'You can make 5, 10, 50x your money': Here's an inside look at the 7-part strategy small-stock expert Ian Cassel is using to unearth the market's most overlooked gems (2024)

In 1997, Cassel stepped into the fray by gripping $20,000 his parents had earmarked for his college education. After a few timely purchases, his account swelled to $120,000.

"When I grewthat $20,000 into a larger amount I got bit by the greed bug," he said. "I didn't want to then blow all the money I had, this hundred thousand dollars, on a college education."

Unfortunately, the jubilation that propelled the technology bubble — and Cassel's portfolio — to new peaks was on its last legs. Soon, it would all come crashing down — and Cassel's capital wouldn't be spared.

"And in 2001, the technology bubble burst — and so did my portfolio," he said. "All those technology names that were riding high, got cut in half and then cut in half again."

He continued: "I averaged down into those companies as they dropped and I quickly turned $120,000 into about $8,000."

Many of the companies Cassel had originally purchased morphed into micro caps (stocks with <$300 million market capitalization) during the bust. Although he was laden with losses, the lessons he learned in the unwind wound up laying the foundation for his journey forward.

Instead of looking for "story stocks," which was a cornerstone of his early investing days, he'd now shift his focus to tiny, under-the-radar issues, and put an emphasis on balance sheet strength, management, valuation, and growth. The goal was simple: identify the market's smallest stocks that have the potential to grow into behemoths.

Today, Cassel manages his own capital as well as about $10 million in a private fund.

Here's how he's doing it.

Cassel's portfolio

Cassel sequesters his portfolio into three separate buckets: good-to-great businesses, turnarounds, and "rocket ships." He allocates most of his funds in the first two, and rations a smaller chunk of cash for the "rocket ship" portion due to its elevated risk profile.

Here's how he describes each.

(1) Good to great businesses

"And these are businesses that are unique. They're growing. They're profitable. They don't need to raise capital," he said. "They don't need to lean on the capital markets to raise capital."

"And mainly companies that dominate a niche area and that can continue to grow double digits and be more profitable every year," he said.

For context, Cassel says that about 18% of all microcap companies are profitable.

(2) Turnarounds

"These companies look like deep value-type stocks, where you're looking for management changes," he said. "And you can make five, 10, 50 X your money simply on a value stock turning into a growth stock."

"You're trying to bet on positive change," he said.

(3) Rocket ships

"And the third bucket kind of goes back to my early years of looking for those rocket ships," he said.

"I'm mainly looking for companies that have that 10, 20 X potential, but there's an underlying floor of value, either an asset base or a core business that you're hopefully acquiring those shares at close to that core value which protects your downside. At the same time the company is working on some new developments or products where if they work could take the value significantly higher."

How he finds his picks

Cassel likens microcap investing to venture capital. Both qualitative and quantitative factors play an integral role in his vetting process. Remember, these companies are very small and are often in their formative years. Risks are prevalent — and Cassel isn't going to pull the trigger without doing his homework.

"I'm mainly looking at everything through a valuation lens of, can I double my money in three years based on conservative, fundamental drivers," he said. "And that's the hurdle rate I'm looking for."

Here's a graph Cassel uses to dive even deeper into his 7-part process.

"These companies, if you get one that works — you get a management team that executes — these stocks can go up five, 10, 20 X," he said. "So if you miss the first hundred percent, it's not that big of a deal, but you would have alleviated a lot of pain if you would have just waited to prove they canexecute a little bit before you deploy a lot of capital."

"We're looking for big returns," he said. "We're not looking to grow our capital 8% a year."