U.S. Markets open in 6 hrs 6 mins

3 Microcaps With Recent 13-D Activist Investors

- By Holmes Osborne, CFA

We are going to look at three microcaps' special situations for current 13-D filings on the SEC's website. A 13-D is when a large shareholder wants to engage with management and give advice on how the company should be run. As these are small companies, they all fly under the radar of Wall Street.

The first activist situation that we'll discuss is Aurinia Pharmaceuticals Inc. (AUPH). NEA Partners of Maryland purchased 11.4% of shares. Aurinia is a clinical stage biotech, high-risk, high-return kind of stock, focused on immunology. Recently, 12,777,775 shares of stock were sold to raise $28.75 million. The company has a drug in Stage III development (the last stage to receive FDA approval) and has another drug in development to cure lupus.


Aurinia has a market cap of $105.8 million, and NEA is the largest shareholder. Sales and earnings have been falling and/or negative for years. Of course it's a biotech, and the income statement is supposed to be that way. NEA invests in biotech and must see something there.

The next situation is Truett-Hurst (THST). Twin-Leaf Management has taken a 9.78% share of this $12.78 million microcap. Truett grows wine in the Dry Creek and Russian River Valleys of Sonoma County and has contracts with Trader Joe's and Safeway (SWY). Some of Truett's brand names include: Paper Boy, Bradford Mountain, Mad Duck, The Criminal and Fuchsia. I like these innovative names. The company does not grow the grapes but does process and market the finished product.

The company has $4.3 million in cash and $3.9 million in accounts payables. This is to $13.4 million in debt and $4 million in payables. Not a bad ratio of debt to cash and receivables. Sales grew from $21.6 million in fiscal 2015 to $25.7 million in 2016. Earnings per share were a loss of 6 cents in 2016 and 35 cents in 2015. There is a dual-class structure of shares where the founders have a B share that receives more votes.

The stock was about $1 in November 2015 and has been slowly climbing to $1.79. It was almost to $6 in 2014. It's a thinly traded stock because of its small size. A good article on Seeking Alpha explains Twin-Leaf's activist filing. The author of the article opines that Truett is spending too much and should cut costs. The company is also involved in a lawsuit with founder Bill Hambrecht, known for his days of venture capital.

The next stock is The9 Ltd. (NCTY) which has a market cap of $28.44 million. China-based Jun Zhu of Incsight Limited purchased a 21.8% of outstanding stock of this video game developer. As The9 is based in China, I'm not sure how activist situations play out, but we'll still take a look. The stock was almost $50 10 years ago and now trades at about $1.20.

The9 develops "first shooter" video games like "Call of Duty" and "Battlefield." It used to own the rights of "World of Warcraft" for China. The balance sheet is pretty funky. There is $3.3 million in cash and $970,000 in receivables. This is to $6.4 million in payables, $3.6 million in customer advances, $5 million in long-term debt, $3.7 million in short-term debt and $25 million in convertible bonds. There is also a $16.9 million due to customers and a $25 million in refund of game points. That's a first for me on a balance sheet.

The9 is a weird company, but the stock is down. I assume there would be a large dilution if/when the convertibles mature.

So these are three microcaps with current 13-D filings. They are tiny companies, good for the individual investor. Of these three, I'd probably look at Truett as I understand wine better than video games and biotech. Still, you can make money by following 13-Ds.

Disclosure: We do not own stock.

Start a free seven-day trial of Premium Membership to GuruFocus.

This article first appeared on GuruFocus.