Investoid

When an investor is trying to generate consistent above market returns, they need to find a way to get an advantage. For the professionals, this may mean having close connections to managers, or having algorithms created and tested by an army of Math and Economics PhDs. It can be tough to compete, so what can an average investor do? One way to get an edge is to invest locally.

By investing locally, I mean looking for companies that have their headquarters or do a large chunk of their business in your area (city, town, or even province/state), but do not have a national profile yet. This does not necessarily mean that they don’t already do business national or even internationally, but that the market as a whole is not aware that they really exist yet.

One way to check out the (inter)national profile of a company is to do searches on national newspaper and business archives. Secondly, look at the local media in financial hubs (in Canada’s case Toronto, and to a lesser extent Vancouver) - assuming the company isn’t located there. If you’re coming up with no stories of substance in the past few years, chances are the company isn’t really high on the radar screens of investors at large. Thirdly, check out the company’s analyst coverage. If there are no analysts (or maybe one or two independent analysts from small research firms), then this is another indicator of a company that’s flying underneath the collective radar. Lastly, check to see if there’s any fund ownership. If there’s none or very little, then the company may currently be too small for managers (who typically have certain liquidity/market cap restraints).

So, if the world is not looking at the company yet, how do you find them? Typically local business magazines and newspaper sections will highlight up and coming businesses. Usually the local media will run something on a company that won’t make national headlines. Sometimes local papers will have a ‘local index’ of companies trading on exchanges that are based in your area.

If the company’s overall story sounds promising, then delve a bit deeper and look at the market opportunity. If the growth opportunity is good and there’s large upside, take a careful look at the quality of management. Have they done this type of business before? How successful were they at it? How have they been financed so far? How much more financing do they need to get to market or grow? If you can’t find this information on SEDAR or on the company’s website, see if you can talk with management or their investor relations department. Typically smaller companies are more willing to field questions from everyday investors, and you’re less likely to get the run-around. Finally, decide how long you think it will be until the company will break out with a story that will attract attention.

You also need to take a look at current valuation and possible dilution, in the context of the market opportunity. If the market opportunity is $1 billion/year in sales in 5 years, and the market cap is already $2 billion, then the stock might have already gotten ahead of itself and all the excitement and market potential is already prices into the stock.

There are definitely risks associated with this type of strategy. The stock’s liquidity will obviously be an issue if you are looking at getting a sizable position in the firm. Thin traders can often be the target of short sellers, who use the light volume to push down the stock price between earnings release and other major news items. Lastly, the company’s execution may falter, particularly if management is inexperienced or if the company is facing barriers due to the location of their operations (I’ve seen cases where issues arise when management was too far away from their customer base).

I’ve done this a couple of times with some successes and some failures.