Morningstar Magazine - October/November 2017 - 96

Ten Questions

Perritt's Michael Corbett on micro-cap
inefficiencies and opportunities.
Laura Lallos, Morningstar magazine's managing
editor, interviewed Corbett in July.
1. Perritt's process was built on academic

6. Where are the best opportunities today?

research demonstrating the "small-firm effect."
How has it evolved over time?

Valuations appear slightly more favorable in
the lower market-cap deciles. The more
interesting fact is that future earnings growth
appears stronger in the micro-cap and
ultra- micro-cap world.

One of the tools we've added is a 9-factor
evaluation strategy that was developed by Joseph
Piotroski at the University of Chicago to
judge companies' financial strength. Companies
that pass the majority of these factors exhibit
enhanced shareholder value. We also endeavor to
obtain a more detailed understanding of the
motivations of other majority shareholders, to align
ourselves with those that share our goals.

A mid-cap strategy is a possibility, but Perritt will
never venture into the larger-cap market.
The large-cap market is very efficiently priced.

2. Perritt MicroCap Opportunities PRCGX has had very

8. Do the qualities you look for in a company extend

to how you run Perritt Capital Management?

We tend to look for companies with processes
and values similar to ours. For example,
at PCM we place a high priority on fluid and
consistent communication among our team
and with our clients to ensure we are successful
within our marketplace.

MicroCap PREOX?

The ultra-micro-cap market behaves quite
differently than the rest of the equity markets,
so this is a great way to diversify for many
investors. Several of our shareholders use this fund
as a liquid private equity alternative.

9. How do you find and keep analysts who are good
fits with your small firm?

advantage, or are there micro-cap companies with
entrenched moats against competition?

Our Chicago location gives us access to a terrific
talent pool. We look for individuals with
a passion for investing in the micro-cap space.
Our analysts get the opportunity to interact
with and influence the executives in the companies they research, something they would not
likely experience with a larger firm.

We typically consider companies in niche markets.
By their very nature, they have less competition.

10. What book is on your nightstand now?

4. Is size essential to maintaining a competitive

of the market?

We never make investments with the idea
an M&A deal is in the future, but it does happen
regularly in our space. MicroCap Opportunities
saw 9% of its holdings bought out in 2012. It was

Morningstar October/November 2017

cap strategies?

low turnover. Is patience key in this space?

5. How significant is M&A activity in this segment

96

7. Might Perritt branch out with mid- or larger-

Investor patience is critical. Allowing time for
management to establish and develop their
businesses is the key to success. A low-turnover
approach also keeps trading costs down.
3. Why should investors consider Perritt Ultra

Michael Corbett is CIO of Perritt Capital
Management and portfolio manager of the
Perritt Funds. He was profiled in the
April/May 2010 issue of the magazine, and
Perritt Ultra MicroCap PREOX was noted
as a success story in a recent 10-year
retrospective of the Undiscovered Manager
feature in the June/July issue. Corbett
joined Perritt Capital Management as
a research analyst in 1990 and became the
majority owner of the firm in 2010.

slower in the micro-cap space in 2016, but we are
seeing an increase this year.

I am not one to have a book on my nightstand,
but I do have an iPad on my nightstand,
which I use to keep up with the business, watch
trends, check emails, etc. A book I do refer
to regularly is Ibbotson's Stocks, Bonds,
Bills, and Inflation. I love to review the history
of the markets.



Table of Contents for the Digital Edition of Morningstar Magazine - October/November 2017

Contents
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