Editor's note: Overlooked microcaps can absolutely soar under the right circumstances. That's why at our corporate affiliate Altimetry, Joel Litman is sharing how to take advantage of them in today's beaten-down market. Even better, as he explains in this essay – adapted from a July 2020 issue of the Stansberry Digest – it's a way to profit right under the noses of Wall Street's money managers...
A lot of people are scared of investing in microcap stocks, as I shared yesterday...
That's why at Altimetry, we've created a system focused on making sure the financials are real... the management team is aligned with investor interests... and the company's true performance and valuation are compelling.
We help police the microcap space and guide investors to opportunities for big gains. It's something we've been trying to talk to our institutional clients about for years... But they typically won't listen.
Importantly, as an individual investor, their disinterest works to your advantage...
Institutional investors shy away from microcaps for three main reasons. And because of that, you can make big returns if you find the right microcap stocks before money managers start paying attention...
1. Lack of liquidity
Institutional investors struggle to allocate capital in high-quality microcaps simply because microcaps don't trade enough shares.
Hedge funds have no interest in investing $10,000 to make $13 million. They want to be able 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 the 5% threshold of a company's stock, it needs to file a 13D – a special filing 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. It couldn't invest all $10 million at once, or it would blow the stock up, since the average microcap trades less than $10 million worth of shares per day.
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.
Fewer people focused full-time on the company means fewer people to hold management's feet to the fire and provide insight about industry dynamics.
That lack of a helping hand 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 who are 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 situations we've seen 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 buy the right companies with the right due diligence for incredible upside.
When these stocks appear on institutional investors' radar, they take off... like Vipshop, a company that drew the interest of one of our institutional clients. After crossing a $500 million market cap, the stock was 580% higher in 12 months.
These stocks have massive upside if you can identify the right ones. And right now is an even more exceptional opportunity...
Microcaps are incredibly cheap thanks to the broad market sell-off we've seen this year. And the same volatility that crashed stocks now has the potential to send these smaller names soaring.
The small-cap Russell 2000 Index is down more than 20% from its November highs. And the Russell Microcap Index remains down more than 25%. The market has punished these companies as harshly as the better-followed names out there.
That's part of the reason why we at Altimetry are 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.
Editor's note: When Wall Street does pay attention to microcaps, these stocks can skyrocket. But to get your money there first, you must learn one secret. It's what the world's wealthiest investors use to exploit hidden inefficiencies in the market... And for a short time, Joel and his team are sharing how it could help you make 500% to 1,000% gains, starting now. Learn what Joel has to say about this rare market setup here...
"There is tremendous value in understanding a company's true financial status," Joel writes. But the market isn't always transparent about performance metrics. That's why he developed a method of valuing stocks that reflects their true value... Get the full story here: This Secret Could Have Made You 15 Times Your Money.
The pros tend to have a shorter fuse when it comes to long-term investing, exiting positions after only a few months in order to protect their portfolio performance. But individual investors have the luxury of not worrying about how long we keep an asset. And that could help us profit from today's volatility... Read more here.