Seek Out Promising Microcap Companies That Are Engaged With Emerging Market Trends
If you’re a microcap investor, or have designs to become one, what’s your strategy for finding winning companies? Which of the 12,000 or so publicly traded North American microcap stocks are most likely to yield tangible growth?
This is not a trick question. You certainly can’t take a stake in all of them and why would you? Only a relative few produce explosive share price growth and/or climb out of microcap market cap territory in a given year and their numbers are far outpaced by the number that go bust.
So, what’s your microcap stock picking strategy? Do you:
- Rely on hot tips from your cousin Vinny, your barber, or someone else you feel has a knack for picking winners?
- Jump on microcap stocks that start surging due to news?
- Pick the most promising as suggested by your favorite investment newsletter or podcast investor guru?
- Pick names out of a hat?
Narrow Them Down by Sector
Well, if you’re a wise investor you undoubtedly conduct a bit more solid due diligence than that in your search. And you hopefully follow the Peter Lynch adage to “know what you own, and know why you own it.” As such, you might take a sector-specific approach with your microcap targeting strategy. Not only does this significantly narrow the field, but helps you better discern the “what” and “why” of your potential stock picks. After all, if you don’t understand the sector how are you going to understand what exactly your chosen microcap company does within its sector to make money?
Most successful microcap investors we know use a sector approach as a key component of their stock picking strategies. We know some who specialize in the biotech sector and others who devote themselves to tech. There are those who focus on mining and others on energy. Some specialize more deeply by targeting specific subsectors, like cancer drugs in biotech or gold in the mining sector. And, sure, many devote their energies to more than just one sector, which certainly falls in line with not keeping all of the eggs in one basket.
Consider Seeking Out companies in Emerging Trendsetting Sectors
Given the benefits of the sector-based approach, why not try to find sectors and subsectors that no one else seems to be paying attention to? That is, newly emerging sectors and subsectors that are starting to build a new market with companies that might not be on anyone’s stock picking radars yet? The idea being that as the new market starts gaining traction with the public, the sector/subsector starts getting noticed by investors, and those companies supporting it start reaping noticeable share price gains. Investors who get in early under this scenario are often in for a wild, profitable ride.
Examples of this can be found on both the macro and micro levels. On the macro level just consider the recent rise of the marijuana sector. Ten years ago, this sector barely existed as a subsector of the biotech sector with a few medical marijuana-related companies. But the 2012 legalization of marijuana in two U.S. states lit a spliff of investment potential that rapidly led to the founding of dozens of publicly traded pot-centric companies. Most of these began as microcaps and many early investors saw incredible gains sparked by a combination of investor euphoria and a slow-but-sure increase in the number of pot-legal states, as well as legalization in Canada.
Investor euphoria has since faded like the embers of an untended joint and related company share prices have come down from their overexuberant highs. But today there are hundreds of companies in the sector, which continues to “emerge” and evolve with the growth spurred by continuing legalization efforts. Should the U.S. federal government make a move towards legalization investor euphoria and the promise of increased profits would likely push share prices of many companies in the sector back towards all-time highs.
How a Re-Imagined Service Toppled a Blockbuster
On the micro level, consider this story: Twenty years ago, if you wanted to watch a movie at home, you likely went to your local video store, which for many people was Blockbuster. At about that time Blockbuster operated around 9,000 video rental stores, was valued at more than $3 billion and saw its share price top $10 on the New York Stock Exchange.
Meanwhile, a small privately held company that offered video rental by mail was developing a platform to stream videos directly to online customers. Blockbuster turned down an opportunity to purchase that company for $50 million in 2000, and then failed to bring its own successfully tested video streaming platform into commercial service. The small video company went public in 2002 for less than $2 per share and continued to expand its streaming platform capabilities.
Seven years later that former microcap posted earnings topping $116 million while Blockbuster reported $518 million losses. Within a year, Blockbuster was delisted from the New York Stock Exchange and trading for less than US$0.20 per share. It soon declared bankruptcy and today the privately held company reportedly owns one remaining store, which is apparently offered as an Airbnb rental.
And that Microcap? Well, Netflix (NASDAQ: NFLX) topped $100 per share that year, is currently trading over US$500 per share and has a market cap topping US$200 billion.
All this to say that if you recognized potential value in that emerging video streaming subsector back in 2002, you could have easily made more than a million dollars in seven years with a small $20,000 dollar investment. Note also that Netflix (and its shareholders) realized such profits in part due to a relative lack of early days competition in the nascent video streaming subsector. When there are relatively few companies within an emerging sector/subsector, scarcity can act like a turbo booster on stock share demand.
Today’s Emerging Sectors and Subsectors
If you’re wondering what emerging sectors and subsectors might currently be in play, just think about some of the companies profiled in The Momentum Letter over the past year:
Delic Holdings Inc. (CNSX: DELC) represents a microcap in the emerging psychedelics sector. This sector is so new to the stock market that it’s trailing an umbilical cord—we’re talking the first day of what will likely be at least a decade of growth and evolution.
Greenlane Renewables Inc. (TSX: GRN) is in the recently emerging renewable subsector of “renewable” energy,” a toddler of the greater overall “green” energy sector.
FansUnite (CNSX: FANS) is riding the global rise of the relatively new online gambling subsector, a child of the long-standing gambling sector.
And, Vsblty Group Technologies Corp. (CNSX: VSBY), is part of the fast-emerging facial-recognition subsector, one of numerous subsectors birthed in recent years by the tech sector.
You can also use your own due diligence to uncover emerging sectors and subsectors and the potential microcap company gems building them. Based on our last example, tech might be a good place to start, especially given how fast advances in tech seem to be coming these days.
