In Defense of Micro-Caps

 | Aug 19, 2011 | 10:15 AM EDT
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In this horrific market environment (for longs), you may easily become despondent that absolutely nothing is working. Generally, you're right! But as Jim Cramer famously notes, there's always a bull market somewhere. Even in this market some stocks did quite well over the past month. I screened for U.S. stocks that were up during the correction period of July 22 to Aug. 8 to look for common characteristics that could guide your stock-picking.

The list of stocks that were flat to up is listed here:

Up Stocks in a Down Market

The most common characteristic is that 70% of them are micro-cap stocks under $200 million market cap. This confirms an investing precept that experience has taught me: Micro-caps are a great hunting ground for "uncorrelated" assets. More than any other group, because of their illiquidity microcaps trade on the fundamental developments of the business and don't often get pushed around by the market. (And usually they also trade on inside information, since "the story" is not often widely disseminated.)

Investors are typically warned away from micro-caps because that non-correlation means they often don't participate in market rallies, and they can have huge volatility. True. However, when the market is cratering, the illiquidity of trading by appointment, with no price change on no volume, can be a welcome addition to your portfolio.

As for the list here, I have no idea if they will perform well going forward, but any stocks that are up in a big down market are certainly worthy of research. And 30% of those names are larger-cap, so if micro-caps make you squirm, you can still find something to look into. Of course, most of the large names in this list that were up are gold-related, so they might only be substitutes for SPDR Gold (GLD).

One micro-cap name I like was that's trading uncorrelated to the markets is not on this list. I'm talking about AEBiofuel (AEBF), which I wrote about here. Do your digging, and you too may find a few diamonds in the rough that can reduce the volatility of your portfolio in difficult times.

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