Why Micro-Cap Stocks Offer the Biggest Upside to Retail Investors
Do you know what this century’s best-performing stock is?
Here’s a hint: it’s not Google, Apple, or Amazon.
In fact, this century’s best-performing stock started out as a penny stock trading at below US $0.10 in January 2003.
Since then, Monster Beverage (NASDAQ: MNST) has skyrocketed to its current share price of US $84 (as of Aug 26, 2020) and has a market cap of more than US $44 billion.
That’s an 83,900% return for early investors who bought stock at $0.10!
What are Micro-Caps?
While micro-cap stocks are sometimes referred to by their less flattering moniker, “penny stocks”, by definition micro-caps are public companies that have a market capitalization of between US $50 million and $300 million.
Micro-caps are considered “high risk” because early-growth-stage companies are more susceptible to internal and external dangers: burning through cash too quickly, getting crushed by competition, or going bankrupt.
For these reasons, and others, which we will dive into later in this article, micro-caps are not widely covered in the mainstream financial media.
However, Monster Beverage (Hansen’s Natural in 2012) illustrates a key benefit of investing in micro-cap stocks: the potential upside is enormous.
In fact, some of the largest public companies of today started off as micro-caps, including Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B); Wal-Mart (NYSE:WMT); Netflix (NASDAQ:NFLX), and Amgen (NASDAQ:AMGN).
High Risk, Higher Reward
Everyone knows the goal of investing in stocks is “buy low, sell high.”Nowhere is that more possible than in the micro-cap space.
This is why some of the most prolific investors of all time such as Warren Buffett, Peter Lynch, and Joel Greenblatt started their investment careers buying and selling micro-caps.
If your goal is to make significant money in the stock market, micro-caps are where you want to be.
Despite micro-caps being a volatile asset class, they have historically produced greater returns than medium or large-caps. In fact, they are one of the best-performing asset classes out there.
An analysis of historical returns conducted by investment firm DGHM LLC for both large cap and small cap stocks dating from July 1926 to December 2018, found that micro-cap stocks annualized 11.6% total returns over this period, versus large-caps’ 9.4% returns. Micro-caps on average beat large-cap stocks by an annual spread of 220 basis points. This makes a material difference when compounded annually.
According to their analysis, if you had invested $1,000 in micro-caps in 1926, that capital would have grown to $26 million by December 2018. The same $1,000 invested in large-caps would have given you returns of just $4 million.
Going Against the Grain: Why Micro-Caps are Overlooked
As previously mentioned, you’re not likely to see an article about a micro-cap company on the front page of the Wall Street Journal. Despite their huge upside potential, micro-caps are for the most part ignored by the mainstream financial media. They are also overlooked by the large-scale institutional investors, hedge funds, sell-side analysts, and high frequency traders.
Why do micro-caps get the shaft from the major players, and why does this matter?
A key component of a successful investment strategy is beating “the market,” and the market is your competition – the other investors who are playing in the same sandbox as you.
When you’re investing in stocks, not only will you be trying to make better bets than other retail investors like yourself, you’ll also be up against big league institutional investors with way more capital – we’re talking millions if not billions of dollars – to play with.
Not only that, these institutional investors also have access to valuable information that the typical retail investor doesn’t.
They employ teams of researchers and analysts to help them make decisions on buying and selling. All that extra help costs money, which their clients pay in investment fees.
Illiquidity is Your Advantage
These large institutional investors are discouraged from investing in high risk micro-cap stocks due to certain legal and fiduciary obligations to their clients and backers.
They also tend to ignore micro-caps because they have too much money on their hands to bother making such small bets.
Compared to large-caps, micro-cap companies are relatively illiquid, typically trading in the range of thousands of shares per day in comparison to large-caps’ millions of shares per day, and big institutional investors aren’t interested in tying up large pools of their capital in illiquid companies they can’t easily exit from. The relative illiquidity of micro-caps also makes it difficult for institutional investors to secure a large enough position to be worth their time and effort.
Furthermore, for these institutional investors, taking a meaningful position in a micro-cap company (even a relatively small position of a few million dollars) often means controlling stake or buying the whole company outright.
In the US, owning more than 5% of a company designates you a material shareholder: this means filing a 13-D with the SEC, i.e. more paperwork and more hassle when you want to sell.
The Beauty of Inefficiency
The fact that micro-caps are overlooked by the mainstream media, analysts and large-scale institutional investors, actually works to your advantage, because it creates market inefficiency in which high quality micro-cap companies are often under-valued in the market.
This inefficiency means there is less competition in micro-cap investing than in large-cap investing and because you, the retail investor, are not constrained by illiquidity, disclosure bylaws, or minimum position sizes.
You can buy up stock in these smaller, under-the-radar companies at lower prices, before institutional investors and financial media notice.
How to Beat the Smart Money
Ideally, if you are trying to beat the market, you’re placing your bet on a high-quality company early on: before the “smart money” finds it.
If, and when, the institutions decide to buy, they will bid aggressively to take a large position and the stock will climb higher. Once the institutional investors start buying, the mainstream media will report it, causing even more investors to start buying.
If you want to be a successful micro-cap investor, you need to gain an advantage over your competition.
Knowledge is key, and those who do their research can reap huge rewards.
Don’t lose out on the next multi-bagger, micro-cap stock in the making.
Sign up to get access to exclusive research reports, videos, and articles covering the most promising micro-cap stocks today.
Are You Ready For The Next Market Move?
“Warning Signs” – Goldman Sachs
Yale’s Crash Confidence Index Higher Than Dot-Com Bubble Top
Crucial New Research: Three Fortune-Protecting Rules For Even The Toughest Markets
**IMPORTANT! BY READING THE CONTENT IN THIS PUBLICATION YOU EXPLICITLY AGREE TO THE FOLLOWING. PLEASE READ CAREFULLY**
SECURITIES HOLDINGS: Dear Retail Corp. or its affiliates (“Dear Retail”) may hold, as well as purchase and sell, the securities of this profiled company before, during and after the time that Dear Retail publishes favorable information about the profiled company. The purchase and sale by Dear Retail of securities in this profiled company may cause: (a) a decline in the price of the profiled company’s stock due to such selling activities, (b) increased volatility due to such buying and selling of the profiled company’s stock and (c) permit Dear Retail to make substantial profits while it is profiling this company, yet may result in a diminished value or loss for readers of this publication who invest in this profiled company.
The content in this publication is a snapshot that provides only positive information on the profiled company. Dear Retail does not and will not publish negative information about the profiled company. Accordingly, readers should consider the information to be one-sided and not balanced, complete, accurate, truthful or reliable.
Frequently companies profiled in Dear Retail’s publications experience a large increase in volume and share price during the course of this awareness advertising and marketing campaign, which increase in volume and share price often ends as soon as this awareness advertising and marketing campaign ceases.
NOT AN INVESTMENT ADVISOR AND NOT INVESTMENT ADVICE. Neither Dear Retail nor anyone involved in this publication is a registered investment advisor, broker-dealer or securities professional or associated with a registered investment advisor or broker-dealer. You understand that the information presented in this publication is provided for informative purposes only and that no content constitutes or should be treated as a recommendation to make any specific investment or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.
RISK OF INVESTING. Investing is inherently risky. Readers must consult with their own investment advisor before making any investment decisions and should understand the risks associated with an investment in the profiled company’s securities, including, but not limited to, the complete loss of your investment. You must be aware of the risks and be willing to accept them in order to invest in any type of security. Don’t trade with money you can’t afford to lose. This is neither a solicitation nor an offer to buy/sell securities. No representation is being made that any reader will or is likely to achieve profits similar to those discussed in the publication. The past performance of any security is not necessarily indicative of future results. Dear Retail does not guarantee that the profiled company mentioned in this publication will perform as it expects, and any comparisons that have been made to other companies may not be valid or come into effect.
ALWAYS DO YOUR OWN RESEARCH TO CONFIRM THE ACCURACY OF ANY INFORMATION IN THIS PUBLICATION AND CONSULT WITH A LICENSED INVESTMENT PROFESSIONAL BEFORE MAKING ANY INVESTMENT. This publication should not be used or relied upon as a basis for making any investment and never invest purely based on Dear Retail’s publications, newsletters or website. You must obtain more specific or professional advice before taking, or refraining from, any action or inaction on the basis of the content on this publication.
INFORMATION PRESENTED: THERE CAN BE NO ASSURANCE THAT CONTENT IN THIS PUBLICATION IS ACCURATE OR WITHOUT ERROR. ANY PERSON WHO MAKES USE OF SUCH CONTENT AFFIRMATIVELY ASSUMES ALL RISKS FROM USING THE CONTENT. Dear Retail has not thoroughly investigated the background of the profiled company. Dear Retail does not guarantee the timeliness, accuracy, or completeness of the information on Dear Retail’s website, in its newsletters or in this publication. Such information is collected from public filings (including without limitation, www.sedar.com and www.sec.gov) and other sources deemed to be reliable, such as the profiled company’s website and press releases, and is provided “as is” in good faith, but has not been independently researched or verified and is not guaranteed to be correct.
DISCLAIMER FOR FORWARD-LOOKING INFORMATION: In addition to historical information, this publication contains forward-looking statements, which are forward-looking and prospective in nature. The words “will,” “expects,” “could,” “would,” “may,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “targets,” “estimates,” “looks for,” “looks to,” “continues” and similar expressions, as well as statements regarding a third party’s focus for the future, are generally intended to identify forward-looking statements. Each of the forward-looking statements made in this publication are based on current expectations and projections about future events, and are therefore subject to risks and uncertainties which could cause actual results to differ materially from the future results expressed or implied by the forward-looking statements. Although Dear Retail believes that the expectations reflected in the forward-looking statements are reasonable, there can be no assurance that such expectations will prove to be correct. Forward-looking statements in this article include statements regarding the future business plans of the profiled company and include the following statements: [insert forward looking statements]. In addition, factors that might cause or contribute to such differences include, but are not limited to, those disclosed by the profiled company in their public securities filings found on www.sedar.com. You should carefully review the risks described therein. You should not place undue reliance on these forward looking statements, which speak only as of the date such statement was published. Dear Retail undertakes no obligation to publicly release any updates or revisions to the forward-looking statements or reflect events or circumstances after the date of their publication, except as required by law.
INDEMNIFICATION/RELEASE OF LIABILITY. By reading this publication, you agree to the terms of this disclaimer and the terms and conditions set out in Dear Retail’s Website Agreement – Terms and Conditions of Use which can be found at www..com. You agree to release and hold harmless Dear Retail from any and all liability, damages, and injury that may be caused from the information contained in this publication. You further warrant that you are solely responsible for any financial outcome that may come from any investment decisions that you make.
Comments are closed.