When chatting with a dozen mining professionals and CEOs at the Prospectors & Developers Association conference in Toronto, one of them remarked that I had gotten involved in his company stock at just three cents, seven years ago. Today, that company is listed on the NYSE with a market cap of $2.2 billion, and that entrepreneur is the major shareholder with a personal net worth of several hundred million dollars.
Enormous wealth creation in the equity market happens much faster than most people believe possible. It takes the right mix of people, product, and financing – and traders like you and me who are prepared to take a risk. My task for the Nasdaq Community is to find winning companies that I believe have prospects of 5 times growth in 5 years – “5x5”.
“5x5” is also radio communications shorthand for a strong, clear signal – “loud and clear”. Recognizing strong, clear market signals is part of my stock in trade.
So, welcome to “Mission 5x5”. We will focus on higher risk small cap companies with the objectives of making serious money and learning important lessons.
I am a professional trader and teacher. Many people know me as “The Trader Wizard”, author of Lessons From the Trader Wizard, written from May to September 2007. In my e-community I provide leadership and direction. It’s a dynamic place and I hope it will be the same here; but it’s up to you. You see, I’m also known for being blunt and I will put this bluntly: we come to the capital markets to make money and this column will not suffer people who waste our time seeking entertainment or ego gratification.
Trading in high-risk small caps is not easy. We play and are played by the market. Price volatility is extreme and there are frequent drawdowns. But if you apply principles of risk management and are prepared to make quick decisions, the rewards can outweigh the risks.
Agreed? Then let’s enjoy this process. I’ll start the dialog and you are invited to participate in constructive discourse. Together we’ll find those future winners.
In my book I covered trading of high-growth small cap stocks. My pick in August 2007 was NetEase.com (NTES), then priced at about $15. By August 2009, NTES peaked at $45 and is now at about $40. In line with “5x5”, NTES has good prospects for $75 by August 2012. In fact, I think the stock will be trading at new highs in a couple months.
The NTES website states: “NetEase operates a leading interactive online and wireless community in China and is a major provider of Chinese language content and services through our online games, wireless value-added services and Internet portal businesses. Our average daily page views for the month ended December 31, 2008 exceeded 640 million. We generate revenues from fees we charge users of our online games and wireless value-added and other fee-based premium services, as well as from selling online advertisements on the NetEase Web sites.”
When financial statements are filed after month’s end, NetEase will show more than US$1.5 billion in shareholder equity, most of it in cash. The company is a cash cow. With a market cap of $5.1 billion, NetEase is no longer small cap.
Things are changing in China, except the series of policy tightenings by the People’s Bank of China that will likely continue well into 2H2011.
A couple days ago, Reuters reported China’s leadership would approve a plan to invest US$300 billion per year for five years in these seven strategic sectors:
• Alternative-Fuel Cars
• Energy-Saving Technology
• Alternative Energy
• High-End Manufacturing of hi-speed trains, wind turbines, solar panels
• Rare-Earth Metals
• Super-Computer Technology
This shift from manufacturing of low-end consumer products to high-end technology – in a country that can pay for the best R&D and process engineering – will push the competitive envelope. Europe and North America will be hard-pressed to keep up. Particularly troublesome for so-called “developed markets” is the deleveraging process the banks in leading nations will be going through during this period of massive investment by China.
Bottom line: The focus of investors for the next five years ought to be on entrepreneurship, in China and other Emerging Markets, but also in North America. I will direct half my portfolio management efforts to small cap companies – half in North America and half in the emerging economies, mostly China.
I will invest at least a couple million dollars in two portfolios of 20 companies each:
• North American advanced markets (AM)
• Emerging markets (EM), mostly China and Hong Kong companies.
Selection criteria include:
• Nasdaq listing
• Market cap less than $2 billion but greater than $150 million
• Share turnover averaging more than 200,000 per day
• Profitability expected in 2011
• Positive rating by analysts
• Institutional ownership greater than 10%
• Percentage of float that is short to be less than 20%
And I’m painting a target on my forehead. I will establish a $100,000 template portfolio, divided as $50,000 AM / $50,000 EM. There will be 20 small cap Nasdaq-listed stocks each in AM and EM for a total of 40, averaging $2,500 each for a total dollar value of $100,000. With the very high capital risk associated with most small caps, I’ll be seeking at least +30% annual gains across the portfolio, including a number of 5x5s.
I’ll track this portfolio for you and write about stocks I buy. We’ll all learn something. It’s always a learning process. We need to help each other avoid nasty surprises. Your constructive comments are appreciated.
I’ve read articles by sophisticated investors about Nasdaq-listed ChinaHybrid stocks, referring to many of these Reverse Take-Over (RTO) stocks as outright frauds. So, we need to dig up that info too.
Here are the account statements of the initial selection of 20 small cap Nasdaq-listed stocks in each of the Emerging and North American markets. Next week, I will begin discussing fundamental, quantitative, and macro-economic reasons for these picks, and how I use technical analysis to time entries and exits.
Did I say, “exit”? Here’s how I trade: at a party in March 2009 thrown by Rob McEwen of US Gold (UXG $7.16 Dec 3 close), I said I had purchased a block of his stock at $2.00. Everybody laughed when Rob replied, “But for how many minutes do you intend to hold it?”
We trade prices. Every stock in our portfolio had a price that was attractive enough to buy it and today has a price where we would sell it.
Hopefully, we buy low and sell high. If we select well, we can look forward to some 5x5 winners.
Next week, I will present the text from Lessons From the Trader Wizard dealing with small caps.
Have a profitable week.