By "not well brokered", I mean stocks that are well known companies, liquid names, it's just that the market segments / geographies are covered by less sell-side houses / or that the way they model the same companies are all different so consensus is messy.
I find it offers a bit of opportunity because less people are attracted to these type stocks (not super crowded), however, it is true that it takes a lot more effort to get these things right and that's exactly why not a crazy amount of people play in these names.
Have you had experience like this? Would love to hear your thoughts.
Based on the most helpful WSO content, covering "not well brokered" stocks can indeed present unique opportunities as well as challenges. Here are some pros and cons:
Pros: 1. Less Competition: As you mentioned, these stocks are not super crowded. This means you might have a better chance of finding undervalued opportunities that others have overlooked. 2. Unique Insights: Since fewer analysts are covering these stocks, you might be able to develop unique insights that give you an edge over other investors.
Cons: 1. More Effort: These stocks can require more effort to analyze due to the lack of coverage and potentially messy consensus. 2. Higher Risk: Stocks that are not well covered may also be more volatile or have less liquidity, which can increase risk.
As for tips, it's crucial to do your own thorough research when dealing with these types of stocks. Don't rely solely on the limited broker coverage available. Instead, delve into the company's financials, understand its business model, and consider the broader industry trends.
Remember, investing should never be about following the crowd, but about understanding the value and potential of a company. So, if you're willing to put in the extra effort, these "not well brokered" stocks could indeed offer some interesting opportunities.
Sources: Why Investors Fail, Let's Talk About the Pros and Cons of our Gigs in RE Finance, How PWM really works (part 4): Misconceptions, how we invest, choosing a broker, and my Q&A, What not to do as an Investor !, Best investing tips for beginner investors
Hello hello anybody not on the slopes?
Can you give an example of a name? I can’t think of too many that are liquid / decent and aren’t covered by at least one BB and a few boutiques.
That said, generally the pros for looking at names that aren’t well covered are first mover’s advantage (long or short, and a good investment opportunity always catches steam), good access to IR/mgmt (not always), less likely to be biased by sell side reports. The cons are it’s likely not as liquid as you think it is / is a small fund trade that most big funds can’t do, not well covered so have to spend more time to diligence stuff and make sure mgmt isn’t doing something funky with financials, takes longer to get up to speed on the biz/industry positioning, borrow on the equity can be an issue if it’s a short, etc.
Appreciate it, I do feel that IR / management access also as a big advantage.
Not going to leave tickers here but think of stocks in the commonwealth countries / the LO darlings, they are very liquid but get relatively less attention than US / EU & from HFs
Jurisdiction can be an issue for a lot of funds since investing outside of non US / well known EU jurisdictions can be a pain or require an extra layer of diligence for similar returns that you might find in the US / well known EU jurisdictions
whats the point of looking at messy/undiscovered stocks? hard to know what the other side is playing for here, so hard to get a sense of what buyside/bogeys are into each quarter so how do you monetize esp since you can't be big in position since it's lower liquidity?
Get a life bro
So the ideal scenario is to continue playing in an extremely saturated market? I'm not a HF guy, but I keep asking myself how big one's ego has to be to think that he may have any sort of edge to reach alpha in a market where each stock is covered by multiple banks, tracked by thousands of investors, and where every possibility of arbitrage is exploited at the seconds by Citadel.
On the macro side of things, deal with il-liquid markets all the time. Truly i think Michael Burry in “big short” explains the process and frustration pretty well. As mentioned you need to do a lot of due diligence and be willing to hold the position for a lengthy period of time. Also have to be prepared to take it in the nards, as your catalyst could be delayed for a while and may have to roll your position even though your due diligence is solid.
Appreciate the colour, I heard about the tales from some credit guys I know - respect that as we never go into even just relatively not as liquid names
I think value in the small cap, no sell side coverage, "unfollowed" discount tends to be overexaggerated by folks and more of a marketing pitch. First, to points others have made, most companies in this cohort have no business being public, are very illiquid and generally impractical to try and build a real position. If you do, you are basically a minority shareholder in a quasi-private equity and are going to get your face ripped off if you ever need real liquidity. For those that do have decent liquidity, I do not believe that many companies simply exist in the $100-500mn EV range without having gone through real sponsorship either via founder ownership or a large buyside owner. Companies of that size have generally had several encounters with the sell side either for M&A, corporate reorganization, ESOP/estate matters, or capital raising and will also have a commercial banking relationship that may have already graduated from local, no name lenders to the Fifth Thirds of the world. The point is that even if there is no sell side analyst coverage these companies have institutional finger prints all over them, people are smart on it, and the market is probably valuing them closer to fair value than not for what they are.
That's fair. The smallest company I've covered & traded in is about 6bn..fasciated about the small cap world
My investable universe is anything under $2.5B so I'm probably a little biased but I think you benefit in a few ways. 1)Fewer people following it tends to make the market less efficient since there aren't as many eyes to find the relevant information to price in and 2) The lack of sell-side coverage makes it exponentially easier for you to form you own thoughts about the company and you don't have to worry about "comparing work". I'm a huge fan of this but recognize others aren't. On the other side, less attention means that the market might miss something and it doesn't move how you expected. Then depending on how small you go vs. position sizing, you have to remember to be cognizant of liquidity in the market. It can get frustrating when you have 5x adv and it takes you a month to unwind without moving the price too much.
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