Many investors shy away from investing in micro capitalization stocks and generally for good reason. On average micro-cap stocks are more dangerous and volatile than their larger peers, and many of these business are in the fragile stage of their lifestyle were failure or bankruptcy is still a possibility. While this is no doubt true, micro-cap stocks have historically provided some of the highest returns for investors and if you are able to stomach the extreme volatility they could be an investment strategy that can work for you.
When it comes to investing in micro-cap companies, a thorough analysis of financial statements is key to finding a successful investment. Generally speaking, there are a few key things that you should be looking for when analyzing financial statements, but as with most every single question involving investing, “it always depends.” While certain lines of a balance sheet or income statement may be more important than others, there can be hidden value traps among these SEC (Security and Exchange Commission) cleared documents. The best piece of advice I can give you is that if you don’t feel comfortable with any portion of a company, don’t invest. Warren Buffet always use to comment that if you cannot determine if a company is worth buying, that it is too complicated for you to invest your capital in that company. This is not supposed to be embarrassing, it helps to make sure you are getting you’re homework done. Proper research is very important so you don’t encounter any surprises later on down the road. Wouldn’t it be great if all investors took this careful approach to investing…that is another story for another day, let us get down to the fundamentals.
Company Description and Business Model
Build-A-Bear Workshop Inc. (BBW: 7.49, -0.01 (-0.13%)) is a retailer of do-it-yourself plush animal toys. In case you are unfamiliar with the company, they have stores which are actually factories. You can go to the store and build any sort of animal you can think of imaginable with more accessories than you could possibly imagine. The experience of building your own lovable animal is at least half of what they are selling to their customers. The company operates over 350 stores worldwide in over a dozen different countries.
Step back for a minute and try to get a grasp of the sheer genius that went into designing this business model. The stores only have a few employees because you are assembling your own animal, they are just there to help with technical difficulties. The distribution centers do not need any workers because they are just shipping boxes of materials to each location, not assembling anything at these locations. Their overhead is extremely low, and their materials are fairly cheap.
