In one sentence: Phil walks through a real pink-sheet screen, VASO Corporation, to show a company can look like a "14 cap" on first numbers, then explains the catch: you cannot buy enough of a thinly traded stock for it to matter to a big investor.
Key ideas
- The case for looking. Companies off the main exchanges lack analyst coverage and have thin data, so mispricing is possible; the flip side is that a scam can go to zero overnight. [02:00–03:30]
- How to find them. At a broker, scan US stocks listed as "pink/BB" (pink sheets and the over-the-counter bulletin board) rather than NASDAQ or NYSE. Names can carry tier labels such as "Pink Current". [03:30–06:00]
- Why a company sits there. Exchanges expect roughly a $5 share price; a $10 million company with 10 million shares trades near $1. A reverse split fixes price but leaves too few shares to list. [06:00–09:00]
- Phil's filter. Market value over $10 million, return on equity of 15% or more, price above 20 cents. This returned about 15–20 names out of thousands, which suggests that companies that publish standard financials get through. [09:00–11:00]
- The chart tells the story. VASO had been public since the 1980s and swung between cents and $11, falling to about 3 cents in 2020 and rising to roughly 31 cents. The point: how violent these prices are. [12:00–15:00]
- The back-of-envelope valuation. About 174 million shares × 31 cents ≈ $53 million. Operating cash flow was about $7.8 million; subtract an estimated 70% of capex ($415,000) as maintenance and owner earnings are about $7.5 million. That is a roughly 14% yield ("14 cap") on market value, well past the 10% hurdle from Danielle's book. [17:00–25:00]
- Caveats Phil raises himself. 2022 numbers were missing, he would need ten years of data, he knows nothing of medical devices, and cash flow from such a business is erratic. It is a first-pass sale signal, not a buy. [22:00–27:00]
- Why it might be cheap: you can't buy it. To hold about $15 million Phil would need to buy 500 days' worth of trading volume (about 100,000 shares a day), which would drive the price up. Big and mid-sized funds can't touch it, which is why such companies stay overlooked. Danielle notes that it is not just attention but access. [28:00–31:00]
- Not a scam on this evidence. A long operating history makes outright fraud less likely, but Phil will not rule it out. [26:30–27:30]
How it maps to RuleOne
- The "10 cap" test is the owner-earnings yield on the stock pages on /stocks/ and /stock/TICKER/. Phil's calculation is the same one the screen does for every name.
- The site's screen lists exchange-listed names, where audited filings make the 10-year check possible; it won't show you pink-sheet names.
Buffett, Munger and Graham links
- Buffett's "if I had a small amount of money, I could do better" idea (partnership-era remarks, widely cited) is about the very small-cap niche Phil describes; I did not hear a specific source in this episode.
- Graham's Intelligent Investor ch. 15 on the defensive/enterprising investor: enterprising investors look where others do not, but with a margin of safety.
Words to know
- Pink sheets / OTC: the over-the-counter market for companies that do not meet a major exchange's listing standards.
- Owner earnings: operating cash flow minus the capex needed to maintain the business.
- Ten cap: owner earnings of at least 10% of the company's market value.
- Reverse split: combining shares (for example 5 into 1) to raise the price per share.
Try this
Take a company on /stocks/ and repeat Phil's math on paper: shares × price = market value, then operating cash flow minus an assumed 70% of capex over market value. Compare the result with 10%.
Check yourself
- What was the "yield" on VASO and how was it computed?
Answer
About 14%: owner earnings of roughly $7.5 million over a market value of roughly $53 million. - Why might an apparently cheap micro-cap stay cheap?
Answer
Funds cannot buy a meaningful position without moving the price, so the usual buyers never arrive. - Name two reasons Phil did not call it a buy.
Answer
Only a year of numbers, missing 2022 data, an industry he does not know, and a wild price history.
Short quotes
None.