I recently came across Matheus Lonning while perusing “X” at 1 AM, sitting and having a few drinks at the El Camino Restaurant on Las Olas Boulevard in downtown Fort Lauderdale. El Camino is Spanish for “the path”. Like many young investors these days, Matheus’ path reminds me of the one I took when I was fortunate enough to discover the world of small and microcap investing and the ROI that came from hard work. Matheus has built a following through his Substack and X by digging into obscure microcaps, reading filings, talking directly with management teams..

Matheus’s approach is pretty straightforward. He looks for companies with strong balance sheets, limited coverage, improving fundamentals, and a valuation that does not seem to reflect the opportunity. He is also comfortable making an initial investment before doing every piece of research, then digging deeper as he learns more about the business. This is extremely aligned with how I invest. That willingness to act independently comes through throughout the interview, especially when he talks about how headline-driven market reactions can create opportunities in small, thinly followed companies. Interestingly, one of his first exposures to the stock market was through a stock contest, similar to my journey.

We get into several of those situations in the Q&A below, including Table Trac, Trio-Tech, SCIA, and a few aerospace and defense names Matheus is watching. He also explains what he looks for when speaking with management, how he tries to distinguish a genuinely misunderstood company from a stock that is simply cheap for a reason, and how some of his ideas played out after he first wrote about them.

Skull Sessions is a collaboration with Geoinvesting.com, a full-stack microcap research platform and MS Microcaps LLC , home of the Microcap Quality Index (MSMqi).

1. How did you first get into investing? Tell us about your journey before and after investing. What is your investing framework and research process like today and how has it evolved over time? When a new idea enters your radar, what does your process look like before you’re willing to invest?

I started investing when I was in High School. There was this “stock contest” where we were paper trading for the entire school year and eventually crown a school champion. Most people just bought something like Apple or Microsoft and forgot about it for the whole year. I was super into it though. I did start by buying whatever company I felt was cool, like Lockheed Martin or Nvidia or Dell, but eventually I started to just buy whatever names were trending regardless of whether I knew the “brand” or not, it was a fun contest and although I was not the winner, it was a great experience.

Nowadays I have graduated from buying whatever is trendy or well-known to buying as obscure businesses as I can. Ideally, these businesses have no analyst coverage and very little chatter on social media.

I usually start with a screener, or sometimes I see a stock go up after earnings and dig deeper. I look for downside protection initially. Is there any debt? What does the balance sheet look like? I prefer businesses with a fairly large cash pile and no debt, but not having that is not automatically a deal breaker. Then, I look at growth, sector tailwinds, peer comparisons and whatever info I can find. With that being said, a lot of these small companies have limited information available online. That is where speaking to management teams can have an advantage. A big part of investing in these lesser known companies is figuring out whether you can trust management or not. That makes or breaks a thesis.

I am a “buy first, ask questions later” person. My best returns have resulted from when I did little research initially and just bought and understood the company later. Overthinking is a bitch. Usually a good pitch is a few sentences long and goes along the lines of: lots of cash, no debt, growing faster than peers but at a lower multiple. Bang.

2. If someone asked what makes you different as an investor, what would you say is your edge?

I am not going to sit here and tell the world I have an untouchable edge when it comes to investing. I do not. What separates me from the average investor, is the ability to think for myself and reach conclusions where there is not a consensus already formed.

I am willing to read filings, speak to management teams and then decide for myself whether or not this is a good investment. I don’t need MS or GS to have a buy rating and high price target to place my money. Usually when analysts start to put out high targets on specific companies it is already too late and the bulk of the returns have already been made.

In short, my willingness to make decisions based on my own reading of a situation allows me to target companies where few others are looking at and that is how you outperform the broader consensus markets.

3. What kinds of companies or investment opportunities are catching your attention right now? What are up to three stocks you’re particularly excited about today, and what do you think the market is overlooking?

I think the aerospace/defense sector is attractive and overlooked even as the US gov pleads to restock ammunition stockpiles, I think the whole sector is going to over earn soon and it is not priced in. My top picks in the sector are: $BUKS, $TAYD, CVU.

4. You’ve written about several companies where the market appears to be focusing on the obvious negative, while you’re focused on an underlying inflection. How do you determine when the market is missing an important change in a business versus when you’re simply rationalizing a cheap stock that deserves to be cheap?

The market has become over fixated on headlines. It has overreacted to both upside and downside without seeing the whole picture. By reading an entire press release or 10k/q one can find real alpha.

Recent examples are overreactions on TAYD, SIF, or even PPIH BUKS. Reactions were quickly corrected and there was fast money to be made by understanding the entire picture.

OK, now let’s talk about stocks. I noticed that there’s a bunch of companies that you talk about that I recognize.

5. In your recent Table Trac ($TBTC)piece, you wrote that speaking directly with management allowed you to learn things that simply weren’t available in the filings, particularly because the company has essentially no analyst coverage. After doing this repeatedly, what are the specific things you listen for in a management conversation that can materially change your investment thesis? What did you particularly learn about TBTC that piqued your curiosity and gave you differential insights? Can you give us an idea of what’s changed in the model and why activist, Chuck Gilman, might have just got involved?

I am basically looking to learn if I can trust them or not, usually promotional CEOs can not be trusted and will line their own pockets before those of shareholders. When a CEO focuses on the business and not the stock that is when I become even more interested.

TBTC chatter with CEO Randy Gilbert was delightful. He gave me an in depth description on how their machines work and what their plan is for the future. I also learned that their actual moat comes from cybersecurity within their software systems. Now I value the company as a SaaS business with high margin recurring revenues, instead of focusing on lumpy system sales.

Chuck Gilman is not involved with the company, it was a mistake proxy transaction causing some confusion. With that being said, I think TBTC will be a long term compounder and find shares attractive even after the recent run.

7. Your Trio-Tech ($TRT) thesis relies heavily on the idea that at a company this small, winning even one additional meaningful semiconductor customer could have a disproportionate impact on revenue and EPS. How do you model that kind of nonlinear upside without falling into the trap of building a valuation around hypothetical customers that may never materialize? Also, from my own experience with the company for three decades, I’ve really never seen their ability to expand margins. Does that concern you? Or is the set-up just more of one, where revenue scales so that even at current margins, the company becomes profitable? .

At the time of my article, TRT was trading around $4 a share. I projected that receiving just one extra order could have a meaningful impact, they received two massive orders in the subsequent weeks/months causing the stock to reach over $20 a share after a strong earnings report. It was a massive realized winner for my book this year.

With TRT I was more worried about revenue growth and taking advantage of the semiconductor boom. They did just that. I honestly don’t expect margins to trend any higher than 15% for SBS segment and near 18% blended, but with sales north of 100m those margins are more than enough to justify the current valuation. At ~$10 a share this is not a home run opportunity anymore, but there is still room for outperformance.

8. I noticed that you are following $SCIA and that you’re quite bullish on the company. I share that optimism with you. The stock is actually in our MicrocapQuality Index as well as covered at GeoInvesting. What does the company do and what are you excited about? Can we really trust that the company has now inflected? Or will they go back to inconsistent growth?

I am impressed with management’s ability to identify new growth opportunities and do not think the market has priced in the fact that they are about to have a couple new revenue streams come online in the coming quarters. Their core business will continue to be lumpy and they are currently overearning from the higher input costs, but these new revenue streams should help normalize growth.

9. Please give us one more person you would like to see us interview.

Jeremie Boyer from Aurelion Research or Jonah Lupton from FirstWave Fund.

Stocks Discussed

• Butler National Corporation (OTC Markets: BUKS) An aerospace and defense company Matheus believes is positioned to benefit from increased U.S. defense spending and ammunition restocking.

• Taylor Devices (Nasdaq: TAYD) A defense and aerospace name where Matheus sees opportunities created by headline-driven market overreactions.

• Table Trac (OTC Markets: TBTC) Matheus sees the company as a potential long-term compounder, with its cybersecurity capabilities and recurring, high-margin software revenue making the business more attractive than its lumpy hardware sales suggest.

• Trio-Tech International (NYSE TRT): A semiconductor-related idea where two major customer orders drove a sharp increase in revenue expectations and sent the stock from around $4 to above $20.

• SCI Engineered Materials (OTC Markets: SCIA): Matheus is bullish on new revenue streams coming online that could help offset the lumpiness of the company’s core business and normalize growth.

• CPI Aerostructures (NYSE: CVU): An aerospace and defense name Matheus sees as an overlooked beneficiary of increased U.S. defense spending.

Subscribe now

This week, Sidecar Investor ( SidecarCap on “X”) brings an interesting perspective to our Investor Notebook Q&A conversations. He is a private investor, but his background spans trading, fund management, institutional asset management and wealth management, and he is also runs Sidecar Partners, an investment firm built around “partnering with exceptional business operators for the long run.”

He has a simple approach to investing: find good businesses, back great management teams and give the best ideas enough time to play out. He is especially interested in smaller companies where the financials may still be messy, businesses going through a change in capital allocation, and situations where the market may be underestimating how far a company can go. His comments on management, concentration and the advantages individual investors have over large funds are particularly relevant for anyone investing in microcaps.

We also get into some of Sidecar’s biggest wins and mistakes, including why he has held Amazon since 2015, why he wishes he had never sold Winmark (Nasdaq: WINA), and why Sears Holdings (formerly: SHLD) remains a reminder of the dangers of making an investment more complicated than it needs to be. He also discusses Happy Belly Food Group (CNSX: HBFG) and Innovative Aerosystems (Nasdaq: IA), explains why some asset-sale situations are not really turnarounds, and shares the books and investors that have influenced his thinking.

Skull Sessions is a collaboration with Geoinvesting.com, a full-stack microcap research platform and MS Microcaps LLC , home of the Microcap Quality Index (MSMqi).

Standard Questions:

1. Tell us about your investing journey. What is your investing framework and research process like today and how has it evolved over time? I see that you actually come from a finance background.

I have been investing since I was 12, starting with money earned from cutting grass. I have always been fascinated by the game and the independence it can provide. In school, business and investing were the only subjects that held my interest which showed in my grades.

I have never been the smartest person in the room but found myself in a variety of roles including operations, trading, fund management, institutional asset management and wealth management. This helped me understand how the machine that drives the market works, and perhaps how to take advantage of its mistakes. Outsiders may be surprised at how many decisions are driven by career risk and benchmark-awareness and trying to keep different stakeholders happy at the same time.

I also noticed that many legendary investors put more weight on management as they gained experience, so I implemented that immediately, before really appreciating its power. How fantastic is it that with the push of a button, you can hire an exceptional CEO to work for you? And stock prices fluctuate wildly, creating the opportunity to do it at prices that would never be available in private markets.

My goal is to do a few simple things very well. It’s hard to overstate the advantage individual investors have by just playing a simpler game. It is absurd that one person at a desk can outperform billion-dollar funds but it happens all the time.

2. How long will you hold a stock and what have you learned from being a concentrated investor? Do you have an example of a stock you hung on way too long that did not work? And one that is currently playing out well? What is a stock you sold too soon that you wish you still owned? I’m particularly interested in understanding what you learned from the ones you held too long and the ones you sold too early.

It’s not unusual for me to buy a starter position then if I don’t develop the confidence to make it larger, sell within 6 to 12 months.

What works for me is building 5-10% positions then letting the portfolio concentrate itself. I have found the strongest returns don’t come from lottery-ticket investments. More often, they come from situations where a low double-digit annualized return seems likely, then management pulls a few rabbits out of their hat which drives the fundamentals significantly higher.

Sears Holdings (formerly: SHLD) is the stock I held too long. I still own it and keep the shares as a reminder to look for simpler ways to make money. Too many things had to go right and even if they did, it was never going to be a great business.

On the other hand, I have owned Amazon (Nasdaq: AMZN) since 2015. It’s fascinating that the same long-term focus that led to the Sears disaster also helped me own Amazon through lots of ups and downs. Maj - you recently had a tweet about forgetting that you own a stock that just keeps executing. I feel that way about Amazon which has delivered a 25% annualized return for more than a decade. They just keep building on new opportunities and I don’t have any plans to sell it.

Winmark (Nasdaq: WINA) is the one that got away. I sold it for around $35 on valuation, to book a quick profit. Investors should study John Morgan who is a talented entrepreneur and a straight-shooter. I invested based on reading a single article about him. The rationality just jumped off the page. Winmark’s model was certainly understandable and also a good example of how a great business can become far larger than anyone, even those who are building it, expect. If you ask 10 investors what their biggest mistake was, the answer is often selling a great business too soon.

Sam Walton said “I believe the folks who’ve done the best with Wal-Mart stock are those who have studied the company, who have understood our strengths and our management approach, and who, like me, have just decided to invest with us for the long run.” My goal is to be this confident in every investment although only a few will earn/deserve this level of commitment.

3. What types of companies or situations are you actively looking for right now? What are up to 3 stocks you’re excited about today, and what is the market missing?

I am most interested in early stage companies where the financials are still messy or more established businesses where I expect the way they allocate capital to shift, usually because management has changed. I am very comfortable with the uncertainty these situations come with.

Happy Belly Food Group (CNSX: HBFG) is a good example. When I invested, the company was a hodgepodge of assets and an unfocused business model. Shawn Moniz and his family controlled the company and brought in restaurateur Sean Black to help chart a new direction, first as CIO and eventually as CEO. From a near standing start, they have acquired about 10 brands and have grown the business to about 100 units, with a pipeline of roughly 700 and counting.

The business model is crossing into profitability and has the potential to generate excellent economics. The market seems to understand the geographic footprint in Canada but may be sleeping on the opportunity in the United States, where I expect franchising deals to be lumpier but larger. This is not management’s first rodeo as Black built several other restaurant brands with exits to MTY and Fairfax-owned Recipe. This experience significantly reduces execution risk. The company is also at the size where institutional fund managers may get more involved, potentially creating additional demand for the shares.

An example of capital allocation shifting is Innovative Aerosystems (Nasdaq: IA) , which makes flight controls and avionic equipment. Unfortunately, the founder and CEO passed away suddenly in 2022. He ran the business well but conservatively. The new CEO, Shahram Askarpour, has been with IA for more than 20 years and has jump-started the acquisition engine, including several opportunistic deals. Importantly, there has been little dilution.

The economics are very good, and other companies in the industry have created tremendous value for shareholders. The valuation is fair, which is about as much as you can ask for with a company of this quality and with this long of a runway.

If I had a time machine, I would go back and cancel the meeting where the style-box was invented. You can probably sense I am a go-anywhere investor and over the past five years have found the most compelling opportunities in microcaps.

Personalized Questions

4. You seem drawn to smaller service businesses; companies with recurring revenue and strong customer relationships. What characteristics make you believe a “boring” service business can become a great compounder? What are the red flags that tell you a service business is not a good fit, even if the numbers look attractive?

Exceptional operators are often drawn to mundane yet essential businesses because of the stability they create. Decisions on how to allocate capital are easier when you are confident 95% of this year’s revenue will come back next year. There also seems to be a glitch where the market often understands the near-term growth potential but underestimates the durability of that growth. In any given year, these companies are also unlikely to be among the best performers, perhaps putting a ceiling on the valuation. There is always something more exciting to do.

When it comes to red flags, I’ve found it’s best to trust your gut. If something doesn’t feel right, it’s often because a dozen small things don’t quite add up. Even if you can’t pinpoint what’s wrong, that feeling is a good reason to not buy or to sell. This has helped me avoid several investments that would have turned out very poorly.

5. When you invest in a company, how important is the relationship you build with the owner or management team? What are you looking for in that relationship?

I rarely talk to management and put most of the emphasis on how they engage with shareholders and their track record. People give themselves away through subtle clues and I am ultimately looking to partner with CEOs who are candid about the company’s potential and risks and are looking for like-minded shareholders, not trying to please everyone. The paradox is these companies rarely need outside capital and are not promotional, which can make them hard to find.

6. You have some great posts on X. I would say even a sort of a master class presentation. Let’s talk about a few of your posts on “X”.

● One of my favorites is about turnarounds because I invest in a lot of turnarounds, especially when there’s asset sales involved. But you don’t call these turnarounds. You said: “Some of the lowest risk, highest return investment opportunities come when management sells secondary assets that have been a distraction to go all-in on a strong core business. While often confused with a turnaround, it’s the exact opposite.” Maybe you can talk a little bit about what you mean here, and maybe give an example of some of your best “not a turnaround” asset sale wins.

○ I am building a position in one that perhaps we can talk about at another time. The point is that even management teams with solid businesses can get bored and look for new things to do, sometimes in the name of diversification. It takes a lot of discipline to stay in one’s lane and if the business produces more cash than it can intelligently reinvest, return it to shareholders. Special dividends and tender offers can be a strong signal management is thinking about this rationally.

● Here’s another one I love. It kind of reminds me of people taking Peter Lynch’s “buy what you know mantra a little too literally.”
“A company I own acquired a business that more than doubled its size. I had never heard of it before, and the temptation, and traditional route, is to dig in and see if I ‘understand’ it. While that may make me feel better, this level of precision is usually an illusion.”

○ I suspect a lot of fundamental research, especially on large companies, is collecting anecdotes that create a false sense of confidence about the future. A lot of what people see is a movie set and if they knew how messy companies are on the inside, they’d probably never invest. Smaller companies are different. They are simpler and it’s possible to pick up pieces of information and develop a unique perspective about its future. They are also going to come with surprises, and the whole point of partnering with exceptional operators is to try to skew them toward being more pleasant than not. I try to be realistic about what I can know about a company or its future and remember that Black Swans can also be positive.

This may sound extreme to people with a more traditional investment approach, but one of my largest holdings has been and will continue to be acquisitive because they have a huge NOL to take advantage of. To me, the crucial question isn’t whether I think the businesses they buy are attractive. It’s whether I trust their ability to assess those businesses correctly. Public market investing is ultimately about outsourcing capital allocation to someone else, and I try not to be an arm chair expert.

● And finally: “Legendary investors like Fisher, Price and Lynch never talked about mental models or variant perception. Suspect there’s a lesson there.”

○ The investment industry likes to dress things up with advanced math and fancy language. Stripping it away is liberating. Unlike supercomputing or flying a fighter jet, there isn’t a fundamental reason investing has to be complex. Many investors have a phase where they are exploring ideas and trying to apply what they learned in other domains. I certainly did. It’s important to get through this as quickly as possible. The goal is to be rational and pragmatic and complexity can make the truth harder to see.

7. Are there any off the beaten path books you would recommend?

The Power Law by Sebastian Mallaby, which is about venture capital, is especially relevant for microcaps. It is filled with case studies of how great investors like Arthur Rock were able to back some of the world’s largest businesses early, before their success was obvious and when there was little data to analyze. It is also very candid about how, by definition, the best founders are going to be eccentric, and some things that are often viewed as turn-offs should instead be seen as turn-ons. I plan to spend the rest of my life trying to find them, and it’s incredible that partnering with just one early and having the courage to hold can change the trajectory of an investor’s life.

8.Please give us one person you would like to see us interview.

Scott Felsenthal who has a unique combination of experience running private and investing in public businesses.

Subscribe now

After publishing our first written Skull Session with Tim Heitman on September 4, I wanted to keep the series going with some stock picking conversation.

For now, I’ll be calling these chats: Investor Notebook…

So, for the second edition, we’re featuring Sergi Mascaro, an investor who has been involved in the markets since he was a teenager and has developed a differentiated approach to finding small companies, early.

Over the last several weeks, I’ve been doing a good deal of communicating with Sergi. So many of his X posts talk about stocks I own, or are being covered at the Microcap Investing Cliff Notes Substack and GeoInvesting, like and $SCIA.

Sergi has built his process around finding companies going through early inflection points. His background in physics and CFA studies gives him a pretty analytical mindset, yet he’s not interested in making investing complicated. He talks a lot about knowing companies for years and how that helps him to move quickly when the facts change.

There’s a lot in this conversation that should resonate with microcap investors. We get into his research process, how he thinks about stock price action versus the underlying business, what he looks for in management, why he likes site visits, and how he handles a stock that falls sharply even when the business continues to improve. He also shares stocks of he finds particularly interesting right now, including Manitowoc (NYSE: $MTW) and Guerrilla RF (OTCMKTS: GUER.

Here’s the full conversation.

Skull Sessions is a collaboration with Geoinvesting.com, a full-stack microcap research platform and MS Microcaps LLC , home of the Microcap Quality Index (MSMqi).

Standard Questions

1. Tell us about your investing journey, before and after investing. What is your investing framework and research process like today and how has it evolved over time?

I will try to make this long story as short as possible without losing the essence of my investing journey.

I started moving in the market when I was 15, in 2010. I was curious about the market before, so I don’t know if there is a “before investing” moment. I had some money saved and wanted to grow it, so my dad introduced me to the stock market at that time. I was very young, but I spent a bit more than one summer trading and trying things like shorting banks, so I lost 50%, or $1,500, and when my mum discovered that loss, she prohibited me from touching the stock market ever again.

A few years later, when I was studying physics at university, I came back to the market and mainly read a few Technical Analysis books from gurus, and nothing made sense to me, especially when comparing it to Quantum Mechanics theories that I was studying back then. Even so, I had to try again and lost some more money, obviously.

Finally, when I was 22, I started studying for the CFA Exams, and at that time the real party began, because it was when everything started to make sense in my mind. I am almost 31 now, so I am a very young investor with a lot to learn still.

2022 was a big hit for me mentally, because in 2021 (a very strong year for my PF) I came into too many unprofitable stories with untrustworthy management teams. At that time, I was just getting introduced to the formal and professional investment community, working in a hedge fund for the first time, and everything imploded very fast, including my personal account. In addition, during those 2 years I started following a few more experienced investors as if they had God’s word, which was a very significant mistake. Since then, profitability, track record, trustworthy management running the business, and thinking independently have been very important aspects for me.

Currently, my investment framework or research process is about going after companies that are going through an early inflection process, and trying to make it easy and simple. I don’t want to fight the market at all. Many of my top picks right now are from companies that I know well and have been following for 4–5 years, and this experience allows me to identify and aggressively act on the inflections earlier than others, enjoying early the also-known-as discovery process. Of course, I am every day checking new candidates to add to my long list of followed companies, but this is usually a slower process, even though I have recently made some improvements to my idea-generation flow that have allowed me to increase the number of new discoveries.

2. If someone asked what makes you different as an investor, what would you say is your edge?

My analytical mindset, the way I was introduced to investing, and how my process was built. The ability to act very fast and aggressively or to change my mind overnight if necessary, including elevated turnover. Having a very long list of companies that I know very well and have been following for years.

All of those can be edges versus other investors.

3. What kinds of companies or investment opportunities are catching your attention right now? What are stocks you’re excited about today, and what is the market missing?

I will try to surprise the reader with unknown stocks that I like very much.

1. The Manitowoc Company (NYSE: $MTW).

Manitowoc manufactures and sells cranes. The company experienced a strong cycle in 2008 and, since then, there has been no cycle, but the proportion of sales from services is increasing, coming at an increased margin.

Recently, their backlog has improved 40%+ and the company should be a beneficiary of tariffs, including a positive ruling on anti-dumping from Japanese competitors. Manitowoc is also seeing demand from data centers, and at some point a cycle of renewing the cranes bought during the 2008 boom will start, given that most of them are 15 years old versus a 9 to 10 year normal life. The thesis sums up noticing some significant improving demand factors. If the company grows from the current $2.4B in sales to their target of $3.0B, it would be trading below 4x EBIT. Plenty of upside in that case, coming from just a small improvement.

2. Guerrilla RF (OTCMKTS: $GUER).

Guerrilla is a radio frequency chip supplier that shifted from low-margin telco and auto markets to higher-growth catalog markets. Catalog serves drones, military, test and measurement, and satellite telecommunications. At a recent interview, management shared that the demand signals they are observing in the UAS and counter-UAS segment are something that they have never seen before.

The company is increasingly exposed to the higher-growth, higher-margin verticals that now represent more than 60% of the company and are growing in excess of 140% in Q2. This shift allowed Guerrilla to move to profitability, printing $1M in EBIT in the last Q2 (important to note that the company has some significant warrants and preferred stock), but I suspect there is a lot more to come, given that backlog more than doubled to $13.6M, against $8M in revenue in Q2, up 49% YoY. Guerrilla is currently traded on the OTC market, but it recently shared that they are working to uplist to the Nasdaq, which I expect could be a strong catalyst in addition to the underlying inflection in the business, coupled with accelerated profitability.

4. When a new idea enters your radar, what does your research process look like before you’re willing to invest?

The best ones I know I have to buy in just after 5 minutes. This is because if they are coming from the list of companies that I have already followed for years, it means that something big changed or happened. Maybe a surprise, maybe something I was hoping to happen. And suddenly, an ugly duckling becomes very attractive. A recent example of that is Camplify Holdings (CHL.AX), which I have been following since 2021. I sold all my shares years ago because management was unable to run the business at profitability, which was a red flag. Also, they made a large acquisition that I didn’t like and it finally imploded. Now, suddenly, they turned the business around and did $2M net profit in one half against a $10M EV, after cutting costs significantly and improving the M&A integration issues that they had.

If the new idea is a new discovery, I like it very much when it is obvious just from researching for a few minutes.

Investing is not like a Quantum Mechanics model. The easier it is, the better, because it will make sense to more investors and it will attract more capital faster. The easier part is when the discovery process starts and you are just there before others. That said, most of the process begins after buying. Talking to management again, researching deeper into previous company cycles, understanding expectations, the type of investor owning the stock at this moment, the macro tailwind, what is driving the change, talking to competitors, customers or former employees. In summary, understanding what is going on, and starting to dream of what can materialize in the future.

Personalized Questions

5. You’ve written about stocks experiencing very large drawdowns even after positive business developments. Also, sometimes a company reports a great quarter and the stock still falls. When that happens, how do you figure out whether it’s just market noise or a sign that your investment thesis needs to change? How do you decide when a falling stock is a great opportunity versus a sign that the market knows something you don’t?

This is a good question because part of my investing framework is making it simple. Don’t fight the market. When the market is going against me I am paranoid, as I respect it too much. But even so, sometimes it starts simple but… the market is changing every day and it suddenly gets more complicated for a company that you now know very well… So, what to do now?

An example of that is $OCC, a stock I bought for the first time at $2.5 in December 2024. The progress made here has been tremendous and the last report was an outstanding achievement that was almost a dream for me. Even so, the stock is at a 50%+ drawdown after reporting Q2 and I don’t think at the peak the valuation went too high; it was still well below peers.

The way I go through this challenge is the following:

1. Selling to protect the capital and mental wellbeing is always a possibility, but this comes at the cost that maybe you will need to rebuy everything higher and very fast, suddenly. And the anchoring bias is very real.

2. Researching further. Talking to competitors, customers and former employees. Visiting the company if necessary. Understanding if this is only an issue with your stock, the peer group or the industry is also helpful. Every three months a new report comes that can change the picture and the narrative again.

3. Diversifying from investing. My day-to-day bills are not paid using investing money; I have another job or profession. But, if lucky, investing can be a very strong boost.

Coming back to OCC, which fits the question, what was going on with this company is that management sold some stock after the report, affecting the momentum. This has been further accelerated by the AI bubble fears and drawdowns in AI stocks. But everything I am finding here is positive… So this is challenging because I have no reason at all to sell, but I respect the market very much, and for now I am not looking to sell. At the end, it comes down to sizing a bet, with luck, timing and patience also playing a role.

6. You’ve said that a great investment analyst needs to also be a great stock analyst. What do you mean by this?

Writing an investment thesis is a great task, but sometimes when you finish it you can start reviewing it again because things changed fast.

I would never look at the investing process while taking away the understanding of the stock moves, what is driving it and why. My personal view is that the market tends to know things and is in general very clever, so the stock price and its variations are variables that I respect very much. For me, it is equally important to analyse the investment case well versus analysing well what is driving the stock moves or the trading dynamics, and this has little to do with technical analysis but with understanding expectations, the type of investor inside it, and previous stock and business cycles.

7. A lot of your X posts break down the numbers behind a business rather than just the story. When you’re researching a company, are there go-to metrics you find yourself coming back to the most, and why?

It depends on the sector, company and moment of the cycle.

For cyclical companies, at the top, valuation multiples are worthless (this is where being a good stock analyst makes an extra difference).

For hardware companies, I like to watch the incremental gross margin and inventories over a few sequential quarters as leading indicators.

But if you are looking for inflections to the better, usually the first sign is called by the management team in the commentary section, which tends to be the first signal of an inflection to the better… but rarely the first signal of a top.

8. You seem to enjoy digging into companies that aren’t getting much attention. What’s usually the first thing that catches your eye and makes you think, “I need to learn more about this business”?

I don’t tend to do theme investing, but this can happen naturally. As a new theme emerges, I tend to find more inflections there. The first thing I like to see in a new stock is a very strong move to the upside, which means a significant surprise happened. Then I want to know what the surprise was, why it happened and if it opens a new door.

It can also happen that I find a bigger company, which will always move earlier, and then try to find a close and smaller peer.

For the companies that I already know, one quarter or one press release can be enough to reassess the full case.

9. When we last spoke, you were on your way to the United States to do some site visits. Have you done site visits in the past? Do you find them useful? What are you looking for?

What I can say here is that when you invest in a company, you are partnering with its people and management team. Knowing well how they think, what their interests are, and whether you can trust them or they will end up lying to you is very important. One of the best ways to discover that and understand the business better is through a site visit. And this makes more sense when the market is going against you.

10. Please give us one person you would like to see us interview.

I would like to know more about Simeon Research.

Subscribe now

Welcome to the first post of our Investor Notebook Skull Sessions: Written Q&A Sessions.

We’re trying something a little different with Skull Sessions. Over the years, I’ve had the opportunity to speak with a lot of experienced investors who have spent decades studying businesses, markets and a myriad of strategies - from deep value to GARP to special situations. They have had incredible insights to share, but between managing portfolios, doing research and running their own businesses, finding the time for a video interview isn’t always easy. And some would just like to remain anonymous.

So for some of our upcoming Skull Sessions, we’ll be sending a handful of investors a set of questions, partly tailored to their investing journeys and giving them the flexibility to answer them on their own time.

I first experimented with this format by curating some of our video Skull Sessions we do into Q&A format, but I was not extremely happy with the outcome.

I got a front row seat of the written Q&A format when I participated in Edwin’s Dorsey’s Sunday’s Idea Brunch interview series.

I found that many of my answers were a little better thought out, and that I could dive deeper into some areas, where It might seem that I was just rambling on and on during a video interview.

Even though it took me an entire weekend to get it done, I loved it and here is the great thing that happened. It really helped me see my journey in an entirely new light… a sort of therapy session. In a way, it was actually kind of nostalgic.

Tim Heitman is a great person to kick off this format, who I consider a friend, as much as I do a colleague. Tim has been part of the GEO Investing community for some time and has joined us for Video Skull Session interviews in the past, so many of you may already be familiar with him.

This time, rather than doing another video conversation, I wanted to give Tim the opportunity to go deeper on some topics and experiences that have shaped his approach.

He’s been investing for decades and has developed a thoughtful framework around fundamental research, what he calls “time arbitrage” and investing in smaller companies. He loves talking stocks and is great at breaking down businesses and building models. We had our original Skull Session with Tim back in August 2023, before we launched this Substack. You can watch the video at Geoinvesting along with our take on the conversation here or you can watch it on this Substack, here, where we just published the video yesterday.

There’s a lot here for investors at any stage of their journey. Enjoy…

Skull Sessions is a collaboration with Geoinvesting.com, a full-stack microcap research platform and MS Microcaps LLC , home of the Microcap Quality Index (MSMqi).

Interview Questions: Tim Heitman

1. How did you first get into investing? Tell us about your journey before and after investing. What is your investing framework and research process like today, and how has it evolved over time?

I was fascinated with business and companies from the time I was a teenager. My dad worked at John Deere in national sales and marketing, and he would have other managers over to the house. I was the oldest child, so I was allowed to stay up late and talk to the guests about business. I’d also go through the business section and look at the net price changes from the day before and wonder how all that happened. I even bought the board game Stocks and Bonds and played it for hours. I think I still have it. I was so obsessed with business and investing that many of my friends told me that I reminded them of the Michael J Fox character Alex Keaton from the TV show Family Ties.

I started my career at Fidelity, which was, and maybe still is, one of the most respected investment research firms in the business. I was on the retail side and not the investment side, but I was still exposed to all the philosophy and culture. Research focused discipline has been my focus ever since. I used the S&P tear sheets and Value Line back then, and I still use Value Line today.

The market itself has changed more than my process has. In the ’80s, ’90s and 2000s, most volume on the exchanges was driven by fundamental investors buying and selling for what they perceived to be fundamental reasons. Today, it feels like 80–90% of volume comes from quants, momentum, retail, leveraged ETFs, zero-dated options and other technical, non-fundamental order flow. Daily, weekly, even monthly stock movements are much less driven by actual human fundamental investors than they used to be.

The practical result is that larger-cap stocks are now driven more by themes and momentum than by changes in fundamentals, because passive money flow is setting the price for the incremental buyer. Small and microcaps have little exposure to that order flow. It takes much longer for improved fundamentals to show up in the stock price, which is exactly the advantage for investors who focus there. There is also research showing that once a company moves from roughly $100 million in market cap to $500 million, it lands on the radar of all the flows I just described.

Moving down the market cap scale also changes what you have to pay attention to. The smaller the company, the more the business, the management team and the board matter. It is genuinely hard for someone to run McDonald’s badly for very long before they get replaced by someone better. It is much easier for someone to damage a small restaurant chain so badly it never recovers.

One other thing has changed. I never used to go to investor conferences. In the last five to ten years, I’ve started going to several of them. In-person conversations with management teams and with other investors are still enormously valuable. Idea generation has never been easier. Managing the information overload is the actual problem now.

2. If someone asked what makes you different as an investor, what would you say is your edge?

I agree with Maj’s information arbitrage strategy and find it valuable, but I still think one of the biggest edges available is time arbitrage. Turnover rates for funds have certainly compressed from the 1980’s until today. Investor investment time horizons have shortened.

What that means is that because most investors have such short time frames, you get something close to a zero-coupon bond effect. The value accretes to the long-term investor over time. Even if enterprise value never changes, free cash flow builds and the buildup of cash eventually shows up in a higher stock price.

A lot of investors are still only interested in a ticker and a story. If you actually understand the business, its competitors, its management team and its products, you can use short-term volatility to add alpha. I know that sounds like the opposite of what I just said about time arbitrage. It isn’t. If a stock declines significantly due to what is most likely short term issues (orders pushed out, but not cancelled, temporary decline in gross margins for transitory reasons like tariffs) knowing this provides an opportunity to acquire shares at a very good long-term value.

3. When a new idea enters your radar, what does your research process look like before you’re willing to invest?

1. Start with the available work. There are a lot of good resources for a starting-point fundamental read: Substack, GEO Investing, VIC, Microcap Club, Yellowbrick, Buyside, etc.. Idea generation isn’t the constraint it was 15 to 40 years ago, and there are far more detailed company presentations available. You can get up to speed faster than you used to.

2. Talk to management, either at conferences or on Zoom or through an email. I like doing it in an outline form so they can fill in the answers.

3. Read the SEC filings. Not optional.

4. Use Claude to go through transcripts. Go through last 6 earnings transcripts. Look for forward looking statements and evaluate how good management has been at achieving them. Change in the number of analysts on the call (if any) and what are the most common questions. Also look for any macro or industry comments that can be helpful in understanding the business.

5. Maybe build a model to tinker with, but I don’t treat it as the definitive step. Models are helpful, but getting earnings estimates and prices targets correct to the penny is not as important and just having general ranges of outcomes. I also do them by hand.

You need to be comfortable with 70–80% of the story. You are not going to get to 100%, and waiting for it costs you the opportunity.

4. What kinds of companies or investment opportunities are catching your attention right now? Are there any you’re particularly excited about today, and what do you think the market is overlooking?

Preferred stock on hotel REITs. Hotels and New York City real estate generally. Real estate developers. Small food companies. I’ve also been interested in utilities, industrials and defense companies since well before they all became part of the AI / data center / reshoring / Iran trade.

5. You spent many years investing in larger companies before moving into micro and nanocaps. What surprised you most about investing in smaller companies?

How wide the range of quality is in management teams, and in boards.

The bigger surprise was how often independent board members fail to act within their fiduciary responsibility to protect shareholder interests. It happens far more than I expected. I think part of it is the lack of a deep bench of successful activists in the space. Large-cap funds have firms like Starboard, Elliott, JANA Partners and ValueAct keeping boards honest. Down here, there just isn’t the same pressure because they are fewer sheriffs to keep management teams and boards in line.

6. You’ve studied a lot of special situations and turnaround companies. What separates a real turnaround from a company that is simply a declining business trying to tell a better story?

Leadership, and specifically the skill set of the new management team.

If a company has underperformed for a long stretch, it may be because it’s been under-managed… or it may be because the business is inherently poor. Those look similar from the outside and they end very differently.

The piece people underrate is culture. It is incredibly important that the company culture can actually absorb the new ideas and actions the new management team thinks are necessary. And sometimes the answer is simpler than a turnaround at all: the company has finally finished being an R&D development story and the product is genuinely ready to sell. Or many times in the oil and gas space or industrial space, a long-term depressed cycle has changed and now there is a real opportunity to grow the company.

Turning around a small or microcap company is much harder than turning around a large one. Less access to quality management. Less liquidity. Fewer cheap financing options. More competition.

7. You’ve mentioned using conference calls and transcripts as part of your research process. What are you listening for that most investors miss?

A couple of things. I’m mostly interested in what management says about why they’re doing something. I also want their comments on competitors and on the industry. That tells me what they think is important.

Honestly, about half the call is someone reading the press release out loud, which is a waste of time. Another 30% is analysts asking what’s happened since quarter-end so they can fill in their models. Most of the prepared remarks and most of the Q&A focus on the short term, and that is simply not where I’m interested. Which brings it back to time arbitrage.

The best recent example: hotel REIT and NYC office REIT management teams spent more than a year telling investors on calls that conditions were far better than the general perception, and they gave tangible examples. Nobody cared. The narrative was too compelling and the stocks hadn’t performed in years. In spite of the constant news flow about how the consumer is weak or weakening, hotel REITs have gone up 50-100% in the last year.

8. You’ve said that management plays a huge role in your investment decisions. What are some of the qualities you look for in a management team before you’re willing to invest?

Humility. Honesty… meaning they’re willing to own up to past mistakes. Transparency, which usually shows up as being detail-oriented about their own business.

And a successful track record, but with a caveat: they have to be able to show it was their skill set and not just an industry-wide turnaround that carried them. Also, not all CEOs that were successful at large companies are successful at smaller ones. Sometimes it was the team they worked with, the financing that was available, advertising spend, etc. Also, CFOs that become CEOs are generally less successful.

9. Some of the best opportunities can take months (or even years) to play out. How do you stay patient when you believe in the business, but the stock isn’t moving?

Good question. It is very hard to know the difference between wrong and early, and anyone who tells you otherwise hasn’t held enough dead money.

The way I handle it is to separate the stock from the business. The stock not moving is not evidence of anything. In small and microcap, there’s almost no flow-driven buyer, so improved fundamentals can sit there unrecognized for a long time. That’s the whole reason the opportunity exists in the first place. If I let a flat stock price talk me out of a position, I’d be giving away the exact edge I went looking for.

So the question I ask isn’t “is the stock working.” It’s “is the business doing what I said it would do.” My framework is to understand the why, follow the cash, determine the value. Patience comes from re-running that, not from conviction or stubbornness.

Mostly,I follow the cash. Earnings are an opinion; cash is a fact. If the thesis said this business would generate cash and the cash is showing up, I’m early. If the receivables are building, inventories are growing faster than sales, or the earnings keep getting explained rather than converted, I’m probably wrong.

The other half is management. Did they do the things they told me they were going to do? Not “did the results come in,” because timing slips for reasons nobody controls, but did they take the actions they laid out. Capital allocation tells you most of it.

It helps enormously to write down at the beginning what would prove you wrong. Then you’re checking against something you decided when you were thinking clearly, instead of re-arguing the position after it’s gone against you.

Also do what is called a “pre-mortem”. This is figuring out if the company did not achieve their goals over 3-5 years what were the most likely things in management’s control that they failed to do? This gives you benchmarks and signposts to use along the way to continue to evaluate if the original investment theme was correct, or if you are just moving the goalposts or the investment thesis.

10. Seems like you have invested in a good deal of retail and restaurant stocks. Any reason why?

Simple business models that don’t change much over time, which makes them easier to analyze. And you can look at 20 or 30 companies all exposed to very similar fundamentals at once.

That’s the real value. When everyone faces the same conditions, you can actually distinguish between the quality of management teams in the same industry, and you can tell when a company genuinely has a competitive advantage versus when it’s just riding the same wave as everyone else.

11. You worked at Fidelity when Peter Lynch was managing the Magellan Fund. Any good Lynch stories? Were you ever part of any pitch sessions?

I was on the retail side in Dallas, not the analyst side, so I wasn’t in the pitch sessions. But a couple of things from that era have stuck with me.

SCI: One of Lynch’s biggest winners was Service Corporation International, the funeral company. It rolled up the funeral and cemetery business and was a 30x winner from 1976 to 1990. Lynch’s view was that the ideal stock had a boring name, did something disagreeable, and operated in an industry nobody wanted to discuss at a cocktail party. A funeral-home company was almost perfect.

The two-minute drill: Before buying a stock, Lynch made himself explain in two minutes why he was interested, what had to happen for the company to succeed, and what could go wrong. His line was that if you couldn’t explain the story to your family, or to your dog, you probably didn’t understand the investment.

Dunkin’ Donuts, and why customers can out-research analysts: Lynch pointed to Dunkin’ as the kind of opportunity an ordinary investor might spot first. A customer could see that the stores were busy and that new locations kept appearing long before a Wall Street restaurant analyst formally initiated coverage. His argument was never “I like the doughnuts, therefore buy the stock.” It was a sequence: notice the product, determine whether other customers share your enthusiasm, investigate the unit economics and the expansion runway, then check the valuation. The line worth retelling is that by the time the restaurant analyst discovered Dunkin’ Donuts, the customer might already have watched eight stores open in his neighborhood.

The lesson is that local knowledge is valuable, but only when it’s connected to rigorous financial work.

12. Please give us one person you would like to see us interview.

Andrew Rem

Subscribe now