Opportunities in Elite Small Caps

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Join Matt tonight for a free event in which he’ll reveal the name of his #1 small-cap stock for the coming recovery. It’s a chance to make 1,000% or more in the next few years

 

The old expression is “he who laughs last, laughs best.”

On March 6, 2009, Matt McCall was ridiculed on national television.

As the markets traded near what would eventually be their ultimate lows during the Financial Crisis, Matt was being interviewed on Fox Business Network.

The other analysts on the show were predicting continued market losses and grim conditions. However, Matt took the unpopular position of suggesting it was time for investors to take advantage of the historic low prices. He recommended buying into nine stocks.

From Matt:

I told viewers that of those nine stocks, there was a good chance a couple could go bankrupt and all would be lost. Even with that possibility, the upside potential of the group as a whole was too good to overlook.

The response from Matt’s colleagues?

Laughter.

Fast-forward to February 19, just before COVID-19 hobbled the markets, and Matt’s nine-stock portfolio was up 721%.

What’s even more remarkable is that this gain included two bankruptcies out of Matt’s nine picks. In other words, even though the severity of the financial crisis left its mark on Matt’s portfolio, the composite return was still over 700%.

No one was laughing at Matt’s prediction then.

Bottom line — it’s a bad bet to wager against the resiliency of the U.S. stock market.


***I bring up this story because, today, Matt is seeing similar investment opportunities as he did back in 2009

 

From Matt:

The panic that has swept not only the nation, but the world is unprecedented. People are sheltering in their homes, buying toilet paper like it’s gold, pulling cash from ATMs, buying up enough ammo for a small war, and selling all stocks regardless of the company.

This has created opportunities today that we may never see again. So, we must act fast.

In this case, Matt is suggesting acting fast in the small-cap stock sector.

To make sure we’re all on the same page, “cap” refers to “market capitalization.” It’s a measure of a stock’s size, representing the total market value of a company’s outstanding shares of stock. You calculate market cap by multiplying the total number of a company’s outstanding shares by the market price of one of those shares.

In general, small-cap stocks are more volatile than large-cap stocks. That means what happens in the large-cap space is often amplified for small caps. This can be painful in falling markets … yet highly rewarding during recoveries.

To illustrate, let’s start by looking at the losses.

Below, we see a chart of the S&P alongside IWM, which is the iShares Russell 2000 ETF, a proxy for the small-cap sector.

While the S&P’s 2020 losses bottom-out at roughly 30% to date, IWM’s low is at 40%. As I write Wednesday morning, it’s still down 33% on the year.

 

But volatility works both ways. So, now, let’s look at the “good” volatility in small caps that characterized the recovery after 2009.

As you can see below, small caps handily outperformed large caps from March 2009 through late 2018 — 466% versus 325%.

 


***While this outperformance is substantial, it masks the extreme outperformance of specific small-cap stocks.

 

Back to Matt:

In a market panic, small-cap companies can go on “fire sale.” They can fall 30% … 40% … 50% … even 60%+, despite their businesses not being impacted anywhere near that much …

And in a market recovery, (10-fold) growth — and, often, way more — is very possible among the best small caps. History shows this …

To illustrate, Matt points toward a company called Patrick Industries. It’s a parts manufacturer for the recreational vehicle and manufactured housing sector.

The stock hit a high of $8.12 on July 20, 2007. When it reached its low of $0.10 on March 19, 2009, it had plunged 99% and boasted a market cap of just $2.3 million. That was a fire sale price, as the stock went on to rally an eye-popping 32,198%.

 

Capturing even a portion of that would not only help you recover from any losses sustained in this recent crash. It could be life changing.

 

***So, small caps can produce far-greater gains than large caps … but why is Matt seeing right now as such a buying opportunity versus months from now, when we have a better feel for the outcome of COVID-19?

 

In short, it’s because catching some of the early gains in a recovery can mean a big difference in your overall return.

To illustrate, let’s look at a hypothetical small-cap stock we’ll call Acme. And let’s say its price is chopped 60% in a bear market. From $20 down to $8.

Meanwhile, we have two investors. The first recognizes Acme’s value so she acts more aggressively. She buys some shares at a price that ends up being early — so she takes some temporary losses. She buys a bit more when Acme trades somewhere near its ultimate bottom. And then when she sees Acme pushing higher, she invests the majority of her capital. Let’s say her blended-average cost-basis is $11.

The second investor is scared by the market volatility. He waits, watching Acme hit a low then climb, but he worries it’s a bull-trap. Even though Acme continues to climb higher, this investor needs significant conviction that the worst is behind. He waits until Acme has recovered to $16 before buying in — still a discount to where Acme traded before the bear market ($20), but well-above its low ($8).

Let’s say that ten years later, Acme’s stock will have climbed to $90. So, both investors do quite well.

But how well? What’s the effect on returns of the first investor buying at $11 and the second investor buying at $16?

It’s a world of difference.

By the time the second investor is putting in his first dime, the first investor is already up 45%.

When Acme’s stock price hits $30, the first investor is up 172% while the second investor is up only 88%. In other words, the first investor has nearly doubled the returns of the second investor.

By the time Acme hits $90 a share, the first investor has made 718% while the second investor has made only 463%.

So, while both investors did great overall, the first investor’s returns were dramatically greater than those of the second investor because she bought in earlier.


***The market is moving fast today, creating conditions for wildly varying entry prices, which sets the stage for wildly varying returns

 

Matt provided one example of this in his update to subscribers on Monday (though it’s not a small-cap stock).

I talked about Boeing (BA) in my MoneyLine podcast on Friday, March 20, when the stock closed the week at $95.01. Today the stock is $152 — a gain of 60%.

While you may have missed Boeing last week, I am sure some of my thousands of listeners were buying shares. And it is not too late. My list of stocks to buy is growing by the minute.

Matt is so bullish on the opportunity in certain small-cap stocks, that he’s holding a special event tonight at 7 p.m. EST.

Matt will be discussing what he’s calling the Crisis & Opportunity Portfolio. He’ll be talking about how he’s viewing the market today, and the wealth-generating opportunities he’s seeing in the small-cap sector.

He’ll even be giving away one of his recommended small-cap stocks — no strings attached. It’s a stock Matt’s never shared before, yet one he believes is in the perfect position to climb 1,000% in the next few years.

It’s a free event. Just click here to RSVP and reserve your seat.

Here’s Matt with the final word:

… we will get past this, and life and business will get back to normal. When it does, you will once again be looking at your portfolio. It would be nice to be able to look back and know you bought into quality stocks selling at discounts you may never see again.

Have a good evening,

Jeff Remsburg

The post Opportunities in Elite Small Caps appeared first on InvestorPlace.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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