By: Bill Spencer — July 18, 2021
Micro-Cap Monday - This Mighty Micro Telecom Stock Could Gain 126%
Bill Spencer here.
Thanks for joining me.
Last year, when the COVID-19 pandemic struck, many working folks had to make a sudden switch…
From the office and conference room to the living room and kitchen table.
Even musicians, who normally attended live auditions and collaborations, scrambled to find solutions.
And while the sound quality of video conferencing is important to us all, imagine how much more important it is for musicians.
Take touring musician Al Carty, who’s supported Alicia Keys, Rob Thomas and Ed Sheeran.
(Click any image to enlarge.)
He’s a bass player, by the way, and as a bassist myself, this really struck a “chord” with me (pun intended).
Al needed equipment that would allow him to work with other musicians and even produce content, but all from remote locations.
A tiny micro-cap company, with a market capitalization under $50 million, actually produces the equipment he needed.
And now that the pandemic has lessened, Al takes that gear on the road. The artist says, “compact enough to throw in my laptop bag.”
I guess Aesop was correct when he said, “good things come in small packages.”
And this micro-cap stock is certainly a ‘small package.’
But even though it’s priced under $5 a share...
In February, one of the world’s biggest tech investors bought $1.06 million of this mighty micro-cap stock. Then it added to the position in May.
Keep reading, and I’ll show you how this stock could gain over 72%.
At a time when the overall stock market looks more and more like it wants to dip. one of the riskier segments of the market, micro-caps, are actually performing very well.
More about all that in a minute... First, here’s what’s happening in the U.S. stock market:
The Dow Jones Industrial Average lost -0.52% on the week. It was closely followed by the S&P 500 Index, as it lost -0.97%.
The tech heavy Nasdaq moved down -1.87%.
The small cap S&P 600 Index gave up -4.56% on the week.
Finally, the Russell 2000 Index lost -5.12%.
To look at the ‘internal market’ we turn to sector breadth, by using one of our Sector Prophets Pro tools, the US Industry Bell Curve.
This indicator shows us which sectors are under the control of the bears, or Supply (the ones colored red), and which are under the control of the bulls, or Demand (those are colored blue).
The image above was generated after the close on Friday, July 16, 2021. You can see that the Curve is a sea of red. This indicates that Supply is in control of almost every segment of the market.
In fact, of the 45 sectors we monitor, the bears control 42 or 93%. The bulls control only 3 sectors - a mere 7%.
Yet, when we look at the overall market on a long term basis, Sector Relative Strength, we find a different story.
In fact, Chris Rowe recently offered an eloquent discussion of market internals in his July 13 article, “Technical Tuesday - Declines to Come and Strength to Follow.”
In it, Chris drew a strong contrast between the bearish picture coming from the internals with the bullish, “risk on” picture that we see when we focus on relative strength:
“But perhaps the good news is the relative strength picture. It’s telling us that even though supply is currently putting downward pressure on stocks, large institutional investors are favoring the higher-risk areas of the stock market and of the global financial markets with respect to all asset classes.
And the latter is the bigger picture, the more reliable picture, the long-term picture.”
The Telecom sector is currently ranked #7 of the 45 groups we track at True Market Insiders.
Its Relative Strength (RS) chart in a column of X’s, meaning the sector is outperforming the Equal Weighted S&P 500.
In the Telecom sector are technologies like 5G wireless, the fifth generation standard for broadband cellular networks.
We used to all want our mobile devices to respond quicker. But in the post-COVID, work-from-home world... We need our devices to respond quicker.
In a recent survey, Statista’s sampling found that just 17% of respondents worked at home 5 days a week. (Fully 47% had never worked from home.)
But since the pandemic, 44% now say they work from home five days a week.
The streaming audio and video conferencing that Telecommunications enables, largely makes way for home-based work. So, it stands to reason that companies in this industry segment could benefit from the movement.
The larger Telecommunications stocks, like Apple, Inc (NasdaqGS: AAPL), have long enjoyed buying from the huge institutional-sized funds.
Yet, the tiny micro-caps are often overlooked by the funds. If they do indeed garner fund attention, they must be pretty exceptional.
ClearOne, Inc (NasdaqGS: CLRO) out of Salt Lake City, UT, is one such stock.
ClearOne designs and manufactures conferencing and network streaming solutions for voice and visual communications, like video conferencing.
CLRO has a market capitalization of $46.56 million -- very small. It’s also priced well below the $5 level that most institutions need to see before they’ll begin taking a position.
Over the first and second quarters this year, funds are finding their way into the stock.
The size of the positions in absolute terms is small, no doubt. But it’s a start. (And that’s where we want to begin getting in -- at the start.)
Even more impressive, of the funds that bought CLRO, Renaissance Technologies, LLC holds the largest position. Renaissance is one of the world’s largest technology funds.
Another reason for optimism is that insiders hold nearly 70% of CLRO (69.67%).
Look at CLRO’s chart for the last three months. The blue arrows show notably large increases in volume on up days. That shows institutional-sized buying.
On Friday, July 16, the stock closed up $0.10 per share at $2.48. That’s within $0.05 of its 20-day Moving Average (the blue line).
Earlier this spring, on May 13, ClearOne reported its first quarter financial results. The company’s sales were up to $7 million, an increase of 23% over the same period in 2020.
Yet, the first quarter is typically a slow one for this company’s sales.
Now, this stock could have a possible headwind in its future. Since October 2019 ClearOne has been involved in a patent infringement countersuit against Shure, Inc.
Cases like this can drag on for years. On the other hand, they can suddenly be settled by the warring parties. We'll have to wait and see.
Nevertheless, in its first quarter, CLROs' earnings per share improved about 22%. That was from $(0.11) in the 2020 first quarter, to $(0.09) in the first quarter 2021.
For its fourth quarter ending December 2020, ClearOne earned $0.32 per share.
Although the company hasn’t declared a date for its second quarter earnings, it’s estimated to be August 13.
So, let’s take a look at where the stock might go from here.
After gaining 167% between October 30 and March 12, the stock made a 52-week high at $4.28 - the blue arrow. Since then it's down about 42%.
But in my opinion, ClearOne clearly has several reasons to move higher.
First, we consider that ClearOne’s video conferencing equipment is in demand. The company is reporting growth in its sales and earnings.
Its stock is part of the Telecom sector, and its BPI is bull confirmed - the strongest bullish signal. And we know that sector performance is 80% of a stock’s performance.
The Telecom sector is showing long term relative strength.
CLRO has attracted recent institutional and insider buying.
In fact, using a Fibonacci retracement tool, we see that if CLRO can regain its 52-week high of $4.28 we'll then see a 72.5% gain.
If it gets up to $5 and more funds begin piling in, the next stop on the sequence of Fibonacci ratios (not shown in the chart) is around $5.60 -- a gain of 126%.
Here’s to your successful investing!
Editor-In-Chief, True Market Insiders