No one will argue that there are huge returns to be made investing in Small
and Microcap stocks, what some will contend is that the rewards do not equal
the risk. As if investing in large cap stocks are inherently safer. Depending on your goals and if your like me, your goal is
to make money. A well balanced portfolio should have a portion allocated to
speculative high return stocks.
Discovering small-cap stocks before the street does can be a challenge. We
like to look for stocks in a hot sector that have the potential to be market
leaders in their sectors. Youíll find no shortage of newsletter gurus willing
to show you the light and send you on that dream vacation, you know the one with
the white sand beaches and the little umbrellas. Be wary of the many sites on
the internet today that promise you returns of 500% or more, 499% or less is
okay. I mean do you know what the taxes would be on a 500% short term capital
To separate yourself from the sites out there that are strictly hype, look
for balance and depth in the report. I received a report the other day from
someone calling himself Gilly Gizzard or something, he sent me a ticker and a
strong buy recommendation. I think the company made antler warmers for reindeer
and was thinking about expanding into reindeer accessories, kind of like the GAP
of the North Pole. The deal was, if I dropped my pastrami sandwich, cancelled my
afternoon card game, called my broker and bought the stock this instant, I would
be well positioned for the 2000% gain that was coming that afternoon as soon as
General Motors found out that reindeer droppings can be converted into some kind
of neo-thermal fuel that makes cars fly. Donít waste your time looking up
neo-thermal fuel in the dictionary, itís not in there. But it sounded
technical enough to me that if itís not already discovered, maybe we should be
looking for it.
With small-cap stocks you will want to concentrate on a few key points that
make a company go.
A) Management: Until a company has its ramp-up quarters (translation: losses)
behind them and you have a clear view of earnings potential, management is
crucial. Look for an experienced management team with past successes.
Avoid management teams that have directors with names like Sleepy, Dopey and
B) Market: You will want to find a company with a large market for its
products, if the market exists and the product is competitive, you have growth.
I donít doubt the market for reindeer antler warmers is vast but since
reindeer donít have pockets, Iím guessing their not carrying currency.
C) Scalable: The company needs to be able to produce their product or service
in quantity should the market demand it. It serves no purpose to have a product
that can not be delivered in a timely manner resulting in cancelled orders and
Many companies simply have a pretty picture of what the product would look
like if they actually had one. This probably saves on inventory costs, but no
actual product, no actual sales.
D) Margin: Look for companies with high margin products and services,
companies with 40%+ margin on their products are able to free up a lot of room
for other cash critical areas and have a better chance of turning profitable
E) Proprietary: The companies products or services should be proprietary or
at least unique enough to give it a distinct advantage. If not first to market
with the product, look for a company that makes a better mousetrap
There are tremendous gains to be had in penny stocks if you research your
stocks before you jump in. Having said that, the trick is performing your due
diligence and we cannot stress this enough. We think having the knowledge to
separate the hype sites from those that actually provide you a service are integral
in meeting your speculative portfolio's goals which should not be allocated more
that 5-10% of your general investing funds. We welcome you to the wonderful world of micro cap stocks, where else
can you double your money in a day and discover neo-thermal fuel.