Three Reasons Why Microcaps Are the Market's Hidden Gems
Editor's note: Microcap stocks aren't on the radar of most investors – even big money managers. But according to Joel Litman, chief investment officer of our corporate affiliate Altimetry, that can create rare opportunities. In this issue, Joel explains why institutional investors often ignore this space... and how individuals can capitalize before the crowd catches on.
A lot of people are scared of investing in microcap stocks...
That's why at Altimetry, we've created a system focused on making sure the financials are real... management is focused on investor interests... and the company's performance and valuation are compelling.
We help police the microcap space and guide investors to opportunities for big gains. And we've been trying to tell our institutional clients about it for years... But they typically won't listen.
Importantly, for individual investors, their disinterest works to your advantage...
Institutional investors shy away from microcaps for three main reasons. And that means you can make big returns on the right microcap stocks before money managers start paying attention...
The Advantages Institutions Can't Access
1. Lack of liquidity
Institutional investors struggle to allocate capital in high-quality microcaps simply because they don't trade enough shares.
Hedge funds have no interest in investing $10,000 to make $13 million. They want to invest $10 million and turn it into $13 billion.
Plus, fund managers don't want to end up with oversized stakes in tiny companies. That's easy to do in microcaps. Once a fund's ownership crosses 5% of a company's stock, it needs to file a 13D with the U.S. Securities and Exchange Commission to designate itself as a material shareholder.
That means more paperwork. And the simple act of filing might prevent the fund from trading more of the company's stock because it's now viewed as an insider.
Even worse for the fund, it would take time to get invested in the stock. The average microcap trades less than $10 million worth of shares per day. So a fund couldn't invest all $10 million at once or it would blow the stock up.
That inability to get in and out in quantity keeps institutional investors away from microcap stocks.
2. Almost no Wall Street coverage
Without analyst coverage, institutional investors have to do more work on their own to find out what's going on with microcaps.
With fewer people focused full-time on the company, there are fewer people to hold management's feet to the fire and provide insight about industry dynamics.
That lack of help means many people won't spend the time necessary to successfully invest in the space.
However, that creates an opportunity you almost never get on Wall Street as an individual investor... an information edge.
Information about major companies is more widely available today than ever before. That's not the case for microcaps. And it means huge opportunities for folks willing to focus on these stocks.
3. Microcaps fall outside of institutional-investor mandates
Many institutional investors aren't allowed to own microcap names because of their own internal rules.
Funds are only allowed to invest in companies that meet the criteria they laid out when they wrote their fund documents. That means they can only invest in large-cap companies, mid-cap companies, and so on.
For most of them, microcaps are off-limits.
Some of the most compelling moneymaking opportunities over the past 10-plus years have been in this space... But because our institutional clients can't buy them, they tell us not to even bother talking about them.
That's why we believe the lack of institutional-investor involvement in the microcap world presents an amazing opportunity for individual investors. The inefficiencies in this market give us a chance to do our due diligence and buy the right companies with incredible upside.
When these stocks do appear on institutional investors' radar, they take off... like Vipshop (VIPS), a company that drew the interest of one of our institutional clients. After crossing a $500 million market cap in October 2012, the stock rose 580% in 12 months.
These stocks have massive upside if you can identify the right ones.
That's part of the reason why we're positioning our readers to take advantage of this opportunity...
We think of it like a land rush in the financial "Wild West." Institutional investors can't – or won't – take on the challenges of this little-understood space.
But as long as you have the right tools, that just means individual investors have a rare opportunity to be the biggest winners.
Regards,
Joel Litman
Editor's note: In a matter of days, major Wall Street firms will be required to make large, rules-based portfolio changes – triggering a powerful ripple effect across the market. This little-known mandate will move billions of dollars at once. Last year alone, it led 21 stocks to double. With the next shift approaching fast, learn how to take advantage before it begins.