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Accelerated Wealth: The Secret World of Microcaps
To read transcripts of these videos, follow these links: Part One | Part Two | Part Three
Part One: An Introduction to Microcaps
Hello, I’m Alexander Green. Welcome to Oxford Microcap Trader. In this video series, Accelerated Wealth: The Secret World of Microcaps, I will be diving into the often-misunderstood world of microcap investing…
When many new investors think of microcap stocks, they assume the term refers to penny stocks. But that’s not the case.
Penny stocks are a lot like lottery tickets. They are usually companies with poor sales, inferior products and bad leadership. And they’re typically unprofitable, illiquid and easily manipulated.
The penny stock landscape is littered with failed companies that had great stories but no fundamental business behind them.
As a result, they are usually good for one thing and one thing only… losing money.
Microcap stocks, on the other hand, are a very different story.
Microcaps are great little under-the-radar businesses that are destined to become midcaps and then large caps… or be bought out along the way.
In short, microcaps are well-run small businesses with fast-growing sales.
They are like penny stocks in that they are super cheap. But they are unlike penny stocks in that they actually give you a very good chance at BIG wins.
Of course, this flies in the face of Wall Street’s biggest lie, which is that you have to assume more risk in order to make more money.
This is simply not true.
It is possible to make higher returns with less risk. But you have to know how to find the good companies among the plethora of bad ones.
That’s all for now. I’ll explain exactly how I separate the wheat from the chaff in Part 2 of this series. Click through to it now.
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Part Two: How to Choose the Right Microcap Stocks
Hello, welcome back to Oxford Microcap Trader’s Accelerated Wealth: The Secret World of Microcaps video series. Once again, I’m Alexander Green.
Any microcaps I recommend have the benefits of young, cheap companies and the business fundamentals to become large companies in the future.
But in order to achieve this, these companies must meet a few criteria.
First, a successful microcap must have a solid, innovative product that will allow the company to break through into its own industry and accumulate market share.
Every major company, from Apple (Nasdaq: AAPL) to Netflix (Nasdaq: NFLX), started off small but had an innovative product that drove its core business.
This product must create huge sales growth for the core business. This shows not only that the company’s products are in great demand from consumers, but also that the company is successful at marketing its innovative products.
Therefore, we’re looking for microcap companies with at least three consecutive fiscal quarters of sales growth.
If a company can’t sell its fantastic products, then it’s effectively pointless. There must be a history of solid sales growth and the prospect for even greater growth in the future.
This alone distinguishes microcaps from the majority of so-called penny stocks and gives them the potential to be great investments rather than gambles. Because, as I said, most penny stocks hardly make money… if they do at all.
But there’s a second criterion I look for: great value.
You see, if you buy microcaps that are dramatically growing sales and trading at a tremendous value, you can make far more money with far less risk.
In particular, I’m looking for stocks trading BELOW the company’s book value per share.
Book value represents the company’s total assets minus its liabilities.
If a company’s market value is less than the total value of its net assets, that tells me the company is grossly undervalued.
Value stocks are generally considered lower-risk investments and, coupled with strong and consistent sales growth, can really supercharge our microcap gains.
In fact, a recent study published by MarketWatch compared the performance of “safe” blue chip large cap stocks over 88 years with that of small cap value stocks.
The large caps did pretty well. They produced $3.45 million in profit. But the tiny small cap value stocks produced $69.1 million!
That’s 20 times more money.
So, yes, microcaps can come with high risk if you buy them when they are expensive.
But if you buy them when they trade at incredibly cheap valuations, the upside far outweighs the downside risk.
One reason for this is that Wall Street tends to ignore microcap companies in favor of far bigger companies, which means it ends up covering these microcaps after most of their biggest gains have already happened.
Just think about it. If a company’s sales are going through the roof but too few people are covering the stock to even notice, then the share price will remain ultra-cheap.
And this gives us an incredible advantage.
We can get in at the lowest possible prices, investing far less than we would have to with a large cap.
And then, when Wall Street finally notices that sales are doubling and tripling… it jumps in and the stock rockets to the moon. This is where we have a HUGE ADVANTAGE over Wall Street.
But there’s one last criterion I look for in a stock… something I call a “profit trigger.”
Simply put, this is when I notice a HUGE spike in the company’s volume, suggesting a surge of investor demand for the stock.
While buying undervalued growth stocks can be a powerful way to collect massive stock gains, it might take a long time to see those gains materialize.
Remember, many microcap stocks are not closely monitored by Wall Street. It may take several months or even years for the Street to pick up on the company’s success.
But our profit trigger alerts us when the market has finally started to notice… before the stock becomes overvalued.
So when I see a big spike in trading volume… I know that Wall Street is finally waking up and moving in, which drives the stock higher very quickly.
Let’s recap. When I pick a microcap stock, it meets the following criteria…
- It has three consecutive quarters of sales growth.
- It’s trading below book value per share.
- It has large insider buying. (Which in turn can cause a large spike in volume, which I also like to see.)
Now, since this video series was recorded, the third criterion I look for has shifted to insider buying. Tracking the insiders is a more accurate way to ensure a microcap is strong.
Insiders know their companies better than anyone and have access to information that investors can only dream of. If they’re buying their own company’s stock, it’s for only one reason, it means they think it’s going up.
If a company meets all three of those criteria, it’s no longer a penny stock you gamble on… It’s a microcap that can deliver massive gains.
That’s all for Part 2. Join me in Part 3, where I’ll explain how to safely invest in microcaps and how to take profits and avoid losses.
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Part Three: How to Take Profits (and Avoid Losses)
Hello, welcome to the third and final installment of my Accelerated Wealth: The Secret World of Microcaps video series. Once again, I’m Alexander Green. In this installment, I’ll be explaining how to maximize your wins and minimize your losses…
Whenever we make an investment, we should know in advance what our potential risks are and strategize to minimize them.
For that reason, I recommend using a stop loss policy to protect both your invested principal and your profits.
A stop is a set price at which an automatic sell order is initiated. As a general rule, I often recommend using a stop policy on any stock positions in our portfolio.
Whenever a stock in our portfolio hits its stop price, we will automatically sell the stock at market. This helps to prevent small losses from becoming bigger, unacceptable losses.
It’s true that many great companies will bounce back eventually. But “eventually” can be a long time. Our policy is not to argue with the market.
We buy based primarily on the near-term business prospects for our recommended companies. But we understand, too, that changes in fundamentals are immediately reflected in share prices. So that’s where we base our sell decisions.
In this service, I use laddered stops. In other words, as a recommendation moves higher, I raise our stop accordingly to protect our principal and profits.
Lastly, there’s the question of taking profits as the stock moves up.
In general, I believe in holding on to your winners… so long as they keep winning.
You don’t want to prematurely cut short an uptrend by selling before you can collect maximum potential profits.
However, a good rule of thumb is to sell half of any position that gains in value by at least 100%. This will allow you to take back your entire principal and let the remaining position ride.
For example, let’s say that you’ve purchased shares of a stock for $50 and a few short weeks later the stock is valued at $100. You can then sell $50 worth of stock – reclaiming your principal – and let the remaining $50 appreciate in the market.
You’ll be playing with the house’s money, so to speak, and thus will incur no risk to your original investment, which you can then reinvest into other stocks.
If you put all of this together and follow my system for microcaps, you can identify these situations well in advance and get the chance to make very big money.
When you can buy stock in companies with sales rocketing higher at ultra-cheap valuations, there is no better recipe for success.
I believe microcap stocks offer the best opportunity to accumulate incredible wealth. With my strategy at your disposal, you could see gains as high as 1,000% thanks to this underappreciated part of the market.
But as with all investing, there are some risks. So be sure to apply my risk management strategy by using stops and collecting profits in an intelligent manner to maximize your long-term gains and minimize your losses as much as possible.
And that’s all for this series. I know there’s a lot of data here, but you can always refer back to this series on The Oxford Club’s website.
Good investing!