United States  

Celebrating 10 Years of Trusted News Discovery
One News Page
> >

Here's an artful—and hands-on—approach to micro-cap investing

Proactive Investors Friday, 12 October 2018
“Investing in stocks is an art, not a science, and people who’ve been trained to rigidly quantify everything have a big disadvantage.”  –Peter Lynch Think back to your college days. How many times did a professor assign a project and the first emotion you felt was fear, with heart-pounding stress coming in a close second? Your fear and stress were likely an immediate response to what seemed like a complicated and overwhelming project. But once you took a step back and began breaking down the project into more manageable, three- and four-hour tasks, the assignment wasn’t nearly as scary.  There's a saying, sometimes attributed to Mark Twain, that says the secret to getting ahead is just getting started. Investing is no different.  By the end of my sophomore year in college, with a couple of finance and economics courses under my belt, I was sure my understanding of financial statements and valuation ratios would carry me to investing success. After all, if I can determine price/earnings and price/book multiple, surely, I can figure out whether a stock was priced for perfection or being sold for pennies on the dollar.  While my college professors imparted a rudimentary understanding of fundamental financial analysis to me, they failed to explain the artful intricacies that go along with being able to decipher an income statement. And if you believe, as I do, that investing is three parts art and one part science, I'm sure you can appreciate the potential dangers of making decisions under the assumption that price/earnings multiples tell you everything you need to know. WATCH: Recent cannabis stock volatility not dampening industry prospects A scientific approach to stock analysis tends to focus on financial statements and primary valuation metrics. And while there are highly educated teams comprised of mathematicians, physicists, and statisticians making vast sums of money in the stock market, often a singularly left-brain approach to investing fails to produce market-beating results.  Remember, if everyone has access to the same information — and in this case, I am referring to financial statements and valuation ratios — you probably don’t have an investment edge. When investing legend Peter Lynch shared his view that investing in stocks is an art, not a science, he wasn’t suggesting we all begin studying charts, plotting out moving averages, and brushing up on our understanding of Relative Strength Indicators. Lynch’s point was that while we must determine whether a company is financially sound, we also need to adopt an artful approach to our investing. And that means being willing to look where others won’t and developing the ability to think outside the box in a manner most cannot.  Filling Wall Street's research void—by yourself Analyzing microcap companies doesn’t need to be paralyzingly stressful, but it does require a set of skills most self-directed investors either lack or are unwilling to learn.  You see, Wall Street makes its money by charging companies large investment banking fees. But since micro-cap companies with market capitalizations below $500 million rarely generate hefty investment banking fees, big Wall Street investment shops have little motivation to publish investment research on these micro-cap stocks.  So, this means you need to learn how to be an investigative investor when it comes to analyzing a micro-cap company. Always begin with some basic financials merely to determine whether the company is at risk of running out of money over the near term. Then, after some fundamental analysis, you need to shift gears and set the problem-solving and logical side of your brain aside and start relying on your creative and intuitive side. Micro-cap investing: an artful approach Micro-cap companies aren’t always unprofitable enterprises, but many are. So, if you’re using traditional valuation ratios to try and make sense of unprofitable companies, you’re probably going to abandon a ton of stocks that have enormous potential. And remember, while the financials of a $25 billion company can provide a realistic roadmap for what that company can be expected to accomplish over the next six to 12 months, for a $20 million growth company, the financials are apt to be stale an hour after they’ve been filed with the SEC.  An artful approach to investing requires you to look behind the balance sheet. For every 10 minutes you spend studying a micro-cap’s mix of assets and liabilities, you should spend 40 minutes or an hour understanding the company’s total addressable market, product growth potential, and industry expansion prospects. Analysis in action In mid-September 2018, I published a story on Proactive Investors about how Alliance International Inc (NYSE:AOI) changed its name to Pyxus International (NYSE:PYX) to better reflect the company’s transformation away from a tobacco packaging and growing company and into cannabis and other non-leaf growing areas of the industry. What attracted me to Pyxus wasn’t the company’s financials; it was management’s vision and the story that executives were pitching to investors. And within an hour of reading past earnings transcripts and press releases, it was clear Wall Street was missing a great story. READ: Tobacco player Alliance One International turns over a new (and greener) leaf as Pyxus International Since that article first ran on Proactive’s website, Pyxus’ stock has run up from less than $20 to as high as $52. But the company’s financials haven’t changed a bit. So, why did the stock more than double?  Simply put, the company’s story gained traction and Pyxus morphed from an undiscovered gem into a short-term momentum darling.
0
shares
ShareTweetSavePostSend
 
Credit: GOBankingRates - Published < > Embed
News video: We Know Warren Buffett's Best Investing Secret, Do You?

▶ We Know Warren Buffett's Best Investing Secret, Do You? 04:27

Warren Buffett is one of the wealthiest people in the world despite not building wealth through founding a company like Bill Gates or Jeff Bezos. So you'll often hear the questions: what is Warren Buffett's Secret? How can I invest in the stock market like Warren Buffett? Strap yourselves in, lean in...

You Might Like


Recent related videos from verified sources

Here's What Investors Should Watch When it Comes to Trade headlines [Video]Here's What Investors Should Watch When it Comes to Trade headlines

Here's What You Should Watch in Trade Headlines

Credit: The Street     Duration: 01:09Published

Audiogram Retail [Video]Audiogram Retail

Well, retail sector layoffs here in the United Kingdom have mirrored to some degree and, in some cases, accelerate and pass the numbers that you've seen in the United States. The Center for Retail..

Credit: The Street     Duration: 00:50Published

Ethical investing is taking off | Short View [Video]Ethical investing is taking off | Short View

► Subscribe to FT.com here: http://bit.ly/2r8RJzM James Kynge, the FT's EM editor, explains how investments in ethical companies have outperformed standard EM indices. As a result large..

Credit: Financial Times     Duration: 02:15Published

ICYMI: Amazon's Big News Week, Facebook and the FTC, Retail Earnings, Pepsi [Video]ICYMI: Amazon's Big News Week, Facebook and the FTC, Retail Earnings, Pepsi

Amazon.com Inc. was all over the news this week. Amazon Amazon is investing $700 million into electric pick up truck startup Rivian, which was announced Friday morning. This highlights the rising..

Credit: The Street     Duration: 03:00Published

What You Missed During Jim Cramer's Action Alerts Plus Call [Video]What You Missed During Jim Cramer's Action Alerts Plus Call

Did you tune in? In case you missed it, Jim Cramer hosted an exclusive, members-only call over on Action Alerts Plus. Cramer broke down a slew of topics, including his five themes for the market, a new..

Credit: The Street     Duration: 00:45Published

'Be Ready to Rotate Back Into Soft Goods Stocks,' Warns Jim Cramer [Video]'Be Ready to Rotate Back Into Soft Goods Stocks,' Warns Jim Cramer

Jim Cramer gave out his five themes for February in his exclusive Action Alerts Plus video Wednesday, Feb. 13. One theme that he focused on was how investors should play soft goods. He gave some..

Credit: The Street     Duration: 01:28Published

'The Government Shutdown Has Created an Overhang of Large IPOs,' Says Jim Cramer [Video]'The Government Shutdown Has Created an Overhang of Large IPOs,' Says Jim Cramer

What can we expect post-shutdown? Jim Cramer believes the government shutdown has created an IPO overhang that could impact stocks such as the FANG stocks. His biggest worry in the next two months? The..

Credit: The Street     Duration: 02:17Published

ICYMI: Google's $13 Billion Investment, Major Tailwinds Powered U.S. Stocks [Video]ICYMI: Google's $13 Billion Investment, Major Tailwinds Powered U.S. Stocks

Let's start with Alphabet Inc.'s Google. Google Google announced Wednesday it is investing $13 billion into data centers across the United States, highlighting the tech behemoth's intention to continue..

Credit: The Street     Duration: 01:31Published

Five Below Stock Could Be a Great Pick In Discount Retail [Video]Five Below Stock Could Be a Great Pick In Discount Retail

Watch the correlation between slower consumer spending and sales growth at discount retailers, say some on Wall Street. That's why Jim Cramer's Action Alerts Plus team owns Five Below Inc. . hint:..

Credit: The Street     Duration: 04:08Published

'Pickup Trucks are the Hottest Selling' Car, Jim Cramer Says [Video]'Pickup Trucks are the Hottest Selling' Car, Jim Cramer Says

General Motors and Amazon are reportedly looking to invest in Rivian, a start-up that makes electric pick-up trucks. The deal, if completed, would value Rivian at between $1 billion and $2 billion. The..

Credit: The Street     Duration: 01:53Published


Recent related news from verified sources

Goldman and Morgan Stanley jockey over new turf; Web-scraping is the hottest new investing edge; UBS creating 'super human' employees

Goldman and Morgan Stanley jockey over new turf; Web-scraping is the hottest new investing edge; UBS creating 'super human' employees
  Dear Readers, In between Amazon's bombshell decision to no longer build a second headquarters in Long Island City, and President Trump's national...
Business Insider

Investing behemoth Fidelity just launched the first-ever fund for founder-led companies. Here's the 3-part 'secret sauce' its manager looks for when picking entrepreneurs.

Investing behemoth Fidelity just launched the first-ever fund for founder-led companies. Here's the 3-part 'secret sauce' its manager looks for when picking entrepreneurs.
· On Wednesday, Fidelity launched its new Founders Fund, which exclusively invests in companies whose founders are still senior managers or board members. ·...
Business Insider

A venture partner who invested in tech winners like DocuSign explains why crypto is here to stay

A venture partner who invested in tech winners like DocuSign explains why crypto is here to stay
· *The crypto market may be in a decline, but that hasn't stopped some Silicon Valley investors from investing in the space. * · *Cyptocurrencies are here to...
Business Insider

If You Invested $1,000 In Tesla Stock at the IPO, Here’s How Much You Would Have Gained

Tesla Stock Ah, the painful gift of hindsight. The ultimate tease in the investing world, it's quite often painful to look back at the stocks that got...
Profit Confidential Also reported by •Motley FoolNYTimes.com

Tweets about this


Other recent news in Business

Tesla slumps after CONSUMER REPORTS says it will no longer recommend the Model 3 due to 'reliability issues' (TSLA)GOLDMAN SACHS doesn't think Apple can compete with Samsung's new foldable phone
PINTEREST has reportedly filed for an IPO that could value the company at $12 billionSouthwest has canceled hundreds of FLIGHTS because of weather and maintenance issues — and passengers are furious (LUV)
Environmentally friendly: One News Page is hosted on servers powered solely by renewable energy
© 2019 One News Page Ltd. All Rights Reserved.
About us  |  Contact us  |  Disclaimer  |  Press Room  |  Terms & Conditions  |  Content Accreditation
 RSS  |  News for my Website  |  Free news search widget  |  In the News  |  DMCA / Content Removal  |  Privacy & Data Protection Policy
How are we doing? Send us your feedback  |   LIKE us on Facebook   FOLLOW us on Twitter  •  FOLLOW us on Pinterest