TIP480: Why Microcaps Have The Best YTD Performance w/ Ian Cassel

Episode Summary

Executive Summary: Ian Castle argues that microcaps have held up better than many larger caps because prior hype was concentrated in mega-cap tech and speculative vehicles, while many microcaps are domestic, profitable, and less exposed to global shocks. He says the market feels closest to 2008 since the crisis, sees rising rates and lower valuations as creating opportunity, and stresses concentrated, high-conviction investing in scarce, cash-generative businesses.

Main Topics: Why microcaps are outperforming during the downturn (Priority: 5/5): Castle explains that microcaps have declined less than the NASDAQ because the prior market froth was concentrated in larger tech names, SPACs, and meme stocks rather than microcaps. He also notes that many microcaps are domestic businesses and may be more insulated from geopolitical shocks. Current market resembles 2008-2009, but not yet the same depth of fear (Priority: 5/5): He says the present environment is the worst he has seen since the financial crisis, but still lacks the full economic pain and panic of 2008-2009. He expects the situation could worsen if recession effects broaden. How Castle stays disciplined in volatility (Priority: 5/5): Castle describes a concentrated six-to-ten-name portfolio, emotional neutrality, and a focus on controllable factors: business quality, balance sheets, growth through recession, and valuation. He emphasizes keeping some cash available to buy into drawdowns. Microcap selection criteria and portfolio construction (Priority: 5/5): He outlines his framework: scarcity, tailwinds, recession resilience, strong balance sheets, intelligent management, and a valuation that can plausibly double money within three years. He says drawdowns force him to cut weaker ideas and increase concentration. The MicroCap Leadership Summit and idea generation (Priority: 4/5): Castle reviews the annual summit, which featured 19 investor presenters and 12 company pitches from seven countries. The event is designed to educate, inspire, and build community, while showcasing diverse microcap strategies and stock ideas. Private equity, M&A, and capital flowing back into public markets (Priority: 4/5): He expects more acquisition activity as public valuations adjust faster than private valuations, citing Brookfield's large capital raise and historical acquisition rates within the MicroCap Club universe. Learning, research, and the value of relationships (Priority: 3/5): Castle says his biggest edge comes from relationships with other investors and from studying companies directly. He also recommends reading, especially 'Sleuth Investor,' and continues to balance investing research with fiction and creative work.

Key Arguments: Microcaps have outperformed relative to the NASDAQ this year because the biggest bubble was in mega-cap tech, SPACs, and other speculative large- and mid-cap areas, not in the microcap space. Castle views the current environment as the harshest since 2008-2009, but says it has not yet reached the same level of fear or economic distress. For microcap investors, cash on hand matters because drawdowns create opportunity, and even a small reserve helps investors stay engaged rather than frozen. The best microcap investments often combine scarcity, tailwinds, recession resilience, strong balance sheets, skilled management, and attractive valuation. Rising interest rates are mostly positive for his strategy because they compress multiples and expose weak businesses, leaving better businesses on stronger relative footing. Microcap investors should focus on profitable companies first; in his view only about 18% of microcaps are profitable, so screening for income statement strength eliminates most bad ideas. Quality businesses tend to recover first in downturns, and larger pools of capital still seek growing, profitable companies even in weak markets. Private equity and M&A interest should rise as public valuations fall faster than private ones, creating opportunities for takeouts and strategic acquisition. The summit’s purpose is not to provide guru picks but to surface many viewpoints so investors can find the truth through deeper research and diligence.

Data Points: SPY year-to-date decline: down 23% - Trey Lockerbie opens by comparing broad market performance during the selloff. NASDAQ year-to-date decline: down 31% - Broad growth stocks are cited as the weakest major segment. Large-cap decline: down 24% - Used as a benchmark in the discussion of relative performance. Mid-cap decline: down 21.5% - Part of the market comparison versus microcaps. Small-cap decline: down 23% - Shows broad weakness across equity sizes. Microcap decline (MSCI index): down 18% - The key surprise: microcaps have fallen less than larger segments. Typical drawdown expectation in microcaps: market down 30%, microcaps down 45% - Castle explains the usual downside leverage of microcap investing. Worst market since 2008-2009: since the financial crisis - Castle’s comparison of the current environment to prior downturns. Microcap profitability rate: 18% - He says only about 18% of microcaps are profitable, so he screens for earnings strength. Portfolio concentration: 6 to 10 companies - Castle’s preferred concentrated portfolio size. Positions reduced: from 10 positions to 6 - He says he has cut weaker holdings during the downturn. New positions added recently: 1 position - He describes selectively adding only one idea in recent months. Company example revenue growth: from $15 million to $40 million - He cites a core holding that scaled rapidly over roughly two years. Company example growth rate: 30% annually initially; then 40% annually - Used to illustrate how high-growth microcaps can rebound and re-rate. Company example gross margin: 90% gross margins - Illustrates quality and pricing power in a microcap holding. MicroCap Club company profiles: 880+ companies profiled - Castle says members have profiled over 800 companies since 2011. Member approval rate: about 10% - Only a small fraction of applicants are approved as members. Subscriber fee: $500/year - Cost for view-only access to MicroCap Club forums. Summit attendees/presenters: 19 investor presenters - The annual MicroCap Leadership Summit featured 19 stock pickers. Summit company presentations: 12 companies - The second day focused on selected microcap companies. Countries represented at summit: 7 countries - Examples included Finland, Denmark, the UK, Australia, the US, Canada, and Belgium. Brookfield capital raise: $110 billion - Cited as evidence of private equity interest in public market opportunities. Microcap ecosystem size (historical estimate): $300 billion - Castle cites an older paper describing the U.S. microcap market size. Microcap ecosystem size (later estimate): $500 billion - He notes a later screening estimate of the U.S. microcap universe. Microcap share of U.S. public companies: 55% - Castle says microcaps make up the majority of public companies in the U.S. Microcap share of Canadian public companies: 70% - Used to show the global scale of the microcap universe. Jobs supported by U.S. microcaps: 3 to 4 million jobs - Illustrates economic importance beyond stock performance. Typical M&A rate within MicroCap Club profiles: 18% acquired - Historical acquisition rate among profiled companies. Deep value manager performance example: 700% in 9 years vs. 200% for the S&P - Castle cites Michael Melby of Gate City Capital as an example of strong niche performance. Lee Enterprises enterprise value: about $600 million - Discussed during the summit stock-pick example. Lee Enterprises market cap: about $100 million - Shows the discrepancy between market cap and enterprise value in the example. Lee stock volatility: around 50% annual volatility - Trey notes this is typical for many microcaps. Example holding size: bought at $10 and rose to $50 by end of 2020 - Used to illustrate volatility and re-rating in a single microcap position.

Pivotal Quotes: "I think this is the worst it's been that I've seen since 2008, 2009." — Ian Castle: His assessment of the current market compared with past downturns. "The best thing about this drawdown is... you can upgrade your portfolio through this." — Ian Castle: Explaining how falling prices help him concentrate into higher-quality names. "The key to this is just finding the truth." — Ian Castle: His philosophy for microcap research and due diligence.

Implications: Listeners should expect continued volatility, but also a fertile setup for selective microcap investing, M&A, and multiple expansion. Castle’s framework favors cash-generative, underfollowed businesses with strong balance sheets and patient holding periods.