Going 'micro' for maximum gains

From there we actually profile each one of those companies, looking for any unique competitive advantages ... without regard to price.

Once we've whittled that list down to about 200 to 300 stocks, then we monitor those on a price-to-intrinsic-value basis. From there we select the ones we feel provide the greatest potential capital appreciation.

How do you handle your research?

Our research is internally generated. We have some third-party research providers that are independent, and we like to know what the Street is thinking, if they have an opinion on the stock, because we want to know why a competitor would be taking a position contrary to our own.

But in the vast majority of cases there is nothing to compare it to, and we're doing everything from the bottom up, starting, of course, with the [Securities and Exchange Commission] filings.

We obviously have to exercise a lot of due diligence on the individual selections we make, and try to be as accurate as possible in assessing the ability to outperform the market.

We probably pay more attention to the predictability of revenues and earnings than most micro-cap managers because we are concentrated.

What are some companies you like?

One of the names we like is Edelbrock Corp. (EDEL), which makes aftermarket performance auto parts.

Here's a company that, in terms of predictability, is a relatively stable company that is consistently profitable. Their net margins are on the order of twice what a lot of replacement auto-parts manufacturers are.

The reason they can sell their products for higher prices is they have a strong franchise – name brand – as well as reputation for performance and quality among auto enthusiasts.

We've held onto the stock for a long time and feel they have strong upside potential.

Mity Enterprises (MITY), [a] Utah company, makes tables and chairs, which is about the most mundane thing. But they operate in a relatively stable industry. And Mity has a habit of making about twice as much money as their competitors do.

If you examine their financial statements you'll see they have no debt on their balance sheet, so they're in a better capital position than their competitors, and on top of that they have an extremely talented, shareholder-friendly management.

It's a dream to own. The stock price hasn't performed probably as well as the rest of our portfolio, but that just indicates it remains a good value.

Are micro caps, in general, getting overvalued?

We're certainly not finding as many values as we did 18 months ago, when micro caps were overly neglected. But there are still pockets of value we're finding out there.

I think we're still in an environment that favors this asset class, and I think we'll continue to be, only because it's easier for a company that's $100 million in total market cap to double, triple, or quadruple in size than it is for an Intel or a Microsoft or a General Electric.

So you'll continue to see strong performance from micro-cap stocks, but I think that selection is now at a premium.

You really have to be careful about which ones you're purchasing. But the fact that there are so many more of them gives you the opportunity to actually find some of these values.

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