Category Archives: Small Businesses

Assessing Small Capital Companies

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Historically, small-cap stocks have been shown to outperform the rest of the market because of greater growth opportunities. A massive company is limited by its existing size. ~ U.S. News and World Report

Small cap company pundits recommend that investors review several key financial metrics and ratios to properly evaluate small cap companies. Following these metrics and ratios, you will be well on your way to finding a few hidden gems in the small cap market.

Each small cap company should be evaluated on fundamental factors to identify which ones can exhibit durable long-term growth.

  • Growth measures include revenue growth rate;
  • Profitability measures include operating profit and earnings per-share; and
  • Capital efficiency measures include return on invested capital.

In short, investors should seek to invest in the top-tier of eligible small cap companies .

Here are seven key metrics that should be reviewed before buying any stock. These indicators should help you get most of the way in understanding a company, its operations, and its underlying business.

1. Institutional activity. Pension funds, mutual funds, hedge funds, insurance companies and corporations that buy and sell huge blocks of shares can create tremendous volatility in prices. To lessen this risk in your investments, try to buy shares in companies where institutions own less than 40% of their shares.

2. Analyst coverage . Another indication of future share volatility is the number of Wall Street analysts covering a stock. Analysts – like the big institutions – have a herd mentality. When one sells, so do the rest, resulting in great numbers of shares changing hands, and usually leading to price declines. It’s best to avoid companies with more than 10, or fewer than 2 analysts following them. (You need some analyst interest or you may be waiting a long time for price appreciation, even in the strongest and most undervalued company) .

3. Price-earnings ratio (P/E) . The price of one share of a company’s stock divided by four quarters of its earnings per share, the P/E ratio is of utmost importance in determining if a company’s shares are over- or under-valued. For the best perspective, go to Reuters , then select Ratios and compare the current P/E of the company to its average P/E for the last 3-5 years, to its estimated future P/E and to the average P/E of its industry or sector. One note: If a company’s P/E is more than 35, it might be too pricy. You may want to stick with companies that are trading at lower P/Es, particularly if you are fairly new to investing.

4. Cash flow. One of the most important parts of a financial report is its Statement of Cash Flows, which is a summary of how the company made and spent its money. The Total Cash Flow From Operating Activities represents the cash the company took in from its primary business operations.

It’s important that this number be positive, or at least trending positive over the course of a year. After all, if the business isn’t making money from its primary product – not from investing in real estate or the stock market – then you probably want to pass it by.

5. Debt/equity. This ratio is how much debt per dollar of ownership the business has incurred. Compare the firm’s historic debt/equity ratios, so you can find out if its debt level over the past few years has been rising too rapidly. Debt isn’t bad, as long as it is used as a springboard to grow sales and earnings. Next, contrast the company’s ratio with its competitors and its industry so you can further determine if your company’s debt position is reasonable.

6. Growing sales and income. One rule of thumb is to buy shares in companies whose sales and net income are growing at double-digit rates. I cannot emphasize this enough, as, appreciation in stock prices is generally precipitated by growth in earnings (which usually follows expansion of sales) . It’s certainly possible to buy stock in a company that has no earnings growth (a new business, or a tech company in the late 90’s, for example) and still make money on the shares – short-term – but it’s not a formula for serious, successful long-term investing.

7. Insider activity. Investors will also want to review the buying and selling activities of a company’s insiders – its top officers and directors. A sudden rush to sell large quantities of the firm’s shares may be a good indicator that the business is falling on rough times. Likewise, a large increase in purchases may mean good news is on the way.

No single financial metric or ratio will determine the validity or potential of your investment. It is of utmost importance that you take a complete look at a company’s financial strength and its future growth prospects, by conducting a thorough analysis – over time – usually a 3-5 year track-record.

Many small caps stay small because they have structural problems, management lacks the capability to grow the business, or their niche simply isn’t large enough to support a bigger enterprise.

In contrast, many small cap companies can graduate to greater things, earning shareholders tremendous returns along the way.

References:

  1. https://www.nasdaq.com/articles/seven-critical-factors-evaluating-small-cap-stocks-2011-06-28
  2. https://money.usnews.com/investing/slideshows/9-of-the-best-small-cap-stocks-to-buy-for-2023

U.S. Labor Shortage Maybe Worse Than It Looks | Barron’s

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“Enhanced unemployment benefits have made it harder for employers to fill low-paying jobs, working parents continue to struggle with child care, and some workers are sitting out because of pandemic concerns.” Barron’s

According to a recent article in Barron’s Magazine, there are 9.2 million job openings and 9.5 million unemployed in the U.S. Employers, conservative politicians, economists, and policy makers blame the bottleneck on twin forces:

  • Generous jobless benefits that have made unemployment the better economic decision for millions of low-paid workers, and
  • A year of remote learning that has pushed some two million parents—mostly mothers—out of the labor force.

The expectation by many economists is that the labor shortage will resolve itself this fall once extra federal jobless assistance ends as of September 6 and parents send their children back to school. However, there are deeper problems besetting the labor market, from “an aging workforce and a new desire of many workers to be their own boss to a deep skills mismatch and a pandemic that hasn’t ended”.

The impact of slowing population growth on labor supply hadn’t been so apparent before the pandemic because many baby boomers worked past the traditional retirement age of 65. In July 2019, Pew Research Center said the majority of U.S. adults born between 1946 and 1964 were still working, with the oldest among them staying in the labor force at the highest annual rate for people their age in more than half a century. But now the oldest boomer is turning 75, the working-age population is falling for the first time in U.S. history, and the pandemic has led many older workers to retire ahead of schedule.

Geoffrey Sanzenbacher, an economics professor at Boston College, found that 15% of those over age 62 were retired a year after the coronavirus took hold in the U.S., up from 10% a year after the 2007-09 recession started and 13% right before the pandemic. As companies expect workers to return in the fall, he says another wave of older workers may choose to retire if they can no longer work remotely.

And, it isn’t just older workers walking away from the labor market, nor is it only low-paid service workers. Many departed workers are gone for good since they joined the gig economy or started new businesses that have flourished during the pandemic.

Yet, there is some evidence that continuing claims for jobless insurance have fallen faster in states that ended the extra payments ahead of the federal Sept. 6 expiration. Aneta Markowska, chief economist at Jefferies, says such claims have fallen 24% since mid-May in the states that have already cut the extra $300 a week, compared with a 0.7% increase in states that haven’t.

A record number of new businesses launched during the pandemic as workers turned into entrepreneurs. Immigration, the lifeblood of many services companies, dropped significantly in recent years. Retail day trading is still booming along with the stock market, keeping many who became amateur traders during the pandemic on the sidelines.

Many doubts persist that millions of moms will return to work in September. Many families have established new norms over the past year, and many parents still harbor COVID-19 virus concerns. While employment among working women without children has almost returned to prepandemic levels, mothers with school-age children are lagging, Misty Heggeness, economist at the U.S. Census Bureau says. Further, she is skeptical that trend will meaningfully change in September. “I think we’re underestimating the fear people have with the virus,” Heggeness says, adding that it’s plausible some parents will hold back children in the fall if virtual learning is an option and if parents themselves remain reluctant to return to workplaces.

June’s Unemployment numbers

The June jobs report looks almost perfect, with hiring beating Wall Street’s expectations and wages rising. One might be tempted to declare the labor shortage over. But investors shouldn’t take the bait just yet. While a nonfarm payroll increase of 850,000 is undeniably strong, it belies a labor market still plagued with supply problems.

  • First, consider that government hiring rose 193,000 last month. That accounts for the entire headline overshoot versus economists’ expectations. Company payrolls increased 662,000, which would be incredible for normal times. Yet it was still far off the one million mark that economists had anticipated by this point in the recovery, as the economy bursts open and vaccinated consumers spend the trillions of dollars in cash stashed during the pandemic.
  • Second, labor-force participation was flat in June despite better hiring. That rate, 61.6%, is still down 1.7 percentage points from its prepandemic level. The employment-population ratio, which Federal Reserve officials have said they are watching, was also unchanged in June; at 58%, it remains 3.1 percentage points below its prepandemic level.
  • Third, the slowdown in wage growth is deceiving. The 0.3% increase from May looks like a Goldilocks print—enough to drive continued spending without fueling inflation fears that have been building as shortages from labor to chips to food push prices broadly higher.

Hiring is being held back by supply, not demand: On an annualized basis this year, leisure and hospitality wages are up 12.3%, transportation and warehousing pay is up 8%, and retail wages are up 5.5%.

Labor force participation was stagnant in June, reflecting an ongoing labor shortage. The degrees to which transitory factors—generous unemployment benefits, child-care issues, and Covid-19 concerns—are capping hiring and driving up wages won’t be clear for months. Schools need to reopen to resolve child-care issues holding back working parents, and enhanced unemployment pay needs to expire before it becomes clear the extent to which such benefits are keeping workers home.

While about two dozen states either have started cutting or are about to cut the extra $300 a week in unemployment insurance ahead of the federal program’s Sept. 6 expiration  70% of those unemployed won’t be affected by those early terminations.

References:

  1. https://www.barrons.com/articles/labor-shortage-worse-than-it-looks-51627664401
  2. https://www.barrons.com/articles/the-labor-market-is-out-of-whack-job-openings-hit-record-high-as-hiring-slows-51625679925
  3. https://www.barrons.com/articles/jobs-report-investors-should-be-skeptical-51625267210

Cyber Security: Recognize Social Engineering

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Social engineering is highly successful because the cyber criminals make their work look and sound legitimate, sometimes even helpful, which makes it easier to deceive users. 

Large companies, like Equifax and Home Depot, are often the target of the most sophisticated and large-scale cyberattacks, but attacks aimed at small businesses can be equally as devastating. Some of the most common social engineering threats include phishing emails, texts or phone calls and malware.

Stay vigilant to social engineering

Small businesses need to do more to protect their IT systems against growing cyber threats. Larger companies have taken significant steps and dedicated significant resources to secure their systems.  As a result, less cyber secure small businesses have become easier targets for cyber criminals.

95% of cyber security breaches are due to human error!

Most small businesses and organizations lack the resources to hire dedicated IT staff and incorporate basic cyber security processes to protect their business, information and customers from cyber threats. Even a small business with one computer or one credit card terminal can benefit from strengthening their cyber security protocols.

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Social engineering is used by many criminals, both online and off, to trick unsuspecting people into giving away their personal information and/or installing malicious software onto their computers, devices or networks.  Social engineering is a psychological attack where an attacker tricks you into doing something you should not do through various manipulation techniques. Think of scammers or con artists; it is the same idea. However, today’s technology makes it much easier for any attacker from anywhere in the world, to pretend to be anything or anyone they want, and target anyone around the world, including you.

Social engineering is successful because the cyber criminals are doing their best to make their work look and sound legitimate, sometimes even helpful, which makes it easier to deceive users.  A 2014 IBM study revealed that human error was the primary reason for 95% of cybersecurity breaches.

Most offline social engineering occurs over the telephone, but it frequently occurs online. Information gathered from social networks or posted on websites can be enough to create a convincing ruse to trick your employees. For example, LinkedIn profiles, Facebook posts and Twitter messages can allow a criminal to assemble detailed dossiers on employees. Teaching people the risks involved in sharing personal or business details on the social media can help you partner with your staff to prevent both personal and organizational losses.

Many criminals use social engineering tactics to get individuals to voluntarily install malicious computer software such as fake antivirus, thinking they are doing something that will help make them more secure. Fake antivirus is designed to steal information by mimicking legitimate security software. Users who are tricked into loading malicious programs on their computers may be providing remote control capabilities to an attacker, unwittingly installing software that can steal financial information or simply try to sell them fake security software. The malware can also make system modifications which make it difficult to terminate the program.

The presence of pop-ups displaying unusual security warnings and asking for credit card or personal information is the most obvious method of identifying a fake antivirus infection.

Guard against cyberthreats

Here are 10 tips to help small businesses and organizations to guard against new and emerging cyberthreats:

  1. Develop or review your cybersecurity plan. An effective cybersecurity plan should include strong network security, encryption and authentication technologies. The FCC offers a free cybersecurity planner for small business owners.
  2. Use a firewall and antivirus software. Protect your internet connection by setting up a firewall and encryption. All computers should be equipped with antivirus software and antispyware. Set up automatic software updates on all company devices to ensure security fixes are in place.
  3. Secure your Wi-Fi network. Make sure your Wi-Fi network is secure with password-protected access to your router. Set up a separate guest account with a different password for customers or clients who need to access Wi-Fi, so they don’t have access to your main network.
  4. Protect your devices. Hackers can use a stolen laptop, smartphone or tablet to access your network. Maintain an inventory of equipment, and make sure your employees know to secure any company devices when not in use.
  5. Back up your data. Store data in several places, using off-site and cloud-based services. If you become a victim of a cyberattack, you’ll be able to restore operations quickly without having to pay for a ransomware decryption key.
  6. Strengthen passwords. Enforce strict company-wide policies for creating strong passwords, using different passwords for different applications and changing passwords on a regular basis.
  7. Educate employees. Develop an employee training program to ensure everyone understands security policies and procedures. Schedule refresher courses periodically to keep employees informed.
  8. Increase email security. Train your employees on how to spot a phishing attempt by paying close attention to URLs and reading emails carefully, even those appearing to come from a known sender. Ask them to avoid opening unknown or unexpected email attachments (especially compressed or ZIP files) or clicking on links.
  9. Separate your important data. Reduce the damage of a potential security breach by making sure your data isn’t all stored on one device or in one place. For instance, don’t keep your payroll information on the same device you use to process credit card payments. That way, if one of your devices is compromised, some of your data will still be safe.
  10. Implement an incident response plan. Documenting what to do in the event of a security breach—such as who to notify and where backups are stored—can save your organization valuable time in a crisis.

Cyber training and protocols can make a crucial difference in reducing or eliminating the number of cybersecurity breaches.

References:

  1. https://transition.fcc.gov/cyber/cyberplanner.pdf
  2. https://www.navyfederal.org/resources/articles/small-business/protect-your-business.php
  3. https://www.sans.org/security-awareness-training/resources/social-engineering-attacks/?utm_campaign=2020%20Social%20Media&utm_content=145945029&utm_medium=social&utm_source=twitter&hss_channel=tw-41655252
  4. https://www.ibm.com/developerworks/library/se-cyberindex2014/index.html#:~:text=IBM%20Security%20Services%202014%20Cyber%20Security%20Intelligence%20Index.,names%2C%20emails%2C%20credit%20card%20numbers%2C%20and%20passwords%E2%80%94were%20stolen.