My Investing Checklist
What I look for in an investable stock.
The goal is to search for companies that have the potential to attract institutional interest… but buy them before institutional investors can. Those opportunities can emerge because of position sizing or liquidity constraints, and even regulatory requirements on large capital allocators. We’re looking for potential high-quality business models with “sexy” stories run by management teams that could scale their companies effectively.
What I’m Looking for in a Stock
It has to operate in a green industry or benefit the environment in some way through its primary business operations.
Why: I think the next few decades will see massive growth for companies that can effectively combat climate change with their technology/solutions. Whether you personally believe in climate change or not… the environmentalism narrative has only grown in popularity since the 1970s. It provides a bullish tailwind and an appetizing story for future investments. Institutional investors have been dying to buy quality companies that offer exposure to this trend.
Microcap or nanocap ($300M market cap and below).
Why: Smaller market cap stocks tend to be less followed, particularly because it’s difficult or even impossible for institutional investors to buy them. This creates potential stock mispricing opportunities that are rarely found in larger valuation deciles of the stock market.
Illiquidity, the stock needs to have relatively low daily trading volume. You’d be surprised just how important this is. Most microcaps tend to be illiquid anyway.
Why: The scarcity of shares available can play a major role in returns. If someone wants to buy a stock in size, then they’ll have to pay up to build larger positions. Ideally, a stock will have trading volumes of ~$50,000 per day or less. According to studies done by MicroCapClub on U.S. equities from 1972-2009, the smallest and most illiquid stocks performed the best. Conversely, small and liquid stocks actually tend to perform the worst of any stock market decile.
Low institutional ownership.
Why: As mentioned above, the institutions buying after us will ultimately be our exit liquidity— if we decide to sell. We want to buy stocks that they would potentially be interested in before they can.
The lower the outstanding share count, the better.
Why: A lower share count contributes to the scarcity of tradable shares. Not only is there low trading volume, but there’s quite literally a low starting amount of shares that can even be traded in this scenario. I’m not going to pass up an opportunity just because they have more shares outstanding than I’d like, but it’s a nice perk if you can find it.
Strong revenue growth potential (can be unprofitable if there’s a clear path to the company reaching profitability).
Why: According to stock performance data from Ryan Telford, a quantitative microcap investor, sales/earnings growth is the single largest factor in determining stock market returns. For the vast majority of the 10x return stocks over the last decade, growth was the determining ingredient.
I’m fine with unprofitability as long as the company has a clear path to break even. A lack of revenue/profits can lead to severe mispricing of stocks, as many investors will avoid those situations. That can be exploited if you have a higher risk tolerance (like myself).
Determining how much growth a company could see primarily depends on its industry, its positioning within that industry, and the business model it utilizes. That plays into my next point.
A capital-light industry or business model that generates an average gross margin of ~40% or higher.
Why: The main problem many of these environmentally friendly sectors have in common is that they’re incredibly capital-intensive. Electric vehicle manufacturers, hydrogen producers, etc, need to spend hundreds of millions or even billions of dollars on infrastructure to reach profitable scales. Many times, these companies never reach profitability and go out of business. We clearly want to avoid that scenario, so the goal is to prioritize business models that can generate ~40% gross margins or higher. If you dip too far below this number, companies can start struggling to generate consistent profits and likely need to spend significant amounts of capital on opex and/or capex.
Some examples of business models I like to look for are technologies monetized through licensing agreements, software, financial products, and royalty/streaming companies. These businesses are often scalable with little, if any additional capex. Fewer expenses mean more capital that will be left over and used in accretive ways for shareholders through stock buybacks, dividends, and further investments.
Management team with prior experience in the industry or entrepreneurship, ideally combined with high insider ownership (10%+).
Why: The management team of any company I buy has to have experience in the industry they’re trying to create a business in, or at least requisite skills that make sense. This limits risk as they’re more likely to know what they need to do to pull off their business plan. Additionally, they need to own a significant stake in their stock, 10% or greater. If they don’t have a sizable portion of their own net worth backing their idea… then why should we?
Potential for a moat, if not already established. We’re searching for companies that are as close to monopolies as possible.
Why: As entrepreneur and venture capitalist Peter Thiel says, competition is for losers. We can dramatically increase the likelihood of success if a stock we buy has genuine competitive advantages that make it difficult for other companies to compete. You can find examples of economic moats here.
The most likely moat a company operating in a green sector will have is patents on intellectual property or a new revolutionary process that no one else can compete with, aka intangible assets.
Undervaluation on a multiple basis, or some type of margin of safety.
Why: This is pretty self-explanatory— nobody wants to buy overvalued companies (or shouldn’t anyway lol). You can find this on a sales/earnings multiple basis or via a sum-of-the-parts (NAV/NPV) analysis of intellectual property or other assets.
Let's be real. We’re investing in small companies, probably in a relatively new industry. Most of them aren’t going to have a tangible margin of safety. If possible, it’s a good idea to prioritize this, but success can be found without it.
Free Stock Write-Up Examples
Worth Noting
At the end of the day, you have to pick your battles, or you may never find something worth investing in again. Chances are, no micro or nanocap is going to check off every single bullet point on this list. None of those stocks I currently own do, but they do check off the vast majority of what I’d like to see. If the opportunity looks promising enough, I will forgo some of the more negotiable factors on this list.
It’s worth noting that I have what would be considered an extremely high risk tolerance. I do what I can to limit the risk of my investments through stringent research, but it’s still probably too risky for most people. It depends on your goals.
Don’t worry if you don’t like to invest in small companies, you can still find plenty of value in my services through:
Regular coverage of news events in green industries.
Documentation of new IPOs, SPACs, spin-outs, etc.
Further analysis of actionable trends in these sectors.
Stock lists that will include investment opportunities of all sizes, not just micro and nanocaps.
Disclaimer
The owner of Green Investing is not a licensed investment professional. Nothing produced under the Green Investing brand should be construed as investment advice. My content is made for entertainment and educational purposes. Do your own research.