We believe mega-cap stocks, like Apple Inc. (Nasdaq: AAPL) and Alphabet Inc. (Nasdaq: GOOGL), that bring regular gains (and a juicy dividend) belong in the "bedrock" of every investor portfolio.
But for really explosive growth, nothing beats small caps. With a market cap from anywhere between $250 million to $2 billion, these companies have the headspace to grow fast, doubling and even tripling before they graduate to big-cap, "household name" status.
Finding those stocks is a question of looking for the "sparks," or catalysts, that always appear immediately before the share price goes up.
Nobody finds these sparks like our Small-Cap Specialist, Sid Riggs, editor of our Small-Cap Rocket Alert trading service. He brings the absolute best small-cap recommendations to his readers with instructions on how to buy, protect a position, or exit. (Note: Sid's recommendations are absolutely crushing the market right now - better than 55% returns, on average, for all open positions.)
Now, Sid was in Baltimore for meetings this week, so I took advantage of the chance for a little face time with him to find out for our Members what kind of small-cap opportunities he's researching right now, and what he thinks of the segment as a whole in 2017.
Here's what he had to say...
A Smarter Way to Play Small Caps
Greg Madison: Hey, Sid, thanks for taking the time to join us.
Sid Riggs: Of course!
GM: So... Small caps can be some of the biggest, fastest gainers on the the market, but as a whole, they're lagging the S&P 500 a bit this year. What do you think the rest of 2017 holds? Do you think this is a sign of some secular trend, or just taking a breather?
SR: I get this question all the time - but I think the real question should be "what's your time horizon?"
If you need to cash out of your stock portfolio in order to pay a bookie at the end of the week, you might want to be concerned with short-term volatility. But if your time horizon is longer than the attention span of a gnat, then I think you want to use pullbacks as a buying opportunity.
Regarding trends, and the remainder of 2017...
I'm putting my money on quality small-cap stocks. I think that's where the year's biggest winners are going to come from.
Case in point, last year - 2016 - alone, there were more than 250 small-cap stocks that delivered trough-to-peak gains in excess of 100%. Of those, 113 were in excess of 300%, 44 were in excess of 500%, and eight were in excess of 1,000%. By comparison, the largest trough-to-peak gain for a stock in the Dow Jones was Goldman Sachs Group Inc. (NYSE: GS) with a trough-to-peak gain of 74.25%, over the same period.
When the dust settles, this year's biggest gainers will likely be a list of quality small-cap stocks, once again.
GM: So it's about quality. What do you like to see before you make a small-cap buy recommendation?
SR: I want to see a spark - preferably multiple sparks - in conjunction with industry-specific tailwinds that can drive prices higher for at least 12 to 24 months.
What I mean by a spark is a reason "why" a stock is going to move.
That spark can be a good earnings report, an upward EPS revision, the announcement of a new product or a new contract with a heavyweight customer, a change in management, even positive news from a competitor can have a sympathetic influence on a stock. But no matter what, I want to see at least one spark.
Regarding industry-specific tailwind...
I want to make sure the industry itself has enough future demand to sustain increased revenue for at least 12 to 24 months.
Whenever possible, I want the industry, as a whole, to be the main driver of revenue growth. Once that's in place, I can drill down to find the company with a differentiating product or service that can give it a first-mover advantage or create dominant market share.
GM: See any hidden gems or sectors looking especially promising in the small-cap "universe?"
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SR: That's the thing: There are always hidden gems in small-cap stocks. That's what's so exciting about them. In fact, every year there are typically hundreds of small-cap stocks that deliver trough-to-peak gains in excess of 100%.
Right now I'm tracking companies with exposure to machine learning, artificial intelligence, virtual reality, robotics and automation, and fiber optic network expansion.
GM: Aah, so you're hunting, by and large, disruptors.
SR: Yep! The first four of those are all new (or fast growing) industries that are poised to completely disrupt every market they come in contact with. Because of that, they literally have decades of runway and billions (if not trillions) of dollars of demand ahead of them.
The latter is a no brainer. The amount of data (fueled by online video, music, file sharing, etc.) traveling across the Internet is exploding.
Consider the following two statistics from the Cisco Visual Networking Index: Global Mobile Data Traffic Forecast Update, 2016-2021 White Paper.
- "Global mobile data traffic will increase sevenfold between 2016 and 2021."
- "Mobile data traffic will grow at a compound annual growth rate (CAGR) of 47 percent from 2016 to 2021, reaching 49.0 exabytes (note: 1 exabyte = 1 billion gigabytes) per month by 2021."
The only way to keep up with that kind of growth is to build faster and more reliable networks to meet the demand. Once again, years of increased revenue runway ahead - and profits for savvy investors.
GM: We're coming out of earnings season, but as always, it won't be long 'till the next one. We see how earnings impact the "Fabulous Five" stocks - Facebook, Amazon, Alphabet, Microsoft, Apple - and other big and mega caps. How do earnings reports impact small caps?
SR: I think earnings are critical for small-cap stocks. In fact, they can be one of the most important sparks to get a small-cap stock moving in a big way. That's because a lot of small-cap stocks are off-the-radar and don't get much analyst coverage. Therefore, earnings reports represent a way for them to grab the spotlight and draw attention to what they're doing.
It's not uncommon for a small-cap stock to jump 10% to 15% or more, in a single day, on a good earnings report. Longer term, a good earnings report can push a quality small-cap stock up 50% to 100% in a matter of months, even weeks.
You'd be hard-pressed to get that kind of performance out of a large-cap stock, no matter how exciting the news.
GM: We're just about out of time, so, apropos of that (laughs)... How can our Members know when it's time to take profits and get out of a small cap?
SR: This is another question I get a lot - and the answer is deceptively simple.
I recommend identifying a line in the sand prior to entering a position. Basically, a point at which you will exit your position, with no questions asked. Period.
That number can be based on something as simple as a percentage-based trailing stop (which I favor for most people because it's so easy to implement) - or it can be more sophisticated like volatility-based stops. The key is to use a method that's dynamic and increases as the price of your stock increases.
Here's why such a simple strategy is so profitable...
Most people think of protective stops as a method to protect their downside from outsized losses - and in most cases they're very good at that - but where they really shine is as a mechanism to capture profits.
Think about it this way...
As your stock increases in value, a dynamic protective stop will increase, too. If you've got a winner on your hands, the protective stop will eventually blow right past your purchase price and then it becomes a point at which you can exit the position profitably. The higher the stock goes, the higher the potential profit that follows. Simple, elegant, and it takes all the emotion out of trying to figure out when to capture profits on a position.
No matter what you do, though, I recommend selling half of the position once you've reached a 100% profit. That way you take your initial investment off the table (which essentially creates a free trade), and then you can redeploy the capital into your next investment.
GM: Thanks for talking with us, Sid.
SR: My pleasure. Talk to you soon.
Click Here to learn more about how to get Sid's Small-Cap Rocket Alert research recommendations - including the big disruptors - for yourself.
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