Jaime Rogozinski, founder of WallStreetBets, heads such a group with approximately 14 million members. And he has no illusions about their investment prowess. "They don't know what they're doing. And they don't care that they don't know what they're doing," he says. "To them, there's no sense in looking at a company's balance sheet or figuring out how to do a discounted cash-flow analysis. They just regard the volatility as an opportunity for fun." Hoo-boy. The sad part is these traders' instincts are basically correct. Low-priced stocks do offer the biggest potential returns. (Although you won't earn them flipping shares every few hours... or minutes.) Run your finger down the list of the best-performing stocks each year and you'll find that the vast majority of them - if not all of them - are microcaps. Microcaps are small companies with a total market capitalization - calculated by multiplying the stock price by the number of shares outstanding - of well under $1 billion. I'm not talking about worthless (and easily manipulated) penny stocks, zombie firms or companies struggling through bankruptcy. I'm talking about real companies - with real products and services and rising sales and earnings - that are early in a high-growth phase. These have the potential to generate some of the market's biggest returns. It's not hard to see why. They are tiny, so mutual funds and hedge funds can't buy them. Wall Street doesn't follow them. And the mainstream media doesn't report on them. This information vacuum creates vast opportunities for those willing to do a bit of due diligence. For instance, let's go back and look at an example. Here are the two-year returns from January 2018 through January 2020 for the five top-performing stocks in the S&P 500... - MSCI (NYSE: MSCI): 108%
- Fortinet (Nasdaq: FTNT): 147%
- Chipotle Mexican Grill (NYSE: CMG): 193%
- Paycom Software (NYSE: PAYC): 238%
- Advanced Micro Devices (Nasdaq: AMD): 347%.
Not bad. But compare those returns - the best of the best - with the top-performing microcaps over the same two-year time period... - Paysign Inc. (Nasdaq: PAYS): 1,239%
- Relmada Therapeutics (Nasdaq: RLMD): 1,296%
- Emisphere Technologies: 1,871%
- Neon Bloom Inc. (OTC: NBCO): 3,200%
- Fastbase Inc. (OTC: FBSE): 4,366%.
Investors everywhere want to earn higher returns. But many are going about it the wrong way. No, they are not gambling like the testosterone-fueled day traders. They make the opposite mistake. They look exclusively at huge companies that should give decent returns in the weeks and months ahead, but almost certainly will not generate extraordinary returns. Take Apple (Nasdaq: AAPL), for example. It's a fine company. I've owned shares of it for more than 25 years now. The annual dividend is many times my original investment. But today it has a market cap of $2.4 trillion. It will not become a $4.8 trillion company anytime soon. I bought Apple when it was a small company. Now it is the world's largest. Personally, I'm much more interested in finding the next Apple than arguing about whether that company is a "Buy" or "Hold" today. There are plenty of publicly traded companies out there with the potential to rise severalfold in the months and years ahead. But they tend to be microcaps, not megacaps. If you're not earning the outsize returns you'd like, don't focus entirely on large firms. And don't waste a minute on little ones without stellar fundamentals. Instead, devote a portion of your portfolio to fast-growing small companies with successful products and services - and superb prospects. If you're going to cast a line, that's the pond where you want to fish. A Pivotal Point in the Market On August 11, I'm sitting down with Empire Financial Research founder and CEO Whitney Tilson to discuss something very important. We believe we are at a key moment in market history. What we're seeing now is something very similar to what happened in the early 2000s after the dot-com bust... in the aftermath of the housing crisis... and in 2020's COVID-19 collapse. In short, the market is splitting in two. Some financial assets are going to perform very poorly over the coming years... And I believe one specific group of assets is going to perform better than anyone expects. Lock in your free spot here to virtually attend our discussion. Good investing, Alex |
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