By: Bill Spencer — May 3, 2021
Introducing "Micro-Cap Monday"
Hi there... "Big Bill" here.
Welcome to the inaugural edition of ... Micro-Cap Monday.
Why the change? I'll get to that in a second...
But first, here's something I find amazing, and you might too.
I've been toiling in the financial vineyards for 33 years, ever since I got my first job at the Federal Reserve Bank of New York in the winter of 1988.
I've written more articles, reports, columns, trade alerts etc. etc. than I can count. Some have been received well, others not so well.
But I can't remember the last time I've written anything that garnered as much fascinated attention as what I wrote two weeks ago ("Here’s A Hot Pizza Stock Topped With Profit").
Here's the part that got everyone's heart racing...
"On March 1st I went on a mission to drop some weight. A lot of weight... The plan is to go from 260 pounds all the way to 190.
"As of Friday morning I'm down to 228, so I'm down almost 32 pounds."
The stock I wrote about -- Papa John's International (PZZA) -- is as of this writing up a respectable 3.67% in two weeks. But hardly anyone who emailed to comment on the story wanted to talk about the stock.
Instead they wanted to know, "How in the world did you lose 32 pounds??"
There's an answer to that of course. But I don't want to say much about it because, apart from recommending stocks and ETFs and the like, True Market Insiders doesn't endorse particular products or services. We're completely independent.
I know what you're thinking... Have I dropped any additional pounds in the two weeks since writing that column?
Why, yes... Yes I have. Thanks for asking!
(Click any image to enlarge)
I'm down 42.3 pounds since March 2. That's a loss of -16.28% in 59 days, or 100.7% annualized. (Sorry -- I couldn't resist adding that last bit.)
By now you're saying to yourself: "Bill, we get it. You've lost weight. Well done, Lad. But why are you telling me all this in an investing article?"
Only because while on this journey to transform myself into the market equivalent of Slenderman... I've more than once found myself saying, "Good things come in small packages." It's sort of a mantra that keeps me focused and inspired.
It's an apt thing to say about weight loss and an apt thing to say about small-cap stocks.
And it's an even more fitting thing to say about micro-cap stocks.
(By the way, if you got in on last week's micro-cap standout -- Euroseas Ltd. (ESEA) -- then you're up about 8.59% in seven days. Your shipping stock went from $12.36 to $14.40. Not too shabby.)
As you look for micro-cap stocks for your investment portfolio, there are several key factors to consider.
A good place to start is an overview of the economy.
It undergoes normal cycles - ups and downs. So does the stock market.
During poor economic times, micro-cap or “emerging growth” stocks become those ‘hidden jewels’ I mentioned earlier.
While the larger equity classes are taking a breather, micro-caps undergo a growth cycle.
And as the economy begins to recover, those nimble emerging growth stocks reflect notable, and sometimes staggering gains.
Consider that, since hitting its low last March, the large cap S&P 500 has gained about 91%.
But the Dow Jones Select Micro-Cap Index has gained more than 145%.
Now, we always want to be completely transparent with you. So you should know that, like anything else, micro-cap stocks come with some pitfalls and challenges. But as you're about to see, they also present huge opportunities.
In mainstream media, you rarely hear about micro-caps. For this reason micro-caps are often called “hidden jewels.”
One reason they get less love than their larger-cap cousins is because they’re so small. With market capitalizations of between $50 million to $300 million, institutional investors frequently can’t buy them.
Usually, those funds only buy stocks trading on the Nasdaq or an exchange, and moreover, those that are priced higher than $5 per share. Or higher than $10 or $15 per share.
Also, with micro-caps, the total number of shares available for trading (the float), is often less than what a fund needs to make one trade - let alone a series of trades in accumulation programs.
It’s kind of like a giant’s foot stepping in a puddle...
Then there's volatility. Micro-caps can wildly swing up and down, with comparatively very few shares in volume. Day traders often take advantage of that very fact.
Yet, watchful, longer term investors can also profit from that volatility.
Here's another thing to consider when choosing micro-cap stocks for your investment portfolio. Make sure that the company is filing timely, audited financial statements with the U.S. Securities and Exchange Commission (SEC).
Micro-cap companies often have little or no budget to staff a full-fledged investor relations department.
That makes their financial statements, again, as filed with the SEC, the best, and sometimes only way to gauge the health of a company.
Stocks trading on an exchange (the Nasdaq or, if on the Over-The-Counter (OTC), with “QB” status) must submit timely financial reports to the SEC.
If they fail to file timely statements, they jeopardize their listing status. For a small company, that's potentially devastating.
Also, micro-cap stocks that trade on the OTC or the lesser Pink Sheets are often thinly traded. In other words, it can be difficult to place trades in those stocks, especially when selling.
OK, those are the "warts" that sometimes accompany micro-cap stocks.
The upside is that micro-caps are where you'll find the next moonshot stock.
The Amazons, Googles and Apples of the world are not about to rise 100-fold.
That savvy biotech or digital media company just might...
For example, topping headlines is one such micro-cap stock that recently handed investors a whopping 105 times their original investment.
I mean Marathon Digital Holdings (NasdaqCM: MARA), a digital mining play (think cryptocurrency).
At its March 2020 (COVID) low, MARA was trading at around 35 cents per share.
As you can see, it currently trades near $37.00.
In the coming weeks you're going to be hearing a lot more about micro-cap stocks with moonshot potential.
Until then, have a great week!
Editor-in-Chief, True Market Insiders