A Major Micro-Cap "Buy" Signal

Lou Basenese

Tuesday, September 14, 2021

Don’t look now — but micro-cap stocks recently staged a breakout above key technical resistance levels.

More specifically, after consolidating and trading sideways since March, they closed out the month of August and entered September by surging above their 50- and 200-day moving averages.

What’s next?

In the months ahead, I’m convinced we’ll see major outperformance.

Here’s what you need to know...

Our Exclusive Edge

Longtime readers know that micro-caps are my favorite type of investment.


Not simply because of their explosive profit potential — the kind of potential I believe will soon be put on full display once again.

But also because of the unfair advantage micro-caps give us over Wall Street.

That’s right. We — Main Street investors and all of our supposed “dumb money” — actually hold an advantage here.

How so? Well, it’s no secret that Wall Street is notorious for keeping the best profit opportunities for itself, leaving individual investors like us out in the cold.

But with micro-caps, they simply can’t hog the opportunities for themselves.

For starters, many institutions are boxed out from micro-caps because there isn’t enough trading volume in these stocks to enable big institutions to buy and sell them efficiently.

Furthermore, since only a tiny number of financial analysts provide research coverage of micro-caps, there are few reports or “cheat sheets” to help Wall Street institutions guide their investments.

More specifically, the average large-cap stock has 20.5 analysts covering it, versus just 3.3 analysts for the average micro-cap.

In fact, countless micro-caps stocks have zero coverage.

And in the rare case where a Wall Street money manager decides to defy convention and invest in micro-caps, the performance boost they capture is only temporary, because they become a victim of their own success...

You see, the high returns they earn lead investors to pour more money into the fund. That forces the manager to invest in small- and mid-cap stocks that can handle the influx of all that new capital.

So in a blink, the fund transitions from a micro-cap fund to a small- or mid-cap fund. But those bigger stocks don’t offer the same upside potential!

Long story short: instead of the odds being stacked against us average investors — just like in a casino — with micro-caps, they’re actually stacked in our favor.

Even Buffett Agrees

Even Warren Buffett recognizes the benefits of being a smaller investor who can invest in micro-cap companies. Here’s what he said:

“If I was running $1 million today, or $10 million for that matter, I’d be fully invested. Anyone who says that size does not hurt investment performance is selling. The highest rates of return I’ve ever achieved were in the 1950s. I killed the Dow. You ought to see the numbers. But I was investing peanuts then. It’s a huge structural advantage not to have a lot of money. I think I could make you 50% a year on $1 million. No, I know I could. I guarantee that.”

Like I said, micro-caps give us an advantage over the “smart money.” And that advantage can be boiled down to a simple truth:

With micro-caps, we can get in early when no one else can buy.

To put this another way, all great companies start out as small companies. But as they mature, their sales and earnings grow, and so do their market caps and trading volumes.

Before long, they become small-cap, mid-cap, or large-cap companies, all of which are “fair game” for the rest of Wall Street.

And when institutions finally get a chance to buy the stocks of these compelling companies, they buy millions of shares — and that pushes up share prices even higher!

At this point, you might be wondering if there’s a catch. For example, maybe you’re wondering if there’s a shortage of these opportunities.

But as it turns out, there’s never a shortage of micro-cap opportunities. There are more micro-cap stocks than any other type of stock in the market — thousands more.

So, how do you go about finding the highest-quality micro-cap stocks?

For all the details, tune into my next column, where I’ll share 7 critical screening criteria…

As well as a specific micro-cap investment or two.

Ahead of the tape,

Tags: micro-cap warren-buffett