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On a professional basis, I have now been analyzing small and mid-capitalization companies for more than 30 years. Smaller companies, in my view, are just more fun. Sure, they are riskier than larger, more-established companies. But they are also typically growing faster, and can provide greater investment returns. You just have to be careful, and know what to watch out for. There are dozens of warning signs one can pick up on for small companies, and we will cover these in a later column. But for now, let’s focus on some things to look for, when trying to find a good small or mid-cap investment idea. We will try to list some company examples, as well.
There is a reason why analysts and portfolio managers always say that management of a company is the most important factor to look at — because it is. This is even more true with a smaller company, because senior management has the vision, the expertise and the motivation (through stock ownership) to drive the company forward. Sure, large companies have lots of experienced managers as well. But smaller companies tend to have managers that live, breathe and sleep their company 24 hours a day. Many managers have their entire net worth at risk in their own company. We like this. Frankly, we want the managers of the companies we buy to be lying awake at night worrying about their business. If they are lying awake, we can sleep better. One example is Well Health Technologies (WELL on TSX). The executive team, led by Hamed Shahbazi, has grown (and sold) companies before. Our clients did well on TIO Networks, Shahbazi’s prior company, which was sold to Paypal in 2017 for $300 million. The team knows how to grow a company. Well’s shares are up 363 per cent in the past year, so are certainly off to a good start. Insiders own about 16 per cent.