Micro vs Macro (Penny Stocks vs Old Guard)
Started Jun 29 2009 at 7:25AM (EST) (By DowJonesDave)
I got a private message asking me "how I sleep at night" holding microcaps with as low as 78 mil market cap. Well, first of all, 78 mil sounds like a lot of money to me...lol! It's only a small number by comparison!
Ok, why micros? First of all that's where I started, and that's the universe I feel most comfortable with. Now by my way of thinking you want to buy low (or small) and sell big (large). Secondary stocks aren't as well covered sinmply due to the fact that most people own large cap familiar names. The media obviously has to cater to interest and the major interest (as measured by money invested) is in the big names. This means you're not going to discover anything unknown about these stocks! All the factors are eblazoned across TVs and papers and the internet so you can really never get a seriously severe disconnect between value and price, leaving big names for the most part fairly valued at almost all times. Kind of hard to make a killing on a continuous fair value price.
Micros on the other hand, are by definition largely unknown. Fundamentals will drive a good micro up into higher cap status over time, less if the stock is quality and unpercieved. The big problem with micrcaps or "pennystocks" is that most of them aren't worth looking at!
That means u have to search and sift to find good micros. You have to WORK.
Bottom line it's hard to find good micros, but they are there hiding in amongst the crap that populates the penny stock universe. There is incredible undervaluation available but you have to know what to look for, and when to look for it.
So anyway, why own a stock that's all grown up with all the really killer growth far in the past? And last year should have educated everyone what can happen to old, grown up entities.
Ok, why micros? First of all that's where I started, and that's the universe I feel most comfortable with. Now by my way of thinking you want to buy low (or small) and sell big (large). Secondary stocks aren't as well covered sinmply due to the fact that most people own large cap familiar names. The media obviously has to cater to interest and the major interest (as measured by money invested) is in the big names. This means you're not going to discover anything unknown about these stocks! All the factors are eblazoned across TVs and papers and the internet so you can really never get a seriously severe disconnect between value and price, leaving big names for the most part fairly valued at almost all times. Kind of hard to make a killing on a continuous fair value price.
Micros on the other hand, are by definition largely unknown. Fundamentals will drive a good micro up into higher cap status over time, less if the stock is quality and unpercieved. The big problem with micrcaps or "pennystocks" is that most of them aren't worth looking at!
That means u have to search and sift to find good micros. You have to WORK.
Bottom line it's hard to find good micros, but they are there hiding in amongst the crap that populates the penny stock universe. There is incredible undervaluation available but you have to know what to look for, and when to look for it.
So anyway, why own a stock that's all grown up with all the really killer growth far in the past? And last year should have educated everyone what can happen to old, grown up entities.
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8 Comments
Top 1%
DowJonesDave
Jun 29 2009 at 7:31AM (EST)
PS: I agree with the general abservation that most penny stocks aren't worth the paper they're printed on. I look for the rare exceptions. To give u an idea of the work, I've gotten through the letters A- C of the NASDAQ Composite so far this year.
Top 97%
jinilla
Jun 29 2009 at 2:42PM (EST)
it is fun to see you find out some really stunning micros to take off
however, not every one could learn from such gift.
Top 1%
dirtyharry
Jul 01 2009 at 6:41PM (EST)
I've always been the anti-penny stock guy, until now. When I review my performance from 2008, the bottom line is my value stocks failed. The fell, and fell hard. It didn't matter what their cash position were, and it didn't matter how profitable they were expected to be. I use VectorVest modeling to find trading ideas, and this last year to year and a half has sent me back to the drawing board.
When I went back and analyzed what worked, what I discovered surprised me: Penny stocks worked. I've since built and tested some great models that have produced astronomical returns. I will start trading them here when appropriate. My last leg that I just exited yesterday produced about 7% since last Wed. I plan on focusing on this model from here on out because it's the only thing I have that produces the big returns I'm seeking.
Top 81%
MasterOFate
Jul 01 2009 at 7:40PM (EST)
Play with micro cap stocks at your own risks. They are more likely to swing violently up and down by stock promoters, newsletters, traders, etc. Good luck.
Top 1%
dirtyharry
Jul 01 2009 at 9:06PM (EST)
I'm well aware of this, which is why I've always avoided them. Still, I can't dispute my findings. They have worked out very well for me thus far. I'm still scared but if it makes money I'll get over it.
Top 2%
shlomi
Jul 02 2009 at 6:09AM (EST)
Maybe micro caps are too scary for me ... but how about small cap company with a great future and a man from the inside (a good friend). A company that quietly, with minimum volatility made more than 60% YTD?
check out MLNX
http://www.marketguru.com/stocks/mlnx
Top 1%
DowJonesDave
Jul 02 2009 at 9:54AM (EST)
As with any stock, you need to trade/invest with market direction. Any attempt to go against the market is almost surely going to result in losses. Micros will outperform both ways, up and down. So yes, you can get hit hard with micros.
A rule of thumb with these companies to cusion downside, is to make sure you buy under book value and that the company has growing sales and operating margins.
Top 1%
DowJonesDave
Jul 02 2009 at 11:25AM (EST)
Clarification: Operating Margins should be positive. Margin Growth is not an essential, as a company with growing revenues (the real measure of quality) will grow earnings on a similar margin as a function of improved revenues.
Net earnings should be considered only if more "one time, non-recurring" losses or gains are suspected. A quick check of the writedown/s that created a net loss (as opposed to operating) can give you clue on this front.
The difference between net and operating earnings is that operating earningsa are derived from revenues and normal operations, whereas net earnings would include things such as a sale of assets at a loss or gain from the purchase price, legal expenses from lawsuits, etc, and in many cases are items that will not be repeated.