Form N-CSR PERRITT FUNDS INC For: Oct 31

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MicroCap Opportunities Fund

Ultra MicroCap Fund

Annual Report

October 31, 2021

The PERRITT MICROCAP OPPORTUNITIES FUND will, under normal circumstances, invest at least 80% of its net assets in a diversified portfolio of common stocks of United States companies that at the time of initial purchase have a market capitalization (equity market value) that is below $500 million (referred to as “micro-cap” companies).  The Fund seeks to invest in micro-cap companies that have demonstrated above-average growth in revenues and/or earnings, possess relatively low levels of long-term debt, have a high percentage of their shares owned by company management, and possess modest price-to-sales ratios and price-to-earnings ratios that are below their long-term annual growth rate. At times, the Fund may also invest in “special situations” such as companies that possess valuable patents, companies undergoing restructuring, and companies involved in large share repurchase programs.  Investors should expect the Fund to contain a mix of both value-priced and growth stocks.

The PERRITT ULTRA MICROCAP FUND will, under normal circumstances, invest at least 80% of its net assets in a diversified portfolio of common stocks of United States companies that at the time of initial purchase have a market capitalization (equity market value) that is below $300 million (referred to as “micro-cap” companies). The Fund seeks to invest in micro-cap companies that have a high percentage of their shares owned by company management, possess relatively low levels of long-term debt, have a potential for above average growth in revenues and/or earnings, and possess reasonable valuations based on the ratios of price-to-sales, price-to-earnings, and price-to-book values. The micro-cap companies in which the Fund may invest include “early stage” companies, which are companies that are in a relatively early stage of development with market capitalizations that are below $50 million. At times, the Fund may also invest in unseasoned companies, companies that are undergoing corporate restructuring, initial public offerings, and companies believed to possess undervalued assets.

Annual Report

October 31, 2021

Perritt MicroCap Opportunities Fund

Michael Corbett,

Portfolio Manager

For the fiscal year ended October 31, 2021, the Perritt MicroCap Opportunities Fund posted a 64.12% gain which compares to the gain of 62.55% for the Russell Microcap Index and the 50.80% gain for the Russell 2000 Index.  The Fund and benchmark performance details can be found later in this report.

 

All industries had positive contributions to the Fund’s performance, except for consumer staples.  The strongest group of stocks for the Fund was from communication services and energy, each with gains well more than 100%.  On an attribution basis relative to the Fund’s benchmark, the Fund outperformed the most within healthcare and financial services.  We are currently underweight to the Index for both healthcare and financial services industries.  Individual stock selection also had a strong positive attribution for the Fund.  Some of the largest gains came from Tecnoglass (TGLS) which rose by 546% in the past 12 months and U.S. Global (GROW) rose by 141% in the past year.

 

The past year started off strong for both the stock market and economic growth.  Most of the Fund’s gains occurred in the first six months of the fiscal year and the U.S. economy also experienced strong growth in that period.  It seems clear to us that growth and projections for further growth moderated as optimism waned due to more coronavirus uncertainty throughout the world.  While the economies are reopening, the pace seems to be less than previously expected.  The markets and the worldwide economy are slowly but surely adjusting to a world with the virus still among us.  As we have noted in the past, the U.S. Federal Government has provided more than $5 trillion in fiscal stimulus in the past couple years, and the Federal Reserve has injected another $4 trillion into the economy by purchasing a variety of bonds.  While recent growth has been choppy, these efforts should result in one of the strongest economic recoveries from a recession in decades.  Therefore, we continue to believe it is prudent to make investments in economically sensitive companies.

 

We remain severely underweight in healthcare stocks relative to the Index since valuations remain very rich, and most healthcare companies are not profitable.  Profitability or near-term profitability remains a requirement for us to make an investment.  We also have a big overweight in industrial and information technology.  As was said earlier, we believe reopening of the economy will eventually occur and our investments in economically sensitive industries will pay big dividends.  We are currently overweight, or as some call it an active weight, in economic industries, such as industrial, information technology, and materials by more than 35%.

 

During the past year, we sold 20 companies from the portfolio.  Three companies were sold after receiving acquisition offers: Biospecifics Technologies, DSP Group and GP Strategies.  Eight companies were sold after reaching their long-term price targets.  There were also eight companies sold due to a downgrade in their long-term outlook for their businesses.  Lastly, we sold one company, Federal Signal (FSS), since it exceeded our definition of micro-cap.  We purchased 18 new companies for the

 

Perritt MicroCap Opportunities Fund

portfolio, all from different industries, but the bulk of them were from industrial and material industries.

 

As of October 31, 2021, the Fund’s portfolio contained the common stocks of 90 companies.  The Fund’s 10 largest holdings and detailed descriptions can be found in the following pages of this report.  Based on our earnings estimates, the Fund’s portfolio is trading at approximately 14.2 times our 2022 earnings estimate.  We are forecasting the average company in the portfolio will grow earnings at nearly 30% in 2022.  Stocks in the portfolio are priced at slightly more than 1.5 times average revenue and the median market capitalization is approximately $233 million.  Finally, the average stock in the Fund is trading at 1.9 times book value and less than 10.2 times Enterprise Value to EBITDA (earnings before interest, taxes, depreciation, and amortization).  The valuation characteristics for the MicroCap Opportunities Fund are more attractive than the Fund’s benchmark Russell Microcap Index.  The Russell Microcap Index is priced at nearly 3.0 times revenue, 15 times earnings and more than 2.0 times book value.  Lastly, it is important to note than more than 50% of the companies within the Russell Microcap Index are not profitable, which compares to only 10% for the Perritt MicroCap Opportunities Fund.

 

I want to thank my fellow shareholders for their continued support and confidence in the Perritt Capital Management team.  I have been a shareholder of the Fund for more than 30 years and have nearly half of my liquid investments in the Perritt Funds.  The Perritt team remains dedicated to investing in high quality micro-cap companies at attractive valuations.  If you have any questions or comments about this report or your investment in the Perritt MicroCap Opportunities Fund, please call us toll-free at (800) 331-8936 or visit our web site at www.perrittcap.com.  Please refer to the prospectus for information about the Fund’s investment objectives and strategies.

 

 

Michael Corbett

President

 

Perritt MicroCap Opportunities Fund

Mutual fund investing involves risk. Principal loss is possible. The Funds invest in smaller companies, which involve additional risks, such as limited liquidity and greater volatility. The Funds invest in micro-cap companies which tend to perform poorly during times of economic stress.

 

Past performance does not guarantee future results.

 

Earnings Growth is not a measure of the Fund’s future performance.

 

Opinions expressed are subject to change at any time, are not guaranteed and should not be considered investment advice. Please refer to the Schedule of Investments in the report for more complete information regarding Fund holdings. Fund holdings and sector allocations are subject to change and should not be considered a recommendation to buy or sell any security.

 

Russell Microcap Index is a capitalization weighted index of 2,000 small cap and micro-cap stocks that captures the smallest 1,000 companies in the Russell 2000, plus 1,000 smaller U.S.-based listed stocks.

 

One cannot invest directly in an index. The index is used herein for comparative purposes in accordance with SEC regulations.

 

Book Value is the net asset value of a company calculated as total assets minus intangible asset (patents, goodwill) and liabilities.

 

Enterprise Value is a measure of a company’s total value, often used as a more comprehensive alternative to equity market capitalization. EV includes in its calculation the market capitalization of a company but also short-term and long-term debt as well as any cash on the company’s balance sheet.

 

Enterprise value to EBITDA Equals market capitalization + preferred shares + minority interest + debt - total cash divided by EBITDA.

 

The semi-annual report must be preceded or accompanied by a prospectus.

 

The Perritt Funds are distributed by Quasar Distributors, LLC.

 

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Perritt MicroCap Opportunities Fund

Perritt MicroCap Opportunities Fund versus

Russell Microcap^® Index and Russell 2000^® Index

 

There are several ways to evaluate a fund’s historical performance.  You can look at the total percentage change in value, the average annual percentage change, or the growth of a hypothetical $10,000 investment.  Each performance figure includes changes in a fund’s share price, plus reinvestment of any dividends (or income) and capital gains (the profits the fund earns when it sells stocks that have grown in value).

 

Cumulative total returns reflect the Fund’s actual performance over a set period.  For example, if you invested $1,000 in a fund that had a 5% return over one year, you would end up with $1,050.  You can compare the Fund’s returns to the Russell 2000^® Index, which reflects a popular measure of the stock performance of small companies, and the Russell Microcap^® Index, which measures the performance of the micro-cap segment of the U.S. equity market.

 

Average annual total returns take the Fund’s actual (or cumulative) return and show you what would have happened if the Fund had performed at a constant rate each year.

 

Perritt MicroCap Opportunities Fund

Performance data quoted represents past performance; past performance does not guarantee future results. The investment return and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance of the Fund may be lower or higher than the performance quoted. Performance data current to the most recent month end is available by calling 800-331-8936.

 

The Fund’s gross expense ratio is 1.64% and is as of the most recent prospectus dated February 28, 2021. Please see the Fund’s Financial Highlights in this report for the most recent expense ratio.

 

Perritt MicroCap Opportunities Fund

DLH Holdings Corp. (DLHC) provides healthcare and social services in the United States. It offers defense and veterans’ health solutions, including case management, physical and behavioral health examinations, and medical administration and logistics services.

 

Silvercrest Asset Management Group Inc. (SAMG) is a wealth management firm that provides financial advisory and related family office services in the United States. The company serves ultra-high net worth individuals and families, as well as their trusts; endowments; foundations; and other institutional investors. It also manages funds of funds and other investment funds.

 

Northern Technologies International, Corp. (NTIC) develops and markets rust and corrosion inhibiting products and services to automotive, electronics, electrical mechanical, military, retail consumer, and oil and gas markets.

 

Radiant Logistics, Inc. (RLGT) operates as a third-party logistics and multi-modal transportation services company primarily in the United States and Canada. The company offers domestic and international air and ocean freight forwarding services; and freight brokerage services, including truckload, less than truckload, and intermodal services.

 

U.S. Global Investors, Inc. (GROW) is a publicly owned investment manager. The firm primarily provides its services to investment companies. It also provides its services to pooled investment vehicles. The firm manages equity and fixed income mutual funds, hedge funds and exchange traded funds. It also invests in the public equity and fixed income markets across the globe.

 

Shyft Group, Inc. (SHYF) through its subsidiary Spartan Motors USA, Inc., manufactures and assembles specialty vehicles for the commercial vehicle and recreational vehicle industries in the United States and internationally. It operates through two segments, Fleet Vehicles and Services (FVS), and Specialty Chassis and Vehicles (SCV).

 

Legacy Housing Corp. (LEGH) builds, sells, and finances manufactured homes and tiny houses primarily in the southern United States. The company manufactures and provides for the transport of mobile homes; and offers wholesale financing to dealers and mobile home parks, as well as a range of homes.

 

Miller Industries, Inc. (MLR) engages in the manufacture and sale of towing and recovery equipment.  It offers wreckers, such as conventional tow trucks and recovery vehicles.  The company also provides transport trailers for moving multiple vehicles, auto auctions, car dealerships, leasing companies, and other similar applications.

 

A-Mark Precious Metals, Inc. (AMRK) together with its subsidiaries, operates as a precious metals trading company. It operates in three segments: Wholesale Sales & Ancillary Services, Secured Lending, and Direct-to-Consumer.

 

IES Holdings, Inc. (IESC) engages in communications, commercial and industrial, infrastructure solutions, and residential businesses in the United States.

 

Fund holdings and/or sector allocations are subject to change at any time and

are not recommendations to buy or sell any security.

Please refer to the Schedule of Investments in this report for a complete list of Fund holdings.

Perritt MicroCap Opportunities Fund

The sector classifications represented in the graph above and industry classifications represented in

the Schedule of Investments are in accordance with Global Industry Classification Standard

(GICS^®), which was developed by and/or is the exclusive property of MSCI, Inc. and Standard &

Poor Financial Services LLC.  Percentages are based on total investments, at value.

 

Note:

For presentation purposes, the Fund has grouped some of the industry categories.  For purposes of categorizing securities for compliance with section 8(b)(1) of the Investment Company Act of 1940, the Fund uses more specific industry classifications.

 

Perritt Ultra MicroCap Fund

The Perritt Ultra MicroCap Fund outperformed the Russell Microcap Index for fiscal year 2021 returning 91.16% versus 62.55% for the Russell Microcap Index.  The shift in strength to the small market names within the Index that we have noted in previous letters continued during the second half of the year which benefited the Ultra MicroCap’s holdings relative to the Index.  Additionally, our stock picks have continued to be strong which led to substantial outperformance for several sectors.  Due to these factors, we were able to outperform the Russell Microcap Index for the period of fiscal 2021.

 

During the COVID shutdowns we had several companies engage in both cost saving initiatives, as well as strategic investments in their businesses.  We detailed some of the cost savings initiatives, as well as their impact on our investments in previous writeups and now that we are far enough past the emergence of COVID-19 and its impact on the global economy, the impact of the strategic investments firms made during that time are beginning to show results.  One example is Quest Resources, QRHC, a provider of waste management solutions to clients, including grocery and big box retail chains, restaurants, and the auto maintenance industry.  At the start of COVID, Quest experienced a disruption to their business as restaurants struggled to adjust to the new environment.  Amidst this uncertainty, Quest was put in the position of needing to grow their business while simultaneously adjusting to the shutdown of one of their core verticals.  While reducing certain expenses and adjusting to new staffing needs, the company continued to execute on their expansion strategies of acquiring new businesses and expanding within current markets.  These investments have paid off during the subsequent recovery with Quest recently reporting revenue growth of 57% for the most recent quarter on a year over year basis, partly attributable to their investments in the business, as well as contributions from general economic recovery.

 

For the fiscal year 2021, the Ultra MicroCap Fund outperformed the Russell Microcap Index by 28.61%, returning 91.16% to shareholders on a net of fee basis compared to the 62.55% return in for the Russell Microcap Index.  The Fund’s longer-term performance, as well as that of its Index, can be found later in this report.  The top contributor to the Fund’s out performance came from holdings in the industrial sector.  The Fund’s industrial investments returned 126.78% for the first half of the year which compared favorably to the 65.50% return for the sector within the Index.  In an echo to the previous letter from the semi-annual report, the second-best performing sector was the Fund’s healthcare investments, which earned returns of 66.76% for the Funds versus 29.54% for the Index.  This is an example of what we in the industry call serial correlation, where positive returns in an asset class in one period may imply the likelihood of positive returns in the next.

 

Since our last update, we have exited four positions and added ten.  Two were sold due to declining fundamentals while two, DSP Group (DSPG) and Support.com (SPRT) were sold due to receiving valid

 

Perritt Ultra MicroCap Fund

buyout offers.  The names we added were drawn from a number of industries and include a mix of names we have previously owned and new ideas we found during our various research activities.  One new name, The Dixie Group (DXYN) which is a manufacturer of flooring and carpeting that has made substantial changes to their business model, selling off non-core assets and focusing on their core markets.  This company had struggled for years prior to their current management team’s strategic plans being put in place and has recently posted the best operating results they have had in years.  This name was first followed by Perritt back in the 1980s and was featured in a newsletter written by our CEO earlier in his career.  This serves as an illustration of the depth of knowledge and experience that the Perritt Research team brings to their stock picking process.

 

As of October 31, 2021, the Fund holds the common stock of 81 companies which is higher than the last report.  We are currently re-evaluating several investments as we head into 2022 to bring that number closer to the 75 names held in the last report.  We intend on adding new investments as others are sold off on a rotational basis to keep a meaningful position in the firms we invest in.

 

Regarding current portfolio valuations, based on our earnings estimates, the Fund’s portfolio is trading at 18.5x forward price to earnings.  The median price to sales ratio is 1.76x, the median price to book is 2.2x and a trailing twelve-month price to earnings of 26.37x.  The median market cap for the Fund is at $104 million.  By comparison the Russell Microcap Index has a price to sales ratio of 2.6, a price to book ratio of 2.3x and a trailing twelve-month p/e of 14.5.  The median market cap for the Index is $264 million.  We like to point out the difference in market cap exposure between the two names, as this illustrates the different focus of the two products as the Ultra MicroCap remains committed to investing in the smallest segment of the microcap space.

 

We want to genuinely thank our fellow shareholders for their continued support and confidence in the Perritt Capital Management team.  Each member of our investment committee, as well as many other employees have made continued investments in this Fund over the years and remain shareholders alongside all of you.  We also wish you and your loved ones well and continued good health as we emerge from the trials of the past year.  If you have any questions or comments about this report or your investment in the Perritt Ultra MicroCap Fund, please call us toll- free at (800) 331-8936 or visit our website at www.perrittcap.com.  Please refer to the prospectus for information about the Fund’s investment objectives and strategies.

 

Matt Brackmann

Portfolio Manager

 

Perritt Ultra MicroCap Fund

Past performance does not guarantee future results.

 

Earnings Growth is not a measure of the Fund’s future performance.

 

Opinions expressed are subject to change at any time, are not guaranteed and should not be considered investment advice.

 

Please refer to the Schedule of Investments in the report for more complete information regarding Fund holdings. Fund holdings and sector allocations are subject to change and should not be considered a recommendation to buy or sell any security.

 

Any tax or legal information provided is merely a summary of our understanding and interpretation of some of the current income tax regulations and not exhaustive. Investors must consult their tax advisor or legal counsel for advice and information concerning their situation.  Neither the fund nor any of its representatives may give legal or tax advice.

 

Mutual fund investing involves risk.  Principal loss is possible.  The Funds invest in smaller companies, which involve additional risks, such as limited liquidity and greater volatility.  The Funds invest in microcap companies which tend to perform poorly during times of economic stress.  The Ultra MicroCap Fund may invest in early-stage companies which tend to be more volatile and somewhat more speculative than investments in more established companies.

 

Russell Microcap Index is a capitalization weighted index of 2,000 small cap and micro-cap stocks that captures the smallest 1,000 companies in the Russell 2000, plus 1,000 smaller U.S.-based listed stocks.

 

One cannot invest directly in an index.

 

Price-to-Book (P/B) is a ratio used to compare a stock’s market value to its book value. It is calculated by dividing the current closing price of the stock by the latest quarter’s book value per share.

 

Price-to-Sales (P/S) is a valuation ratio that compares a company’s stock price to its revenues. The price-to-sales ratio is an indicator of the value placed on each dollar of a company’s sales or revenues.

 

Trailing Price-to Earnings (P/E) is calculated by taking the current stock price and dividing it by the trailing earnings per share (EPS) for the past 12 months.

 

Forward price-to-earnings (forward P/E) is a version of the ratio of price-to-earnings (P/E) that uses forecasted earnings for the P/E calculation. The forecasted earnings used in the formula typically uses either projected earnings for the following 12 months or for the next full-year fiscal (FY) period.

 

The annual report must be preceded or accompanied by a prospectus.

 

The Perritt Funds are distributed by Quasar Distributors, LLC.

 

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Perritt Ultra MicroCap Fund

Perritt Ultra MicroCap Fund versus

Russell Microcap^® Index and Russell 2000^® Index

 

 

There are several ways to evaluate a fund’s historical performance.  You can look at the total percentage change in value, the average annual percentage change, or the growth of a hypothetical $10,000 investment.  Each performance figure includes changes in a fund’s share price, plus reinvestment of any dividends (or income) and capital gains (the profits the fund earns when it sells stocks that have grown in value).

 

Cumulative total returns reflect the Fund’s actual performance over a set period.  For example, if you invested $1,000 in a fund that had a 5% return over one year, you would end up with $1,050.  You can compare the Fund’s returns to the Russell 2000^® Index, which reflects a popular measure of the stock performance of small companies, and the Russell Microcap^® Index, which measures the performance of the micro-cap segment of the U.S. equity market.

 

Average annual total returns take the Fund’s actual (or cumulative) return and show you what would have happened if the Fund had performed at a constant rate each year.

 

Perritt Ultra MicroCap Fund

Performance data quoted represents past performance; past performance does not guarantee future results. The investment return and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance of the Fund may be lower or higher than the performance quoted. Performance data current to the most recent month end is available by calling 800-331-8936.

 

The Fund’s gross expense ratio is 2.68% and is as of the most recent prospectus dated February 28, 2021. Please see the Fund’s Financial Highlights in this report for the most recent expense ratio.

 

Perritt Ultra MicroCap Fund

Ten Largest Common Stock Holdings (Unaudited)

DLH Holdings Corp. (DLHC) provides healthcare, logistics, and technical services and solutions to Federal Government agencies including the Department of Veteran Affairs, the Department of Defense, and other government clients.

 

A-Mark Precious Metals, Inc. (AMRK) together with its subsidiaries, operates as a precious metals trading company. It operates in three segments: Wholesale Sales & Ancillary Services, Secured Lending, and Direct-to-Consumer.

 

Transcat, Inc. (TRNS) provides calibration and laboratory instrument services in North America and internationally. It operates in two segments, Service and Distribution.

 

Perion Network, Ltd. (PERI) delivers advertising solutions to brands, agencies, and publishers in North America, Europe, and internationally.

 

Technoglass, Inc. (TGLS) through its subsidiaries, manufactures, supplies, and installs architectural glass, windows, and associated aluminum products for the commercial and residential construction industries in North, Central, and South America.

 

Quest Resource Holding Corp. (QRHC) through its subsidiaries, provides solutions for the reuse, recycling, and disposal of various waste streams and recyclables in the United States.

 

Northern Technologies International, Corp. (NTIC) develops and markets rust and corrosion inhibiting products and services to automotive, electronics, electrical mechanical, military, retail consumer, and oil and gas markets.

 

Napco Security Technologies, Inc. (NSSC) develops, manufactures, and sells electronic security products in the United States and internationally. The company offers access control systems, door-locking products, intrusion and fire alarm systems, and video surveillance systems.

 

Century Casinos, Inc. (CNTY) operates as a casino entertainment company worldwide. The company develops and operates gaming establishments, as well as related lodging, restaurant, horse racing, and entertainment facilities.

 

Immucell Corp. (ICCC) an animal health company, acquires, develops, manufactures, and sells products that enhance the health and productivity of dairy and beef cattle in the United States and international.

 

Fund holdings and/or sector allocations are subject to change at any time and

are not recommendations to buy or sell any security.

Please refer to the Schedule of Investments in this report for a complete list of Fund holdings.

Perritt Ultra MicroCap Fund

The sector classifications represented in the graph above and industry classifications represented in

the Schedule of Investments are in accordance with Global Industry Classification Standard

(GICS^®), which was developed by and/or is the exclusive property of MSCI, Inc. and Standard &

Poor Financial Services LLC.  Percentages are based on total investments, at value.

 

Note:

For presentation purposes, the Fund has grouped some of the industry categories.  For purposes of categorizing securities for compliance with section 8(b)(1) of the Investment Company Act of 1940, the Fund uses more specific industry classifications.

 

Perritt MicroCap Opportunities Fund

The accompanying notes to financial statements are an integral part of this schedule.

Perritt MicroCap Opportunities Fund

The accompanying notes to financial statements are an integral part of this schedule.

Perritt MicroCap Opportunities Fund

The accompanying notes to financial statements are an integral part of this schedule.

Perritt MicroCap Opportunities Fund

Percentages are stated as a percent of net assets.

 

 

The accompanying notes to financial statements are an integral part of this schedule.

Perritt Ultra MicroCap Fund

The accompanying notes to financial statements are an integral part of this schedule.

Perritt Ultra MicroCap Fund

The accompanying notes to financial statements are an integral part of this schedule.

Perritt Ultra MicroCap Fund

Percentages are stated as a percent of net assets.

 

The accompanying notes to financial statements are an integral part of this schedule.

Perritt Funds, Inc.

October 31, 2021

The accompanying notes to financial statements are an integral part of these statements.

Perritt Funds, Inc.

For the Year Ended October 31, 2021