Includes shares in Xpel Technologies Corp., Surge Components Inc., National Oilwell Varco Inc., Chicago Bridge and Iron Co.
After graduating from college, Nicholas Bodnar decided to pursue his passion for investing. He now spends most of his day reading annual reports, preparing investment analyses and managing his portfolio. He publishes his analyses on seekingalpha.com, where he is a contributor, and hopes some day to land a job as an equity analyst.
How he invests
Mr. Bodnar knows about efficient markets and passive investing. But he has some ideas for earning better returns than the market, and wants to give them a try while he is still young – and has the time to regroup if things don't work out.
He has adopted a version of the value-investing approach Benjamin Graham sets out for "entrepreneurial investors" in his book, The Intelligent Investor. The basic idea is to find and invest in undervalued companies for the long run, of course. But there's a twist.
Mr. Bodnar seeks to improve his odds of earning extraordinary returns by focusing on a market segment where professionals and smart operators aren't competing with him to uncover undervalued companies. This segment is known as the microcaps, which are companies with a market capitalization of under $50-million.
Companies with small capitalizations tend to be riskier. But if an investor can tolerate the volatility and spread company-specific risk by owning a collection of them, higher returns than the overall market can be had, according to academic studies.
Mr. Bodnar also keeps his portfolio concentrated in his best ideas. Like investing legend Warren Buffett, a widely diversified approach is avoided because his portfolio would then begin to look more like the market index and have similar returns.
He looks for undervalued microcap stocks with:
– large cash balances, ample free cash flow and little debt;
– enterprise value of less than four times earnings before interest, taxes, depreciation and amortization;
– insider ownership greater than 25 per cent;
– double-digit annual growth.
His largest holding is Xpel Technologies Corp., listed on the TSX Venture Exchange. It manufactures films to protect auto paint and headlights. "The company has revenues that have grown at more than 50 per cent a year, high returns on capital, barriers to entry and recurring revenues."
Otelco Inc. and Highway Holdings Ltd. (since sold) gained 50 per cent within three months of him buying their shares.
"Buying into oil-related stocks too early." They were cheap due to the fall in the price of oil but it was like "catching a falling knife." He is still holding them because he believes they will recover.
"Go off the beaten path, where other investors do not go. The market is efficient in well-followed stocks, but inefficient in less-followed names."