Microcap Stocks to Beat This Boring Market

 | May 26, 2015 | 4:00 PM EDT
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Stock quotes in this article:

lmrmf

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truu

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acu

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xxii

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newt

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hotr

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astc

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ohgi

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watt

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stvf

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amnl

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eyes

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cubi

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auxo

This market is really running the risk of becoming boring. As of this writing the S&P is up 2% year to date. This is hardly Gordon Gekko/Bud Fox stuff. And remember the concept of opportunity cost. If you are only going to get a 2% capital gain on top of the 1.94% current yield, you just can't be that excited. Nobody builds homes or buys boats on 4% returns. Those are also pre-tax figures, by the way, so your "take home" on a year with 4% total returns is really de minimis.

So, where is it not boring? Small and Micro Caps. I am just constantly amazed at the volatility in these names. These things will routinely move 4% in a day, and actually double-digit percentage moves in either direction are not uncommon.

Those are the moves that Gordon and Bud were looking for and the ones I want for my clients as well. I just do it legally.

So, this time of year is a perfect one for looking for hidden gems. The two most value-added small/microcap conferences will be held within the next ten days. This Wednesday and Thursday here in NYC is the Marcum Microcap conference, and next Monday through Wednesday in Los Angeles, microcap rockstar Chris Lahiji and his team throw the LD Micro Invitational. This Thursday, also sees the SeeThru Equity conference in New York, another gathering devoted to management presentations from microcap companies.

So, even after today's pullback, I still believe the overall market -- as measured by the S&P 500 -- is overvalued by at least 10%. My main strategy is income-based and those bonds/preferred shares offer an alternative to a "blah" stock market.

But if you really want an antidote to this boring market, buy microcaps. These stocks move on individual fundamentals, and though the Russell 2000 is often used as a guide, it's actually composed of larger stocks. With a median market cap of $737 million and an average market cap of $2.042 billion the Russell really is useless as a gauge for microcaps.

But that's the point: there is no benchmark for microcaps, they move (and, boy, do they move) almost totally on the fundamentals of the individual company. So, a little digging can produce what fund managers like to call asymmetric returns. That is a fancy statistics term for returns that would not be predicted by a normal distribution of expected returns.

For reasons known only to them, Marcum's keynote speaker will be the infamous Dick Fuld. I started my career at Lehman Brothers, and I can't think of anyone in the world of finance less qualified to speak on risk management, but that will be one of the themes of his talk.

Risk management is key with microcaps. So, gratuitous shots at Mr. Fuld aside, please know that when I write about microcaps, it is with the assumption that the reader realizes these are risky securities.

With that caveat, at Marcum and LD Micro, I'll be focusing on the following companies (starred companies are presenting at both conferences). I've written about the majority of them in prior RealMoney columns, and staying in touch with the management teams is absolutely crucial in analyzing them. 

Marcum:

Lomiko Metals (LMRMF)

True Drinks Holdings (TRUU)

Acme United (ACU)

22nd Century Group* (XXII)

Newtek Business Services* (NEWT)

Chanticleer Holdings (HOTR)

AstroTech Corp. (ASTC)

One Horizon (OHGI)

Energous (WATT)

Stevia First* (STVF)

 

LD Micro:

Applied Minerals (AMNL)

Second Sight Medical Products (EYES)

Customers Bancorp (CUBI)

Auxilio (AUXO)

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