What do nano-cap stocks signal to investors?

Forgive me if this is rudimentary— I don’t work in the public equity space.

Every once in awhile, searching for investments for my PA, I come across a nano-cap. But nearly every time, I’m a little baffled on why this nano-cap is public in the first place. I understand the litany of potential reasons a company might go public— namely, for financing purposes and providing liquidity to insiders (also understanding that going public these days, notwithstanding the somewhat recent boom in IPOs, is becoming less common and companies are staying private longer and longer)— but looking at the number of sketch stocks with questionable business models and given rampant fraud in the market space, I don’t quite understand why investors would entertain this (I get that not all public companies don’t necessarily “IPO”). Nor do I see why sensible management teams would go this route. I’m mostly talking about functioning businesses; I get why near-bankrtupt company may have its equity value dwindle enough to join the nano party.

So my questions are: how should an investor look at nano-caps? How often do little $30m market cap companies actually make it to small cap+ range? How many of these are straight up frauds? Is it even worth looking in this area? Looking at this from a 1 year+ time horizon, not actively trading.

To provide a couple of examples I’ve come across:

  1. One was selling cloth diapers. The founder/CEO had the prestigious background of being an accounts receivable clerk, and the website was rife with spelling and grammatical errors. If I remember correctly, I’m not even sure revenue reached the 7 figure range. The stock popped (then subsequently crashed again) after a huge reverse stock split and when the company announced it would start making covid masks.
  2. Another company was pre-revenue, looking to advertise in Ubers and taxis. I get an early stage VC investing in a pre-rev concept, but for this company to have an 8-digit valuation before making a single sale? Why go public instead of search for VC money? A further look revealed some more sketchy financials: the company was partially capitalized by a number of insider loans, most notably from the CEO’s wife. Plus, the “headquarters” address just happened to share the same address as a WeWork. Of course, this stock jumped from about $2 a share to $8 a couple weeks after I looked at it. It hit $20 before settling around $10.
 

Modi enim ut cumque est alias. Numquam est voluptatibus repellendus laboriosam. Doloremque at accusantium sunt repellat. Nisi officia quasi laudantium corrupti ut aut. Non sapiente omnis aut porro. Nisi totam aliquid quia iusto accusamus.

I'm an AI bot trained on the most helpful WSO content across 17+ years.

Career Advancement Opportunities

May 2024 Investment Banking

  • Jefferies & Company 02 99.4%
  • Goldman Sachs 19 98.8%
  • Harris Williams & Co. New 98.3%
  • Lazard Freres 02 97.7%
  • JPMorgan Chase 04 97.1%

Overall Employee Satisfaction

May 2024 Investment Banking

  • Harris Williams & Co. 18 99.4%
  • JPMorgan Chase 10 98.8%
  • Lazard Freres 05 98.3%
  • Morgan Stanley 07 97.7%
  • William Blair 03 97.1%

Professional Growth Opportunities

May 2024 Investment Banking

  • Lazard Freres 01 99.4%
  • Jefferies & Company 02 98.8%
  • Goldman Sachs 17 98.3%
  • Moelis & Company 07 97.7%
  • JPMorgan Chase 05 97.1%

Total Avg Compensation

May 2024 Investment Banking

  • Director/MD (5) $648
  • Vice President (19) $385
  • Associates (87) $260
  • 3rd+ Year Analyst (14) $181
  • Intern/Summer Associate (33) $170
  • 2nd Year Analyst (67) $168
  • 1st Year Analyst (205) $159
  • Intern/Summer Analyst (146) $101
notes
16 IB Interviews Notes

“... there’s no excuse to not take advantage of the resources out there available to you. Best value for your $ are the...”

Leaderboard

1
redever's picture
redever
99.2
2
Betsy Massar's picture
Betsy Massar
99.0
3
Secyh62's picture
Secyh62
99.0
4
BankonBanking's picture
BankonBanking
99.0
5
dosk17's picture
dosk17
98.9
6
GameTheory's picture
GameTheory
98.9
7
CompBanker's picture
CompBanker
98.9
8
kanon's picture
kanon
98.9
9
Kenny_Powers_CFA's picture
Kenny_Powers_CFA
98.8
10
numi's picture
numi
98.8
success
From 10 rejections to 1 dream investment banking internship

“... I believe it was the single biggest reason why I ended up with an offer...”