Quinsam Capital Corp. CEO and renowned small-cap fund manager Roger Dent discusses his approach to investing in small cap companies as well as how he balances the risks and rewards of these greater volatility names, and even mentions some of the small cap stocks he likes at this time.
Interviewer: Can you tell our viewers about your company and your role there?
Roger Dent: I’m Roger Dent with Quinsam Capital Corporation (CSE: QCA). I’m the CEO of the company. We’re an unusual vehicle in the small cap space. We’re actually a publicly traded vehicle on the Canadian Stock Exchange that invests in companies, provides advice to companies, act in some respects as an investor, some respects as an advisor, really a microcap-focused merchant bank.
Interviewer: What is your approach to valuation?
Roger: We take a very subjective approach to valuation. We’re basically looking to find stocks that we feel are very inexpensive. However, the way we determine that is subjective and varies from industry to industry. What we’re really trying to find are stocks that are off the beaten track, that have something very interesting about them that is not broadly perceived in the marketplace. When you’re dealing in the microcap space, companies that have market caps of 10 million or 20 million or 30 million, in many instances, these companies are not well-understood by the marketplace. There are usually no analyst forecasts. There’s usually no forward-looking guidance.
So what we try to do is find companies where there’s something exciting going on that is not obvious by reading the public disclosure, and getting involved in them within three to six months of when these exciting events are likely to happen. What we’re looking for are companies where news is coming that we think is not understood by the marketplace. That when it comes, is going to attract attention and cause stock prices to increase.
Interviewer: Do you think small caps have outperformed large cap names this year?
Roger: Small caps, it’s a very diverse groups of companies. So we started Quinsam back in November. And since that time, we’re up something like 60% to 70% over the course of the last eight to ten months. So from our perspective, the small caps that we’ve been investing in have very, very strongly outperformed large caps. However, it’s a very diverse sector. There are aspects of the small cap marketplace that are very difficult right now. The mining sector continues to be very much out of favor, but other areas are in favor. If you focus in the small caps space in the areas that are topical and interesting, we think you can outperform on a pretty consistent basis.
Interviewer: How do you take advantage of the risk/reward with small cap stocks?
Roger: Small cap stocks, by virtue of the fact that, in many cases, you’re dealing with companies that have a single product, a single technology, they are inherently more risky than large cap companies, simply by virtue of their size. Plus you’ve got market risk. They’re often thinly traded. The stock prices can bounce around just based on day-to-day emotion and the actions of a small number of individual investors. So we try to be reasonably diversified in our approach. We’ll typically have 20 to 30 companies that we’re invested in any given time. We try to be sufficiently diversified that if something goes wrong with the company, it isn’t that serious a hit.
On the other hand, we don’t want to be so diversified that if we find a company that’s a great performer, that it’s not material. So we try to have enough in our investments that they matter if we win, but not so much that if something goes wrong, that it’s going to damage our returns for the year.
Interviewer: Can you tell our viewers some of your favorite small cap names?
Roger: At any given time, we own perhaps 30 names. A couple of things that we own right now that are among the favorites would be NTG Clarity Networks Inc. (TSXV: NCI). This is a company that implements technology for major international cellular telephone and other telephone companies. We think that it’s trading somewhere around five or six times current year earnings. We think this is a bargain price for this type of company with its growth profile.
Another favorite of ours right now is Nuvo Research Inc. (TSX: NRI). This is a company that has…it’s in the life science area. It’s got commercial products on the market. It also has some pretty new, exciting products in advanced clinical development that we think have blockbuster potential. So Nuvo, we’re looking forward to them hopefully relicensing their existing commercial products on very favorable commercial terms, hopefully by the end of the year. We’re also looking for exciting news coming out of the clinic early in 2015. So in the life science space, it’s probably right now our favorite name.
Interviewer: Thanks for taking the time for today’s interview, Roger!
Roger: I’m glad to be here. Thanks a lot.
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