By Marc Robins
“We Lose the Winners, and Gain the Losers”
One of the great things about my publication, The Red Chip Review, between 1993 and 2002 was the talented creative and editorial team. This incredible group of professionals originated financial by-lines, ad headings, whole advertisements and logos (like, We Discover Tomorrow’s Blue Chips Today or Like ‘Insider Information’ Without All that Unpleasant Jail Time) better than many of the nation’s magazines and ad agencies. One of my favorites, not because it was so very clever, was “We Lose the Winners and Gain the Losers”. For those that haven’t figured it out, this relates to how successful small- and micro-cap stocks that work, move up in the capitulation strata and out of the micro-cap realm. It means that discoveries that were made in the $20 million to $100 million market cap range that work, eventually rise in price and market cap until they are bounced out of the micro-cap classification. Top of mind examples that I was involved in include Precision Castparts, Nike, Costco, Expeditors International, Celgene, Medicis, etc. Those that don’t do so well…typically major big cap names that have plopped-out due to technology changes or poor management, like Kodak, couple of major banks back in the past decade, an auto company or two, and multiple others…fall from vaulted valuations down into our realm.
To the exact point of this paper, nothing seems more setup for a fall to me now than the stratification of capitalizations today. On the highest level, there are those that are either woefully over valued because the investing public has lifted them as favorites or are overly held positions in professional managers portfolios—a blatant situation of so much investible cash that they have to hold major names for liquidity sake. (Does the price of Microsoft during December, 1999 at $60 a share ring a bell? Since its “favorite” stock status, the shares have declined and then flat-lined for a decade-and-a-half.). Consider also the regrettably overvalued companies that are up in price and capitalization but are in a perilous state because the number and valuations of “investible” names are so limited that the demand (and cash) has bid up the top-tier universe of stocks to inappropriate valuations. (I think this is why Warren Buffett may be stressed about available opportunities he can deal in. Now remember, he has $10s-of-billions to spend on a single position: He could never get close to a micro-cap idea. So, he’s kaput until there’s a correction or the economy really takes-off and some big names lag.).
“Why the ’fall’ in big names?” I hear you ask. There really doesn’t have to be a decline in major company shareholder prices and values. It can be, and I think this is what will develop, a universe of larger-cap market names that are stuck in neutral while the performance of the smallest of cap stocks really begin to rocket. Again, this situation is very much like the 1970’s, more so than investors realize.
Why would the big caps be stuck in neutral? Go back to the early 1960’s and early 1970s. The major names and favorites were lunched. Most notable of the time was Polaroid (think: Apple, Google, Facebook, etc. today) when the stock’s valuation knew no limits. (Polaroid was selling at 90-times earnings.) As probably the most symptomatic example of the “Nifty-Fifty’s” blow-off, PRD dropped from $148 per share to $14 during this collapse in hallowed names. But be sure to put the name in the context of the time: Polaroid stood as one of the most innovative and socially meaningful companies in the world. Now, it’s kaput.
So after the financial gut-kicking in the late 1960s and early 1970’s, there was a rebound in share prices. Remember too that the Dow – the best measure of large-cap, stock values at the time – then moved between 600 and 1000 for the remainder of the 1970s. Additionally, recall stagflation! This is when the economic growth was paltry and inflation began to really show its teeth. During the up-and-down market moving sideways in time, we moved from the Viet Nam war and Nixon’s resignation, to “WIN” (Whip Inflation Now!) buttons, to a “banana” economy (Chief Economic Advisor, Alfred Kahn’s, term for a recession) and eventually the period of hyper-inflation (recall the “Misery Index”, adding the unemployment rate to the inflation rate), which Reagan rode to the White House.
We don’t seem to have the makings of an extensive rally by the major market indices right now, so a sideways motion could be very possible. Why? Paltry domestic growth, increasing taxes, poor employment conditions, the stalled condition of overseas economies from Europe to China, the substantial government debt both recognized and unrecognized (meaning the huge, unfunded government liabilities.) So I submit that even though the stock market is hot right now (and I am not bearish at this moment), I do believe that the large-cap euphoria is limited like the markets from 1969 to 1982. During this time, investors will become more comfortable with the meager advance of our economy, as well as more tolerant of risk. Finally, the money made in the large-cap names, as well as money coming back from under mattresses, will drift into the small- and micro-cap names, boosting valuations.
Two last points to think about: Nothing in the market (except the corrections 1987, 2001, 2000 and 2008) is immediate….trends seems to do just that…trend. So, I would expect that people will “orient themselves” to tolerate and understand “risk”, in degrees. Secondly, I want readers to genuinely consider what it means by pricing “ON THE MARGIN” and how truly small amounts of new cash flowing into the micro-cap/small-cap arena could dramatically shift valuations.
For example, the S&P has a total market capitalization of $11 trillion. Compare that to the total micro-cap capitalization of only $297 billion. So only a quarter of $1 trillion shift would almost double the whole, micro-cap market capitalization. Now, a single shift of that magnitude is not just going to happen…people/investors don’t shift preferences immediately, but they can trend. That is the most important of all facets here: as investors see the improvement of relative performance of small-and micro-cap stocks versus their larger cap holdings, they will be attracted to the tertiary issues, shifting more money to the asset class and furthering the up-trend.
This is what we are now witnessing. Yes, the big cap names are doing well, but it doesn’t take too many successes like we’ve noted above in the micro-cap universe to attract more and more interested investors (“Hey, Marc just ‘four-pled’ his investment in SITO: I want some of that too!”). Since it’s still just us financial fanatics that are so inclined to make bets in the micro-cap space, we have a long time to go before there is the inevitable blow-off.
- The Dow, S&P and other major indices are all acting much better in the face of very low interest rates and an economy that is “less worse”.
- There are actually two stock markets in the USA today: Those large-cap issues that have (some) following, wide institutional ownership, and are covered broadly by the press versus the small- and micro-cap marketplace that has been utterly abrogated by research, news media, brokerage operations, etc….a wholly bifurcated market.
- The market has worked for over three decades crowding-out any interest, support or ownership of the tertiary issues, producing a chasm of untold and historic proportions.
- Paltry performance returns, generated by savings accounts, bond and large-cap equity investments, even computer algorithms, have left individual and professional investors wanting higher returns, or face greater cash calls.
- It has been the history of the USA for its citizens to seek higher returns on investments and turn toward more risky alternatives….the micro-cap and small-cap equity arenas are begging to be re-discovered.
- Because of governmental/administrative roadblocks and cultural shifts, the process of “returning to our investment roots” (considering small- and micro-cap equity alternatives) will be a long, laborious, but extended, up-surge in asset class returns.
I think another way of expressing my excitement regarding the future of micro-cap returns can best be described like this: When have you been able to “buy” opportunities that can triple to 10-bag your capital investment with assets that represent only one- to two-times the level of risk a staid businessman would afford to take. There are certainly hundreds, if not thousands, of small, but totally exciting opportunities where the CEOs are facing normal entrepreneurial conditions yet by “working through” difficulties and bottlenecks should reward investors multiple times.
The next piece I’m likely to write is more on the information chasm.
About Marc Robins: Mr. Marc Robins is a Managing Partner and Founder of Catalyst Financial Resources, LLC. He is also employed as a Preisdent and Director of Research at The Robins Group, LLC. Prior to these positions, Mr. Robins was the Founder, Editor-in-Chief at the RedChip Companies, Inc.. Mr. Robins resigned from this other post as of November 22, 2002 and has since moved to full-time positions at Catalyst Financial Resources, Crown Capital, LLC, The Robins Group, LLC and Crown Point Group, Ltd. Prior to founding the RedChip Companies, he was co-manager of the WestCap Small-Cap Portfolio for Capital Consultants, Inc. in Portland Oregon. Mr. Robins has previously held positions of portfolio manager, and directors of research at several Portland, Oregon-based investment firms. Mr. Robins was the President of the Portland Society of Financial Analysts. He served as a Director of FreeRealTime.com Inc. since August 2000.
The MicroCapClub (mc2) is an exclusive forum for experienced microcap investors focused on microcap companies (sub $300m market cap). The MicroCapClub was created and founded by Ian Cassel as a way to share ideas and to learn from other seasoned like-minded microcap investors. Our goal at MicroCapClub.com is quality membership and quality stock ideas. If you are an experienced microcap investor, feel free to Apply today.