SA Interview: Small And Microcap Investing With Aaron Warwick

Summary

Aaron Warwick focuses on opportunities where the market has not yet figured out or appreciated a company’s fundamental business and/or upcoming catalysts.

His concentrated portfolio approach, typical traits of a “breakout” investment and why he focuses on small and microcaps are topics discussed.

Aaron Warwick shares a long thesis on Quipt Home Medical.

Feature interview

Aaron Warwick is an individual investor who enjoys collaborating with others on Seeking Alpha, as well as on the new Breakout Investors platform he helped start. He focuses on opportunities where he believes the market has not yet figured out or appreciated a company’s fundamental business and/or upcoming catalysts. We discussed how to tell the difference between an unwarranted selloff versus one that is warranted, how following a stock for years can provide an edge and how to separate the signal from the noise listening to management on conference calls.

Seeking Alpha: Walk us through your investment decision-making process. What area of the market do you focus on and what strategies do you employ?

Aaron Warwick: First of all, I want to express my thanks for this interview and allowing me to share some of the things I have learned over the years with other Seeking Alpha investors. So many in the Seeking Alpha community have helped me, and it’s always good to be able to pay that forward. I also want to thank my mentors (who wish not to be named) for all the guidance they have given me, and continue to provide.

In terms of my decision-making process, it may seem strange given that I tend to make concentrated investments, primarily in the volatile small cap space, but my first step in the decision-making process is assessing risk. There’s a phrase: “The best way to make money is to not lose money.” Earlier in my investing life I made the mistake of focusing on the reward side of the equation. This led to some nice wins, but then I would give it all back on another investment. So, allocating for risk is of the utmost importance to me. But that is something I can only determine, of course, through extensive research.

In approaching the market, I primarily focus on small or micro cap companies, which I know we will discuss later my reasons for that. But I do not focus on any specific industry. I focus instead on situations where I believe there could be a disconnect between the company’s fundamental value and the market pricing. And when I say that, I don’t mean I am looking for a 20-40% mispricing, unless it is something very short-term, like I wrote about with respect to CRSS in 2021. Normally, I am looking for the possibility of at least 100% upside. And that does not mean the stock should immediately be 100% higher, but that with a few things going the right way for the company, in the next year or two, I see that it could or should be at least 100% higher.

A few years ago, I really had to spend a lot of time looking for companies. I went to the LD Micro Main Event and attended many of LD’s virtual events, and still do. But, because I can’t watch every single one of the presentations, I would give them about five minutes max to capture my attention, and if they did not, I would move to the next. And I think that’s one benefit of my approach: I’m not looking to make twenty different investments each representing 5% of my portfolio, or less. I’m looking for companies that could be anywhere from 5-20% of my portfolio at a given time, depending on how much risk I project. But one of the advantages of my risk assessment process and my desire for a concentrated portfolio, is my ability to pass on many investment opportunities and never look back.

I think the final thing to note here, as I know we will cover several other things later in the interview, is that I manage my allocations percentages like a hawk. This allows me to naturally take advantage of fluctuations in the market or in my more volatile positions. If a stock runs, I trim it so it does not become too large as a percentage of my portfolio. Likewise, when it dips, I will add some more so that its percentage allocation in my portfolio does not become too low. Doing this regularly ensures that I almost always have cash available for these fluctuations. […]

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