Perritt’s Michael Corbett on micro-cap inefficiencies and opportunities.
Laura Lallos, Morningstar magazine’s managing editor, interviewed Corbett in July.
1. Perritt’s process was built on academic research demonstrating the “small-firm effect.” How has it evolved over time?
One of the tools we’ve added is a 9-factor evaluation strategy that was developed by Joseph Piotroski at the University of Chicago to judge companies’ financial strength. Companies that pass the majority of these factors exhibit enhanced shareholder value. We also endeavor to obtain a more detailed understanding of the motivations of other majority shareholders, to align ourselves with those that share our goals.
2. Perritt MicroCap Opportunities
Investor patience is critical. Allowing time for management to establish and develop their businesses is the key to success. A low-turnover approach also keeps trading costs down.
3. Why should investors consider Perritt Ultra MicroCap
The ultra-micro-cap market behaves quite differently than the rest of the equity markets, so this is a great way to diversify for many investors. Several of our shareholders use this fund as a liquid private equity alternative.
4. Is size essential to maintaining a competitive advantage, or are there micro-cap companies with entrenched moats against competition?
We typically consider companies in niche markets. By their very nature, they have less competition.
5. How significant is M&A activity in this segment of the market?
We never make investments with the idea an M&A deal is in the future, but it does happen regularly in our space. MicroCap Opportunities saw 9% of its holdings bought out in 2012. It was slower in the micro-cap space in 2016, but we are seeing an increase this year.
6. Where are the best opportunities today?
Valuations appear slightly more favorable in the lower market-cap deciles. The more interesting fact is that future earnings growth appears stronger in the micro-cap and ultra- micro-cap world.
7. Might Perritt branch out with mid- or larger-cap strategies?
A mid-cap strategy is a possibility, but Perritt will never venture into the larger-cap market. The large-cap market is very efficiently priced.
8. Do the qualities you look for in a company extend to how you run Perritt Capital Management?
We tend to look for companies with processes and values similar to ours. For example, at PCM we place a high priority on fluid and consistent communication among our team and with our clients to ensure we are successful within our marketplace.
9. How do you find and keep analysts who are good fits with your small firm?
Our Chicago location gives us access to a terrific talent pool. We look for individuals with a passion for investing in the micro-cap space. Our analysts get the opportunity to interact with and influence the executives in the companies they research, something they would not likely experience with a larger firm.
10. What book is on your nightstand now?
I am not one to have a book on my nightstand, but I do have an iPad on my nightstand, which I use to keep up with the business, watch trends, check emails, etc. A book I do refer to regularly is Ibbotson’s Stocks, Bonds, Bills, and Inflation. I love to review the history of the markets.
Michael Corbett is CIO of Perritt Capital Management and portfolio manager of the Perritt Funds. He was profiled in the April/May 2010 issue of the magazine, and Perritt Ultra MicroCap PREOX was noted as a success story in a recent 10-year retrospective of the Undiscovered Manager feature in the June/July issue. Corbett joined Perritt Capital Management as a research analyst in 1990 and became the majority owner of the firm in 2010.