Sometimes smaller is better.
A common misconception about smaller cap companies is that they’re much more volatile, and therefore are more risky and not worth the gamble. But the reality is that many of them generate returns that are as good as, if not better than blue chip stocks.
Look at their performance to date.
As of June 2017, small cap stocks are again outperforming the broader markets.
As we noted just days ago, with the S&P 500 up just 0.46% and the NASDAQ in negative territory since the start of June, the Russell 2000 is up 2%. The iShares Russell 2000 Index ETF (IWM) is up 4%, as smart investors find value in small cap stocks.
Better yet, if you can find hidden, ignored value, the opportunity for profit becomes greater.
Look at our Diversified Restaurant Holdings (SAUC) recommendation, for example.
Over the last year, The Cheap Investor recommended buying the stock on two occasions.
In July 2016, we recommended it at $1.31 a share. Even though first quarter revenue had just jumped to $48.2 million from $39.4 million, year-over-year, others ignored the value. Even net income soared from $262,642 to $430,405.
We also noted that, if the company could “dramatically lower this year’s loss or return to profitability, the stock should move up at least 50%.”
In September 2016, we recommended SAUC a second time at $1.20 a share. Again, others ignored the stock even though revenue improved from $36.9 million to $46.4 million year over year. Net Loss dropped substantially from a loss of $3.3 million to a loss of only $182,426. We wrote that, if the company continued to increase its revenues and earnings, the stock could move 50% to 100% from those current prices.
It performed even better than our expectations. In the months following those two recommendations, SAUC returned potential gains of 215% and 243%.
Heading into the second half of 2017, there are still plenty of opportunities that remain.
Pundits are calling small caps the smart opportunity that should benefit from President Trump’s economic policies. The idea is that smaller companies may gain more since they’re less exposed to a protectionist approach to trade.
In fact, according to The Wall Street Journal, that and a stronger dollar “could hurt multinationals and leave smaller, domestic companies relatively better off.”
In short, this could be another banner year for small cap stocks.
Small-cap stocks still offer some of the greatest rewards. In fact, The Cheap Investor just unveiled several new opportunities in the July 2017 issue found here: https://thecheapinvestor.com