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Msg  713 of 789  at  1/23/2020 11:33:35 AM  by

Investulator


Nanocaps and bank relationship

Getting a mortgage would actually be a good thing, as it would signal that the banks are taking a nano-cap seriously. Normally they do not.
 

The Chicago stocks you've never heard of

Metro Chicago teems with microcaps that long for the good old days

CTI Industries, a maker of latex and foil balloons, had big news recently: Its quarterly profit had quadrupled. Yet the stock barely budged. Management wasn't surprised. With a market capitalization of $16 million and all of 3,300 shares trading on an average day, who on Wall Street cared?

When Congress passed the Sarbanes-Oxley Act in 2002, stock market commentators roundly predicted that tiny companies such as Lake Barrington-based CTI would disappear, unable to afford annual audit costs approaching $1 million for even the smallest businesses to comply with the financial-disclosure law. They would be forced to go private or put themselves up for sale, the thinking went.

And yet these little companies persist, not as penny stocks or pink-sheet also-rans, but as genuine Nasdaq and even New York Stock Exchange listings as microcaps (market capitalizations of $50 million to $250 million) and nanocaps (less than $50 million in value). Of the 144 companies in the Bloomberg Illinois Index, 20 percent fall into these two rankings.

They've survived in the face of a general winnowing of listings in national markets. Fifteen years ago, there were almost 6,000 public companies on major exchanges in the U.S. Today that total has shrunk to 3,700, says Michael Corbett, CEO of Perritt Capital Management in Chicago, a specialist in microcap investing.

While some investors like microcaps, companies typically don't relish the status. That's because many of them have storied pasts and once were bigger, such as Tribune Publishing, which for a while in January was valued at less than $150 million.

Among other long-standing companies that have been reduced to microcaps is A.M. Castle, a specialty steel distributor in Oak Brook, which was founded in 1890 and employs more than 1,600 people. With its stock trading at $1.47 a share, down from more than $38 in 2007, its market cap comes to $35 million. Another is Chicago Rivet & Machine. The Naperville-based fastener-maker dates to 1920 and its stock has been publicly traded since 1930. Its market cap: $22.6 million.

“We buy into many of these microcaps because we don't see much downside from these levels,” Corbett says. His Ultra MicroCap Fund owns more than 5 percent of CTI, which traded recently at $4.98 a share, half its all-time high of $9.75 in 2010.

When the Securities and Exchange Commission severed the ties between brokerage house research and investment banking, firms gutted their budgets for small-company coverage, leaving most microcaps as orphans.

At CTI Industries, President Stephen Merrick says that New York firms such as Sidoti that once wrote reports regularly have dropped CTI. “The calls I get are from investment bankers who want to take us private or find somebody to merge with us,” he says. He adds that the great advantage of remaining public is that “we can retain top executives with stock options. If we were private, there would be no market for those options.”

As a testament to how far some microcaps can fall, Warrenville-based Fuel Tech, which develops systems to lower emissions from coal-burning plants, had a dozen analysts following its stock a decade ago, when shares traded as high as $38.20. Today the stock trades at $1.57—its market cap is $36.4 million—and a single analyst has maintained coverage. As customers have switched from coal to clean-burning natural gas, Fuel Tech's products are losing currency. “We attracted a lot of market interest at one time,” CEO Vincent Arnone says. “But the world and markets are very different today.”

Many of the smallest companies have older management, further dampening investor interest. CTI's Merrick is 74, while Chicago Rivet Chairman and CEO John Morrissey, who has been on the board since 1968, is 80.

O.B. Parrish is chairman and CEO of Female Health in Chicago, which produces a female condom mostly marketed in developing countries for AIDS prevention. He is 82 with no immediate plans for retirement. He has paid analysts for years to write invariably optimistic research reports on the company that are distributed to investors, but the stock was stuck around $1.56 recently, yielding a market cap of $45 million.

Parrish has no regrets for taking the company public in 1999. “We raised about $6 million at a time when banks wouldn't lend to us,” he says. “Without issuing public stock we probably wouldn't be here at all today.”

Female Health trades 75,000 shares a day, too few to interest institutional investors, says Alexander Paris Jr., president of Barrington Research Associates in Chicago. “For these microcaps, it's tough for institutions to trade in and out of the stock. That means that investors have to take a long view of the company,” he says.

Nevertheless, most microcaps forge ahead with the hope they will rise again into the ranks of small-caps, Paris says: “If the company has a good story and executes well with earnings growth, the stock price will eventually rise. The problem is that in the world of microcaps, 10 percent growth won't catch anybody's attention. You need more like 50 percent growth. And that's not easy for anybody to achieve.”

 


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