Are you Cut Out for Investing in Microcap Stocks?
Companies / Investing 2022 Nov 03, 2022 - 10:14 PM GMTBy: Stephen_McBride
By Chris Wood : I love microcaps.
As a group, they generate 24.5% higher returns than bigger stocks, based off nearly 100 years of data.
They’re largely “undiscovered” by Wall Street, which means you can gain a real “information edge” 99% of the public isn’t privy to.
And unlike big stocks, you can get in on the “ground floor”... before the most explosive growth occurs.
But microcaps most definitely aren’t for everybody.
Are they for you?
- Imagine you bought Kopin (KOPN) when I first recommended it in 2019.
Kopin is a little-known company that supplies cutting-edge display technology for AR and VR headsets.
But in March 2020, KOPN got sucked into the COVID crash and sank to $0.19 per share.
Down 84.9% from where I first identified it for my Project 5X readers.
Not good!
The stock price made absolutely no sense. It was trading like the company was dead in the water. And that was plain wrong. In fact, it was securing record orders.
And, crucially, it had the best technology on the market, hands down.
I knew it was only a matter of time before its stock price reflected this.
I told my subscribers to hang tight… and that our patience would be rewarded soon.
- Kopin went on to soar 5,657% over the next 11 months to close at $10.94 on February 12, 2021.
That’s when we exited the position.
We nailed the timing pretty well, closing the position one day before KOPN’s peak.
See the power of microcaps?
Because of their small size, microcaps can grow in ways that are simply impossible for larger companies.
But to tap into this profit potential, you must be willing to take a roller coaster ride sometimes.
Like with Magnite (MGNI).
We bought Magnite when it was called The Rubicon Project on January 23, 2020. Soon after, it announced a merger with connected TV specialist Telaria.
Rubicon developed an online exchange to automate the selling of digital ads. I knew the merger with Telaria would change the game in digital advertising.
On April 3, 2020, Magnite hit a low of $4.09—57% below the price I recommend it at.
But again, the stock price made no sense. It was trading for less than 1/10th of what the combined company was worth.
At the time I wrote, “This is by far my highest-conviction pick right now.”
- Magnite soared 1,409% over the next 10 months to close at $61.70, which is when we exited the position.
Kopin and Magnite ran up well over 1,000% in less than 11 months.
Those were great trades.
And fun stories, in retrospect.
But you need the right emotional makeup to tap into profits like these.
People want a stock that’ll take off the month you buy it.
Sometimes that happens…
But the world doesn't usually work that way.
No stock is preordained to go up.
I’ve had my share of losses.
But with Kopin and Magnite…
20 years of experience and the deepest and most careful research possible told me it was extremely likely they would pay off handsomely… IF we could simply wait out the roller coaster ride.
- You must do what’s right for you.
Many folks can’t handle the volatility of microcaps. And that’s perfectly okay.
There’s nothing wrong with parking your money in an index fund to earn 7–8% a year, on average, before inflation.
Of course, the inflation-adjusted return of the S&P 500 over the past 20 years is 5.3%.
And that’s when inflation was low. Today, with inflation at 8%+, the results from index fund investing might not be so pretty.
To me, it makes sense to allocate at least a small part of your portfolio to microcaps because of their explosive upside.
And because their upside is so high, you only need to risk a little to make a lot.
Does that make sense for you?
I can’t say.
Only you can decide.
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By Chris Wood
© 2022 Copyright Stephen McBride - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.
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