Process

Perritt Capital Management invests in companies that are listed in the bottom two deciles of the major stock exchanges as ranked by market capitalization. Today, the strategy invests in companies that at the time of initial investment have a market capitalization between $50 and $500 million. The firm follows a disciplined investment process that uses a bottom-up approach, which favors companies with modest valuation multiples relative to long term growth prospects. Steps in this process include:

1. Companies are first subjected to a nine-point evaluation – based on balance sheets, cash flow statements and income statements – that we believe demonstrates whether a company is acting in the interests of its shareholders.
   • Top performing companies demonstrate strong balance sheets, positive cash flows, and expanding profitability. Other factors include above-average growth in revenue and/or earnings, a relatively low or declining level of long-term debt, a significant percentage of their shares owned by company management, and reasonable price-to-sales ratios, price-to-earnings ratios, and price-to-cash flow ratios.
   • Companies are initially evaluated based on year-over-year and quarter-over-quarter numbers, and subsequently re-evaluated each quarter.
2. For companies whose fundamentals look favorable based on the nine-point evaluation, the next step is to assess its broader business prospects. The focus of this step is to identify growing, niche companies with innovative products and/or services and the potential to build franchises and brands.
   • The investment team meets with 3-5 small company CEO's and CFO's per week in our offices. This step in evaluating a company serves to assess its long-term business prospects.
   • Some of the factors we consider include: the maturity of the business, the size of the market and the company's relative share, the niche qualities of the company, the defensibility of their niche, existence of catalysts for future growth, stability of management, and management performance track record.
3. Stocks are then assessed based on valuations, and are considered for purchase if they fall under a range of valuation determinations, including GARP or Deep Value.
   • The investment team makes a point to use conservative growth estimates – generally 10-20% annual growth – when determining valuations. The investment team understands that companies cannot grow at high double-digit rates indefinitely. For example, in an instance where a company is growing at 45% rate at the time of evaluation (which can be common for companies in the microcap space), the team may use a 20% growth rate when valuing that company.

We believe that our key advantage is that we have more than twenty years of experience investing in microcap companies. Perritt Capital Management has been investing in microcap companies since the firm’s inception in 1987. Microcap equity is the firm’s primary institutional strategy and we have a twenty-year track record of microcap investing that has been established over multiple market cycles. In many ways, we are one of the pioneers in microcap investing – only a handful of microcap managers launched in the 1980s still exist today.