$NDAQ, $BRK.A, $BRK.B, $CIIT, $YBAO
FLASH: Think Big with Small Cap Stocks!
We here at HeffX-LTN often feature small-cap and low price stocks, when we do we fully evaluate risk/reward and have done a full due diligence review.
Currently we are focused on small-cap and low priced stocks under $5/share that trade on the OTC markets, but that have full Nasdaq (NASDAQ:NDAQ) listings ahead.
Small cap refers to market capitalization, or the value of all the company’s shares. There is no official definition for what constitutes a small cap, but generally they are companies valued at around $300-M to $2-B
But, this has nothing to do with the price per share. A small-cap stock can just as easily have a share price of $5, $50, or $500. It is not the price of the stock that is relevant, but the value of the company that we are focused on here.
Both small-cap stocks and low-priced stocks are good for investors and the same reason they are good for us.
Investors buying such companies that other investors either cannot or will not buy is a stocked pond of opportunity for the savvy participant.
Taking an independent outlook, avoiding promotions and being willing and able to go where others will not go can be extremely beneficial.
On low-priced stocks.
These stocks are off limits to most large investors. Most institutional investors such as insurance companies, pension funds, endowments and even a many mutual funds are forbidden in their mandates from buying stocks priced under $5, as these are considered penny stocks.
However, as a practical matter, most also avoid stocks priced under $10 per share. Smaller shares can be volatile and institutional investors do not want to have to manage that action.
But, hang on, the same institutional investors that would not buy a stock at $9/share might suddenly get interested once it trades at $12. So, focusing on these lower priced stocks allows one to get in before the big players do.
On small-cap stocks.
If you run a multi-billion-dollar mutual fund or endowment, you cannot build a meaningful position in a small-cap stock without distorting the market because of the size of the position required.
Warren Buffett talks about this situation regularly. Berkshire Hathaway (NYSE:BRK.A, BRK.B) is worth $500-B most of which is in publicly-traded stocks. At that size, the investments realistically open to Mr. Buffett are limited.
Mr. Buffett has repeatedly said that, were he still running a $100-M fund, he could make his investors 50% per year. But at Berkshire’s size, he is lucky if he beats the S&P 500 by 1 or 2 points.
We like the 50%+ outcome, so follow our small cap and low price stock recommendations the risk/reward benefits can be extreme beneficial.
Note: I have 1st hand experience in this, as in Y 1981 after a very demanding SoCal real estate development buy out. Then I invested in a small computer software company at $0.03/share, along with Microsoft (NASDAQ:MSFT) at $0.06/share and Barrick (NYSE:GOLD) at $0.06/share (they are core positions still). The startup software rose to $27/share by Y 1984 and was bought by MSFT. And that is a Key reason I am in the equities business still as the returns are in the hundreds of thousands of percentage points. PE
Have a terrific week.
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