In the current environment it’s been hard for investors to make a return. Just about every asset class over the past 12 – 24 months has been decimated – And microcap has been no exception.
While the focus of investors lately has been on the decline in public company share prices, and portfolio destruction, we are starting to hear from several CEO’s and Board Member’s who are questioning if operating as a public company is worth the cost right now.
And for sentiment check-up, this has been a radical shift in thinking since the frothy bull-market top in late 2020 and early 2021, when everyone wanted to take their private company public.
But it’s a justifiable question given the large costs required to operate as a public entity, which for microcap companies, can range from $250K per year and upwards, comprising of costs such as, legal, audits, investor relations, board compensation, disclosure fees, exchange and filing fees, and more.
Operating a public company is expensive!
Most companies go public seeking a higher valuation, while also increasing access to a larger pool of potential investors.
But in today’s environment, many companies are trading at discounted valuations relative to their private market peers – Hence the question many CEO’s are asking, why are we public?
It’s our belief that either the private market valuations must decrease, or the public market valuations must increase.
Usually it’s somewhere in the middle, with both public and private valuations changing. And sometimes the way these valuations change is when someone, be it existing management, or some other entity, buys a company at a premium to its trading price, and takes the company private.
A Framework for Valuation Analysis
One of the best features of the stock market is the opportunity to purchase a fraction of a company, and not the entire business.
The flexibility for public market investors can be a massive advantage over private market investors, as they can put small sums of risk capital to work, without the concentration issues or requirement for a large horde of cash.
Additionally, public market investors have the benefit to potentially decrease their risk over time. For example, and easier to imagine in this declining market environment, if a company were to double its business and cashflows over a two-year period, but the stock price further declined from an investors original purchase price by 50%, that investor would be getting twice the business at half the price.
It’s an incredible feature for any investor looking to make a good return.
So, with that in mind, and given the number of companies that have recently announced their intentions seeking alternatives to being public (TSX.V: TBRD) (TSX: DNTL) (TSX: CTS), we’ve created a video that outlines a framework for valuation analysis.
Private equity investors do this exercise routinely, and for us public market investors, it can be a helpful guide for determining how cheap some of these companies have become. Check out this educational exercise by watching the video below.
And a final note with earnings season wrapping up, we are working to prepare a few lists for companies that stood out this past quarter, and will be sharing names of companies that look attractive under this framework for analysis.
