and you do need to understand what that total adjustable market is for you to understand. You know they got here they grew at 30%, but now they're going to grow at whatever, at inflation 2%, forever. The only way they're going to grow is by increasing prices.

Speaker 1:

You alluded to liquidity before. So if you like a micro cap, how do you even go about accumulating a position? I'm going to assume you're doing limit orders. You're spreading it out over multiple days, but is there anything technical that you're doing that, trying to time, or is it just getting over some period of time? Well, this goes my secrets out.

Speaker 2:

There's. There's two ways, two ways I go about this. The first one is by buying blocks. So some people just want to exit, maybe their owners, they own like 50% and they won't really care about 71%, or they've been in it for 10 years. It hasn't moved. They just want out. But if they sell it into the open market it'll go down by like 20% or something, and so that's one way I buy them. So essentially a one-to-one transaction with a party that wants to sell. The other way I buy it, and this is actually extremely useful information which took me a number of years to learn, useful information which took me a number of years to learn.

Speaker 2:

You can buy up to 20% 10 to 20% of the volume per day without moving the stock, and that's sort of what you want to do. For instance, the smaller side of when it comes to volume, the smaller, on the smaller side of my portfolio, you're going to have companies that have a daily volume of about 20k, so you can probably buy two to four thousand bucks worth of this. If I gather more assets, or if I were to gather more assets, this would not make it viable, because if you're buying that and you want to exit you want to like you're gonna have to do that once again. Imagine you you're buying 60 days, which is sort of my limit. I do 60 days with with 10, 30 days with 20. If you're buying 60 days of that and sort of my limit, I do 60 days with 10, 30 days with 20. If you're buying 60 days of that and you want out, and especially if you have outside investors and they want out immediately, imagine you have some. Your door needs some random operation. That's extremely urgent. You're obviously going to get money from wherever you can and if that's the case and I don't sell it in 60 days, it'll be dropped the value of the stock. So you do need to be extremely careful with that.

Speaker 2:

If you have outside investors, you need them to be very patient. You can lock them up or, as in, have a lockup, have a gate in. You can have an extremely long warning period, which is, for instance, what I do. I have like 100 days warning period. But yeah, it's the challenging part of this Exiting. However, in my experience, once these things have 10x, it's usually not that hard because as the company grows into the small mid-cap space, the volume just explodes. There's a point where you have the passive guys BlackRock, vanguards of the world and you have analyst coverage, so other banks are either buying or distributing the company in some shape, way or form, and that just creates a lot of volume. There's a lot of people transact With. That being said, stay away from this if you're doing something like trading, because you won't make any money. In fact, you will probably lose a lot of money. If you can't, we'll fast them once.

Speaker 1:

Let's talk about sectors or industries. Are there some sectors or industries that you find tend to be more profitable in the microcap space? I would assume, for example, that tech is maybe more difficult Because, again, it's winner-take-all. Maybe I'm wrong on that, but any sort of probability increase by looking at industrial microcaps versus healthcare microcaps or anything like that.

Speaker 2:

I haven't really observed any in the past. At least there are a lot of. If you look at the biotech sector, for instance, and you're good at that and you're good at healthcare, then you probably have some edge, because there's some that are essentially cash. They are, of course, burning cash because they're developing some drug and those will explode all of a sudden, but beyond that I haven't really seen anything. It is true, however, on the flip side of that, that especially tech has a lot of private interests. Of that, then, especially tech has a lot of private interests. So you'll get private equity players buying up very, very small companies in the tech space because they have ARR multiples and they'll be growing up 50% to 100% every year and those just don't get listed anymore. So there's a deficiency of those and maybe because of that, there's sort of a sample bias. But yeah, most of the stuff I own has usually been there for a while or is a consolidation of something that's been for a while in that sort of space.

Speaker 2:

I'll give you another example. There's this company called Gismondi. Gismondi is an Italian jewelry company and these guys are a seventh generation family business, so they've been around since like 1700s, pretty long time ago. However, the company that is listed is actually three companies put together, so the oldest one is a seventh generation company, but what they did is integrate the whole thing. The older one just sold the jewelry but now they have the manufacturing of the jewelry and they have sort of these, some of these supplied sites. So they buying of the diamonds and the gold that is sort of integrated into this company that's listed. So, yeah, a lot of a lot of heritage when it comes to some of these microcaps, and most of them eventually get listed, but they're usually quietly listed. You know there's not going to be a lot of boom when it comes to their price. There's not going to be a back sort of trying to sell it to you at 200 percent of what it was quoted for yesterday how much is the um, the macro environment, factor into microcaps, right?

Speaker 1:

so I'm thinking about rates in terms of the so-called zombie company dynamic. I assume a lot of microcap companies are pretty leveraged, right? They probably have quite a bit of debt. So how do you think through the direction of rates and interest rate policy when it comes to the space in general?

Speaker 2:

Well, rates have a significant effect, especially, as you pointed out, in other companies.

Speaker 2:

I think I'll publish tomorrow, actually, but I've completed a few days ago this write-up of a company that's called Lazy Days Ticker G-O-R-V.

Speaker 2:

I think they're the number two player in the RV retail industry in the US and these guys normally have a SOFR plus rate.

Speaker 2:

So imagine they have like 100 million debt and then you have something like 5% to 9% is usually range of movement plus SOFR.

Speaker 2:

So 9% plus 5% is a lot of payments, a lot of interest payments, and these guys have, if you read the contracts, they have a variable rate and it's usually the case in a lot of micro case in micro, especially in the States and in Canada, where, depending on their leverage, it'll be one plus sulfur or it'll be three plus sulfur, and you need to be very, very, very aware of these because changes in the interest rate and the leverage of the company themselves do have a large impact. When it comes to companies outside of the US, however, I'd say it varies significantly because it has more to do with upside potential. I'd say, for instance, in the micro-cap space you can get up to. One of the companies in my portfolio has like a 65% return on invested capital. So if you use debt and the debt is marginally higher, so one, two, three percent points higher when it comes to interest payments, you don't really notice it because you subtract five from 60 or 10 from 60 and you still get an incredible rate over it.

Speaker 1:

You mentioned talking to managers and then you mentioned worldwide. You're looking at all kinds of microcaps. You mentioned culture. Do you find that the openness with which managers are willing to talk to an investor is different across countries? Do you find that the way they communicate makes it easier to do due diligence in some countries versus others?

Speaker 2:

A hundred percent In my experience not that you know it's not that extensive, but in my experience, japan is a place where I would love, I would love to deploy capital. There's so many interesting things, but they just don't speak English and unless you know proper Japanese, it's extremely difficult. It is extremely difficult. I'm working on a write-up, actually, with Ray Saito. He also has a sub-stack shout out to Ray where we're looking at boutique beauty salons essentially hairdressers that have these. They share this software. It's called CNTY.

Speaker 2:

You can't really go to like executives. You go to these people who are essentially not trained, they won't have higher education or have lived abroad 10 years in the US. These are people who were born and bred in Japan and they open shop and they're using this software. That is super local and in order to get the information, you need to make an investment in a micro-cap. You need to interview these guys, you need to ask them. You know what are the strengths and the weaknesses of the software. What do you hate? Are these any competitors? And without the language barrier you know I'm not even talking about the cultural barrier, which is also there but without that you can't really get the information. You need for it to translate into an investment.

Speaker 2:

Another example in this annual shareholder meetings, where it says there's one in Germany who refuses. He is a rather old gentleman and he speaks perfect English, by the way, but he refuses to hold the AGMs in English. He'll just hold them in German. And once again, I can dabble in German but I'm no expert, so I'm pretty sure that a lot of it is lost in contact and the only reason I'm invested with them in this case is because I have a direct contact with him and I know some people around him and I feel like that's extremely important. But I wouldn't be able to do it if it were Japan or if it were like China or Singapore or Indonesia. I wish I could. But yeah, unless you have lived there for a while, know the language and the culture, it's pretty difficult to sort of understand how some of these people will act, especially in difficult circumstances.

Speaker 1:

Do you factor in the length of time a company's been around? I mean going back to your point about how they will respond, the longevity aspect of some of these companies. Is that an important consideration? You mean? How long it's been since the IPO? Well, no, since the company's been not even pre-IPO?

Speaker 2:

Not really. It is important to understand the early stages of the company and the sector. But I mean, if the company was created two years ago, it's probably a startup and it won't be within the scope of, I said, 1 to 50 million, but the lowest I've actually invested in was 9 million-ish. It was like 12 million Canadian. So 9 million. Once you get to that stage, you already have 20 people, 15 to 20 people at least you have a proper staff. So understanding, sure, the length of it is not really a concern because there's different situations. For instance, the Gismondi has been around for a really long time and there's a lot of heritage, but Gismondi as it is right now has only really existed for like five years. So, sure, you know, understanding the origin is important, but the past isn't really what I'm looking at. I'm looking to understand the future and the execution of the ideas that managers currently have. You know, their vision of what this can become, because the past is already priced in essentially. But that qualitative factor in the future is really nice.

Speaker 1:

As we start to wrap up here, Alejandro, maybe talk through some of the misconceptions that people have around microcap investing and talk about the sub stack and how people can read more of your work.

Speaker 2:

Well, the main misconception is they're extremely risky. Risk is, you know well? First of all, risk. Risk is equal to volatility, in a lot of people's eyes at least. In academia You're taught that in theory, and mega caps are very volatile because of this inequity result where a single purchase order or so order will create massive fluctuations in price. That being said, they're businesses, so it doesn't really matter the size that the business has. What matters is the idea. If the idea is good, then it can be an incredible investment. Honestly, not risky at all, but you do need to pay attention to it.

Speaker 2:

The greatest example is probably PLC. Plc. When it got bought out, most of it got sold to the Saudi group. That led to a lot of internal restructuring and one of the things they did was give out two loans to the company. One of them is a loan at 0% interest until 2027. So they're getting free money from their current shareholders. That number will count towards the debt, the total debt and the net debt figure, but I wouldn't consider that debt compared to the other liabilities they have. Why? Because it's given by the people who own it and at a 0% interest rate. That is not risky at all. I wish I had that sort of flow.

Speaker 2:

With all that in mind, I will sort of plug in my sub stack. I have a sub stack where I write about these things more in depth. In particular, I write in-depth write-ups about the companies I own and I find interesting. Some of them are well. Most of them are honestly actionable. Some of them are just stuff I've done in the past, but I find the company fascinating. For instance, Coffee Feta, which is a monopoly on cork. They distribute 60% of the cork in the world. They're a very interesting company, but I was involved with them in 2014. So I don't think that's actionable. With that in mind, knowledge accumulates, so it's extremely important to have that sort of thing in the back of your mind, whereby you will see another company that does something similar and you just be like, okay, this is analogous to this other company that I run. So I write about those companies Montagnier and I wrote about PLC right before it released earnings or on the day actually of earnings.

Speaker 2:

And then I do this thing where I do an overview of my portfolio. I look through the positions and sort of explain what I'm buying, what I'm selling, why I'm buying it, why I'm selling it and sort of the frame from which I look at that specific play. I allocate play, for instance, in Argentina. About 4% of my portfolio is distributed in six companies in Argentina. It's a very tiny percentage for me. My percentage is usually 5% of the portfolio. But the framing for this which, by the way, does have some macro to it is laid out to the T within the posts, and they do create this discussion where maybe in 10 years I'll be right and I'll be like you Now great success. But if I'm wrong I can go back and sort of see what my loss is and where I went wrong, so I don't make that mistake again. And that is essentially the subject.

Speaker 2:

There's some educational stuff as well. I write about tools. The latest post, for instance, the latest educational post, was titled the natural monopolies, which is a critique on the concept of natural monopolies which is commonly sold to us. You know things like, uh, train tracks and and utilities, um, stuff that isn't really a natural monopoly but rather a monopoly through government action. Competitors get blocked because there's this super high barrier of entry called the license and so you can't really, even if it makes economic sense, you can't really compete against it. And yeah, that's sort of the stuff I write about. If you're interested or if you want to read any of these, you know, feel free to DM me. I'm always happy to learn from other people and obviously, if you want to talk microcaps, I can talk about that forever.

Speaker 1:

Appreciate those that watch this live stream. Please make sure you check out Alejandro's Substack. Very interesting conversation, just kind of getting a sense of how to really be an investor as opposed to a trader, which you need to be if you're going to be in the micro cap space, and I appreciate everybody watching. Thank you, alejandro, appreciate it thank you very much.

Speaker 2:

Thank you, michael cheers, everybody. Thank you, thank you.

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Michael A. Gayed, CFA

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