Stock Investing Secrets: Small Caps

Hey, what’s going on everybody? Today I purchased Oasis Midstream Partners. Find out when I take a look at when looking at small caps on this episode of Stock Investing Secrets. Here with another episode and today we’re looking at small caps. Yesterday we looked at large caps and that was much more simplified thing that you would have to do, but , looking at large cap or small caps has a few more steps to it. In fact, has about 13 things you should be taking a look at to make sure that it’s the right stock for you. And today I bought Oasis Midstream Partners, which is an oil and gas company, but also has ventures in different areas as well. And while I’m not really keen on buying oil and gas because I don’t see oil as being the way of the future, I think that it’s still got another 10 years to go before oil companies start to really, , really suffer and disappear.

So I’ve still feel confident in buying oil companies and this one, with all the calculations and the attribute to the ads after all my research turned out to be the best that I can find for small caps. So here’s, here’s what I did and I just want to give everybody an overview of what to do when you’re buying small caps and there’s about 13 steps, maybe 14 or 15, but 13 major things that you need to look for when choosing a small cap stock. And I’m going to go over each of those in their own episode. But today I’m just going to go over an overview of how was it I decided to purchase this particular stock. , so the first thing I do is I filter out, whenever I’m looking for small cap stock, I filter out from 15,837, stocks on the Canadian and the US stock exchanges.

Now I want to, I want to filter that down so that I can just find the market capitalization, which is basically the value of the stocks that I want to look at. So for small caps, I don’t want to take a look at Google or Amazon or Netflix or bank of America or any of those other companies. I want to do my due diligence and take a look at every single stock that falls into my category. So when I do this, first thing I do is I filter out all those that don’t apply as small cap stock. And so when I choose a market I go on RBC direct investing and go into my filter. Once I choose market, I choose either Canadian or US markets and then I go by sector to sector.

So, there’s, there’s quite a few sectors in the involved in this. And actually I would even even take a different approach which would be industry, which breaks it down even further. So there’s around like maybe 70 industries that are encompassed. Like it breaks down to chemical manufacturing, che micals, plastic, rubber containers, packaging gold, silver footwear, like the broader categories or consumer cyclical and there’s energy and there’s consumer cyclical conglomerates, capital goods, basic materials, and that breaks down from there like technology, transportation, utility. So all of these different, , sectors have their own industries that are, that are laid out. And I go through every industry, so I’ll start from the very tippy top and I’ll go with chemical manufacturing and that narrows it down automatically to 192. But that’s not factoring the market capitalization’s when you go from small cap, the area that I take a look at, it actually narrows it down to 36.

And then I take a look at all 36 of those and then I decide which ones to keep an eye on and put that on a list. The first thing I do is I check for the revenue and whether or not they have at least 25 percent gains a a year to year. And I make sure that these companies are also following certain other standards like are on the right market capitalization, which is pretty much taken care of by the filter and several other approaches. But I’ll demonstrate why I selected OMP, and taking a look at this stock. The first step that I do is I make sure that the annual sales is $250, million or less, and I see that with this particular company when I go into the financials, their annual for the last year, it’s $100 to $180 million and so that automatically qualifies.

It means that it has a lot of potential for growth. So this is one of those stocks that haven’t really been discovered by mainstream, like a mutual funds and all those. Once the mutual funds and the big brokerages start gaining some more insight into these stocks, they get more noticeable. They’ll buy them up and now they’ll pop their price up. But if you’re buying mid cap or large cap, they’ve already got all the attention in the world on them, so there’s not going to be a huge balance in the price because everybody is already taken a look at these stocks. Now, the second thing I look at is the daily dollar volume. And for that, what you need to do is you just need to calculate how much is the stock worth. So in this case, Omp is at $20 and thirty cents and then his average volume is around 154,000.

So I multiply $154,000 by 20 point three. And thatI would get me something that’s less than a 3 million, so it’s just like two point 2 million or something like that. So that tells me that there’s not a lot of traction on this stock right now and there’s a lot of potential for it to grow. And now the third thing I’d take a look at is I make sure that this price between $6 and $25, if the stock is priced at, let’s say $10 or anywhere in that range, there’s a lot greater likelihood that it’s going to double rather than if you’re buying a stock like Google, which closed around $1,030 today. So for that stock to double, there’s going to be a ton of like a major shift in that stock and it’s not likely going to happen.

But there’s a greater chance of a lower priced stock doubling than a higher price stock. Of course we don’t wanna go too low because then it’s going to be a stock that’s so small that it has a very good chance of going bankrupt. You want something more established but not to establish. Now the next thing, the fourth thing I take a look at is the profit margin. I want to make sure that the company has at least 10 percent profit margin because if it has lower than that, it could hit a year where it’s a bad economy or something happens with the company and they’re not able to turn as much of a profit and then it would actually go into the red for that year. So with this company OMP, I found that, the operating income actually last year was 102 million and it’s revenue was 182 million.

So that’s around 70 percent profit margin, which is pretty crazy. That’s really impressive. As expenses were only are under 80 million. So this is a company that’s got it’s margins really figured out, which allows it to do other things like invest in the future because they would have a large cash flow, which is something else we take a look at now, the relative strength we also want to pay attention to. And it depends on which online brokerage account you’re using, but you can find that information online and some of them don’t have it. So you have to check that out based on the brokerage account that you’re using. Now, the relative strength is how well the company is doing in comparison to its competitors. So those companies are in the same industry. You take a look at how it is, how it has performed over the past 12 months compared to those other companies in that business.

And so if you have a relative strength of 90 or higher, what that basically means is that this, this stock has performed in the upper 10 percent of all companies in that, same business. So on my RBC direct investing account, it doesn’t look like they have the relative strength. And so when I come into a problem like that, if there’s some information that my online brokerage account doesn’t have, what I normally do is I go to yahoo finance and they generally have some of the information that, our RBC direct investing doesn’t have and vice versa. So I generally, when I’m looking at stocks, I do a hybrid approach. So I use both of them when I’m investigating which stocks to buy. So you would just go to the Yahoo Finance and you would take a look at the stats that they have and I believe it’s in analysis would be future, but it is located somewhere in yahoo finance or RBC direct investing.

I don’t exactly know where, but sometimes occasionally it’s not in either of those, so you can just google OMP or whatever stock you’re looking at and go omp relative strength and they’ll generally come up with like a motley fool thing or something else. So here’s a Montley fool google analysis of OMP and on here it has the relative strength and it gives you kind of have some of the parameters and many of the parameters that use are actually quite similar to the Motley Fool because I found that that Motley has done really well. So in this case, a Motley Fool actually says that the relative strength for OMP has failed. See, they agree the company outperforms 90 percent of the market in the past year. OMP is doing pretty good at 78, you know, like I said, I keep track of every little component of each of these stocks and then I give him a rating of how many things they’ve accomplished out of the 13 things and for this company it failed with relative strength, but it’s not doing too bad and that one relative strength is kind of a tricky one as well because you want to find stocks that are undervalued and if you’re looking for stocks that are undervalued, it’s hard to have a stock that has a high relative strength because generally that means that it’s done really well on the stock market in the past year, which means that it might not be undervalued.

It might be fairly valued if everybody’s picked up on it. So it was kind of contradictory there. That’s why you take a look at everything and, and nothing ever meets all parameters. I’ve never actually experienced that. I’m sure it will happen someday, but I’ve never found a stock that meets all the parameters I’m taking a look at. So it was number five, and we’re going to go into more detail about all of these in each of the success of episodes. So number six is insider holdings of at least 15 percent. So I know RBC doesn’t have that and it was available on the older version of Yahoo Finance and I believe that it’s still on the new one. Yeah. So here we have insider holdings and this company actually has 38 percent of insiders holding shares. Would that tells you, is that the people who are on the inside who knows all the information about the company more than what you and I know more than the analysts know?

They have a lot of faith in this company. Thirty eight percent of the shares of OMP are owned by insiders. And so for example, you’re a CEO of OMP. If you think the company’s not going to do well, you’re not gonna have any shares. On the other hand, if you think the company’s going to do really well, you’re going to pick up a lot of shares. Finance breaks down who’s owning those shares. And then it can go into more detail that we’ll cover later about when were the shares purchased? When were they sold? I mean, if you see somebody selling shares in a seat on the news, if you’re following a stock investing secrets, or if you’re following other news media for the stock market, you’ll notice they’ll say so and so sold a bunch of shares of that company. And then everybody will panic and they’ll sell off. Well, maybe he just needed to buy another house or something. It doesn’t necessarily mean that the company is not doing well. So, the next portion I take a look at the cash flow from operations and I want to make sure that there is actually a cashflow. So this would be located in financials

You want to, you want to make sure that they have a positive cash flow. If they don’t have a cash flow, then it means that they might not be in as healthy of a financial position as you might like, and it might be harder for them to take on debt or borrow from banks if they’re trying to expand and do new things. It’s a health indicator for a company to have positive cash flow. You also want to have consistent margins and this is located on the income statement. You want to take a look at the operating income. So like we said before, total revenue is $182 million operating income last year was 102 million. So that if you were to have 10 percent profit margin, you’d only need 18 million of operating income.

OMP has 102 million, which just blows it out of the ballpark. I mean that’s a grand slam right there and then you also want to take a lot of research and development. Now there’s a lot of companies that won’t be doing research and development just because of the industry that they’re in. Now Omp is oil and gas, so it’s likely not doing a lot of research and development just because it’s focused on finding where you can get a lot of oil and then exposing that oil and then shipping that off. It’s just, it’s not looking at new ways to get oil most likely. So research and development actually that’ll be based in financials.

They might call R&D or they might not even have it on there at all just because they don’t have a line for it. So instead of putting something there that just don’t put anything at all. And that’s not a big concern because this kind of company, you don’t really expect them to be investing in research and development because the technology stock, like if apple wasn’t investing in research and development, that would throw up some red flags because you want apple to always be innovating. And if they’re not investing in research and development, you can bet there’s going to be a competitor out there who is, this is going to overtake apple. But in the case of OMP, it’s not an important component. Now you also want to make sure that they’re paying their taxes. Now this is going to be on the income statement and you see here, they’re paying their taxes.

So if the company is not paying their taxes, it tells you they’re trying to save everywhere they can and they’re forwarding that payment to the next year, or it means that they didn’t make profit at all. So if you see that there’s a profit, but there’s nothing allocated for taxes, they’re going to be getting a big tax in the future. And that’s what you want to avoid. You don’t want to be invested when they’re going to have to pay like five times what they normally would in taxes that’s kind of decreased profit actually could take away their complete profit. So that’s a check checkmark for OMP. Now you also want to make sure that there’s inset. We went over insider holdings. You want to look at accounts receivables, like approximating the, the growth in profits. So that is located in the balance sheet.

Now accounts receivables, it goes from $10 million in 2015 to $12,000,000 in 2016, to $86 million in 2017. Now if you go back, like that’s increased to 20 percent the first year and then the second year it’s like 700 percent increase. So how does that relate to the profits here? Well, it’s pretty consistent with the revenue from 2015 to 2016, 2016 to 2017. They blew it out of the water with that. So that means that in 2018 they likely will have a lot more revenue. If they have that much in accounts receivables, that means they’re going to be getting that money sometime. It’s probably going to be within the next 12 months. So you can start to see that next year. You can see the prediction. Next year it’s going to be a lot higher. Now you can take a look at the chart and you say, well, has the price kind of gone up in reflection of that?

Yeah, it has, it has, but we’ll do a full ratiocalculation later which determines whether or not the stock is priced properly. And now take into account the PE ratio and earnings per share and it’s calculation where you take the earnings per share which the eps, the trailing 12 months and you divide the future earnings per share, the estimates by the analysts by that number and you get the average annual growth rate. And average annual growth rate Or earnings. So if for example, I have my full list here, so if you screenshot that, that’s the result of about five a days worth of research. All the tickers are down here and this is something that will be definitely be charging for some time later or right now everything is free. So this is my list that represents about 45 hours of research and I do that once per year and that’s all free to take a snapshot if you want, you can, judge for yourself.

Now the ones in red are the ones that didn’t pass the full ratio analysis. The ones in yellow are the ones who are kind of borderline. They’re probably going to go up, but the ones in green are the ones that I’m going to be buying and I’ve already bought one and they’re going to go up. It’s expected that it’s going to be at least 100 percent increase within the next 18 to 24 months. Now the full ratio, which we’ll be going into a lot more detail later, is point one, nine four, one p and its current price when I bought it was $19 and eighty nine cents, I expect to go up to over $100, which will be a 426 percent increase and I expect that to be within the next couple years. That’s a reflection of the I’m the analyst expectations, but primarily those expectations are largely driven by the accounts receivables.

So when you take a look at these numbers, you get to see patterns and where you can combine what’s happening for example, the price of the stock and with the analyst’s estimates and then you can see, oh well wait a minute, they have so much in accounts receivables coming in. So that means next year they’re probably going to be doing, they’re going to blow it up water again. And then you see something like a fall from its highs and just around $20. That’s a big buying opportunity. So now is a really, good time, I’d even bought it at $50 per share, so it would still be set to double the final thing that I think we’ll look at is as far as the 13 steps, the broad overview, like the macro steps is I look to avoid debt.

You don’t want to have a company that has got a lot of debt on its hands. Its acquiring debt It means that it doesn’t have a very good cash flow. So I can see here with OMP, it’s gonna have debt, I mean most cases, but you want to make sure that it’s cashflow. It was more than that and it’s not taken a lot of charges for interest and whatnot. So that’s the general overview and if you’re interested in stocks, that was probably very interesting for you. If you’re not, if you’re more interested in the other stuff that I put out, like how to save and how to properly budget, this is where the learning curve comes in and there’ll be a for a full course that breaks it down step by step showing you what to do.

And then of course I’ll be available for coaching at some other time. I’ll have a newsletter coming out to shows a lot more about this information, but that’s a general. And if you, if you absorbed 100 percent of that you could go tomorrow and you can start buying small caps and you’d be doing very well with yourself. There’s a few other steps, like if it has all those components, like in my sheet set I had like 36 out of the 15,000 stocks that I filtered through. And then I took a look at, I’m 36 of those, just 36 out of 15,000 qualified to make my list for me to do a further analysis on. So after the broad overview, which I just showed you, only 36 qualified, and then I did the full ratio analysis to figure out where should that stock be priced at, where is it in relation to other stocks in the stock market and where is it related to people’s perception about it. So I hope you enjoyed that. Stock Investing Secrets will be back within the next couple of days. I’ll break it down step by step. And also this will all be turned into a course eventually and you’ll be able to see it and break it down and replay it as much as you want. So thanks so much and we’ll see you again.