Why Not Microcaps?

It’s no surprise that many investors looking for big gains end up putting money into volatile, popular assets. Whether its cryptocurrency, AI stocks, or another trending meme, taking a gamble on something everyone’s heard of continues to be a common bet.

These types of assets can create incredible gains, but they are also already known, meaning the discovery phase is largely gone. They have already ridden the hype train up, and when big retail numbers finally jump in, down they go.

Instead, there is another way to get great returns, but it requires effort as it’s not largely known. As we have said again and again, there’s a section of the market that is ignored, a section that, when you sift through the duds, has a great selection of companies that make money and have incredible growth potential, microcaps.

Starting small

Most investors’ understanding of microcaps stems from vague recollections of shady website promo banners, friends with hot stock tips, and conference salesmen. These stereotypes are part of the microcap space because, by its nature, it contains high-risk and volatile companies, and with that comes the types of risk-takers you’d expect.

It’s not surprising that investors rarely start in microcaps, nor is it surprising that most investors don’t see these stocks in a favourable light. But that’s just noise because about 10% of the companies in this space hold incredible potential. It’s no coincidence that legendary investor Warren Buffet got his start in microcaps, making a fortune on finding unknown, small companies and getting in before everyone else.

There are many others like Warren. However, you won’t hear about famous, rich investors in this space now because they don’t need to be. This is where you try to get rich.

Big money is largely non-existent

You’re on your own. Institutional investors often have restrictions on buying small companies, and they rarely have a permanent presence in microcaps. Having said this, everything moves in cycles, and we have seen signs that institutional investors are showing up, as capital looks for a strong return down the chain.

Private equity is even circling, infusing capital into the sector and confirming how undervalued some of these stocks really are, but also bringing its own issues including the threat of retail investors losing out.

But overall, the microcap space remains a pla where retail investors can get in early, if not first. Every large company started small, and this is where they are born and grow.

How to get started

Spending hours sifting through complex reports and calculating financial metrics, trying to separate the good from the bad, is hard work. And even if you find a lead, there are many other factors you must consider to truly understand if the investment is sound.

This is where we come in. We know this space, and we have developed a system for sifting through the thousands of small stocks to find the gems. We regularly publish reports on companies we follow, through video interviews, written analysis and more.
Our method is no secret. We put in the legwork to uncover companies that align closely with our criteria:

• Revenue growth. It tells us something is working with the company. Our rule of thumb is at least 25% year-over-year revenue growth per share.
• Profitability. We look for companies that have at least two consecutive quarters of profitability. When combined with revenue growth, this shows that you are buying an actual business—one that is sustainable.
• Shares outstanding. The smaller the better. There is no magic number as every company has variables to consider, but we have found the further down from 100 million the better. We are particularly intrigued when we see sub 50 million because it often reflects the next point . ..
• Sound management. The way a management team treats its shares is a good indicator of how they treat their cash, staff, clients and customers. There is a lot to say about what makes a sound management team, but in summary we encourage investors to look into them wherever possible. We publish interviews on our YouTube channel regularly of interviews with management.
• Few institutional investors. As noted above, it’s advantageous that institutional investors are not heavily concentrated in this space. And if you find a good company that has no institutional involvement, there’s a good chance you are getting in on the ground floor, before the big money shows up and pays up.

While a company doesn’t have to tick all these boxes, the more the better. Over the last couple years, we’ve seen several success stories following this approach including: ZDC.V, PNG.T, HASH.V URL.C.

Adding it all up

Everyone wants to find an investment that, in a relatively short time, makes 10 times their money. Having money set aside in search of this type of risk-reward scenario is perfectly fine, but approaching the investment world without doing due diligence leads to heartache.

If you look in the microcap world, these types of outsized gains are very possible. It’s a space where the big money is largely absent, meaning small retail investors get a chance to get in early. And while it’s loaded with companies that are not good investments, to put it mildly, there are plenty of solid businesses as well. They don’t need to go in search of money as they are making it—and growing. What’s more, they are often dirt cheap, lumped in with the pricing of countless other duds.

The most important consideration is that the good companies don’t come looking for you. You must find them, and you must develop criteria for screening stocks, testing it to measure results. Or follow someone who does.

It’s all very possible, as we have shown, and the potential returns make any effort well worth it. So, if you’re choosing between a fad stock, a crypto coin, or a promising microcap with a dirt-cheap stock price, you should be asking yourself a simple question:

Why not?