I recently had the opportunity to speak with Chris Lahiji, Founder and President of LD MICRO, a by-invitation only newsletter firm that focuses on finding undervalued companies in the micro-cap space and providing research for its clients. Since 2002, the firm has published an annual list of recommended stocks as well as comprehensive reports on select names throughout the year. We touched on a variety of topics from corporate access, annual reports and even the future of sell-side coverage. Chris’ unfiltered views on these subjects are refreshing and insightful for any investor relations practitioner.
Disclaimer: On occasion, The Podium will publish interviews with professionals not employed by Sharon Merrill Associates to provide their opinions on topics of interest. The views expressed by the interviewee do not necessarily reflect the views of Sharon Merrill Associates.
DW: Could you tell our readers a little bit about yourself and how you became interested in specializing in small-cap stocks?
CL: I come from humble means. No one in my immediate family or extended family worked in the world of stocks, bonds, and mutual funds. Getting bought by "Goliath" is acceptable depending on the buyout premium.
What fascinated me at the beginning is the simple ability for a person to own a single share of stock, and technically consider themselves to be a part owner in that specific company. I would go into Toys “R” Us and tell horrified staff and customers that I owned the company and to please call on me if any questions arise. That's because my father was a tiny shareholder and I was the custodian. We were rightful owners.
Investing was a hobby that ultimately turned into a profession. To me, I consider small company investing to be my passion, and something that never gets tiring or old.
The reason I focus intently in the micro-cap world is because our country's success depends on it. Small businesses hire people, invest massive amounts of money back into the system, and continually innovate. My job is to back "David" and hope he does not get killed by "Goliath".
DW: On December 3, you are hosting the second annual LD MICRO Conference in Los Angeles. What can attendees expect to take away from the event?
CL: Since the systemic crash we had late last year, many companies in the financial world decided to leave micro-cap and focus on larger companies. We never left, and grew even stronger in the process.
Liquidity to me is the biggest problem a small investor faces. Good research allows for good visibility, and if done correctly, creates liquidity.
Since we rarely talk to people outside our client base, I wanted to have an annual event that would encompass everybody in the micro-cap universe. One where a wealth of information gets shared, analyzed, and discussed.
Last April, it was our first time, and the only other event I had planned to that point was my little brother's birthday party. 60 companies presented, over 400 people showed up, and no one got anything stolen from their cars when parked in valet.
This year, we have 77 names attending. What makes me most proud is the quality and the diversity of the companies. Over 75% are profitable or cash flow positive, market caps range from $5 million to $500 million, and they are spread throughout all industries.
In every 30 minute interval, four companies will present, and they will all be different. The biggest problem attendees will have is choosing which names to go see, because they all possess wonderful qualities.
DW: At age 20, you became the youngest person ever to professionally manage a mutual fund and were often referred to as a “Wall Street Wiz Kid.” How would you say the markets have changed since then?
CL: In six years, the markets are fundamentally the same. The only drastic change is the proliferation of information, which is not always an advantage. You have to sort through a lot of junk on the Internet and databases nowadays, looking for a few pieces of key information.
DW: Many sell-side firms have eliminated or cut back on small cap coverage as a result of the financial crisis. As these companies lose coverage, they are also being invited to less investor conferences. How would you suggest small-cap companies looking to gain more visibility do so in this market?
CL: Be proactive and don't get discouraged. Hire a good investor relations firm that has made money for its clients over the years. Write a letter to shareholders at least once a year, have a one-page fact sheet showcasing why you would make a good investment, get management to buy some shares in the open market, be persistent, attend a couple high-quality conferences and navigate both the pros and cons. It takes time to build relationships and for people to get comfortable with you. Companies need to be open and responsive at all times. Above all, it's all about the pudding (a.k.a. numbers). If you are profitable and growing, it won't take long before a bunch of bloggers start salivating over your 10-Qs.
DW: Do you believe that companies should be using social media as a means for communicating with investors?
CL: No. Social media is used for socializing. I would have an "online journal" that would from time to time talk about a remarkable employee or discuss charitable giving, or all the things that are more important than profits. But please, no Facebook page. I can only imagine 12 year olds trying to “friend” Lockheed Martin.
DW: It is challenging for micro-cap companies to identify potential investors willing to take the time to meet with management and consider making an investment. What are some steps that thinly-traded small-cap stocks can take in order to differentiate themselves from the competition and attract buy-side attention?
CL: Very tough question. Start with the private investors and work your way up. Much easier said than done. The trick is to be open, and offer a steady stream of information that catches the attention of investors and gives them a reason to track you. It goes from small investors, to regional broker dealers, to bigger broker dealers, to boutiques, and then hedge funds and mutual funds.
DW: In 2002 you ordered and read every annual report published in the U.S. The annual report has evolved since that time. What is missing and what would you like to see more of in these annual filings?
CL: I think anything that gets people away from reading annual reports is a good thing. They are long, repetitive, and boring. Unless you are Warren Buffett and have the discipline to read for days on end, I think a condensed "USA Today" type setting with distracting photos and small charts is the way to go.
Someone should invent a “CliffsNotes” for annual reports. I have someone I trust read them and get back to me nowadays.
DW: Small- and micro-cap stocks have long been victims of aggressive short selling. How do you think the SEC should handle the short-selling issue?
CL: Enforce it! Just start in Florida and go north.
DW: If you could offer one piece of advice to an investor relations practitioner for a small-cap company trying to develop an effective IR plan for 2010, what would it be?
CL: My one piece of advice for my IR friends in 2010...establish trust early, and never stop providing insight (not to be mistaken with insider information). Investors talk to you seeking questions to their answers. Give it to them promptly, but also make a connection. One that lasts.
I make and lose money all the time. Regardless, I do business with people that I like and respect. Get their trust and protect it.
Don't read off a script.
Make me laugh.
For more information on the list of presenting companies or to register for the LD MICRO Conference, please visit http://www.ldmicro.com/.
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