Thursday, September 16, 2021
Looking for an investing edge?
Earlier in the week, I shared why micro-cap stocks are where it’s at. And why the market could be sending us a major “buy” signal right now!
Here’s the thing about micro-caps: in this market, not only do individual investors have an unfair advantage over Wall Street, but the profit potential is unmatched.
Case in point: Historically, micro-cap stocks have beaten the returns of the S&P 500 Index by nearly 3x.
And remember, those are just the averages. It’s common for individual micro-cap stocks to soar 500% to 1,000% or more in a single year.
Who doesn’t want some of that in their portfolio?
With this in mind, as promised, today I’m sharing my 7-Step Screening Process.
This process can quickly help you whittle down the universe of thousands of potential micro-cap stocks to a handful of the most compelling opportunities.
And for the lazy researchers in our midst, I’ll also be sharing a simple, one-click method to own an entire portfolio of the market’s most promising micro-caps.
So let’s get to it...
Do the Work, Earn the Rewards
As you can imagine, doing the research to identify a high-quality micro-cap takes time — lots of time.
Typically, it takes me three to six months of nose-to-the-grindstone research to identify and vet the opportunities that could quickly deliver the biggest gains.
Sometimes I spend years researching and waiting for the right time to purchase a specific micro-cap company.
Why? Simple. If we’re aiming to maximize our profits and minimize our risk, we can’t just invest in any micro-cap.
Here are the seven criteria every micro-cap stock should exhibit before we consider buying a single share:
- Fast-growing market worth $1 billion+ with expansion opportunities: There may be riches in niches, but market opportunities below $1 billion don’t attract enough mainstream attention to increase share prices meaningfully. We need to insist on companies tied to a mega-growth trend. After all, a rising tide lifts all boats, right? At the same time, we want to focus on companies that can expand their products or services into adjacent markets because that expands their growth and profit potential even further. For the company… and for its investors.
- Strong patent protection and/or first-mover advantage: In a world filled with “knock-off” products and services, patent protection and insurmountable first-mover advantages help ensure we own the types of companies that can generate meaningful sales and profits — and whose share prices can be propelled higher and higher.
- Proven management team: Winners keep winning. So we look for a track record of success over time. But we also need these proven management teams to have meaningful “skin in the game” — which leads to the next criteria...
- Insider ownership of at least 10%: When management owns a significant amount of stock, we can be sure that their interests will be aligned with ours. The more they own, the more motivated they’ll be to bring about higher share prices. We also should take into account recent insider buying and selling trends. After all, insiders might sell for a variety of reasons, but they only buy for one reason: they think the price is going up! And it doesn’t get any more bullish and urgent when a group of insiders is buying at the same time.
- Little or no analyst coverage: By focusing on companies with little or no analyst coverage, we can ensure that we’re investing ahead of, not behind, the billions in capital that Wall Street directs.
- Listing on a major U.S. exchange: When it comes to protecting our downside and cashing in on the upside of micro-caps, liquidity matters. That’s why we focus on companies that are already listed on major U.S. stock exchanges. That means they’re also fully reporting companies. In other words, don’t ever waste your time with bulletin-board listed penny stocks.
- Visible Inflection Point: No one likes waiting for investments to work out. Especially when there’s an opportunity cost associated with tying up our capital in an investment that goes nowhere. If a catalyst doesn’t exist on the near-term horizon, neither does an opportunity to profit handsomely. That’s why we need to insist on micro-caps with imminent catalysts that will serve as inflection points for the stock’s valuation. This could be a new product launch, a major customer win or partnership, fresh clinical data, or even a potential acquisition.
But for those of you who can’t be bothered to put in the time and energy to find the market’s most compelling micro-caps, a solution exists:
Ahead of the tape,