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Micro-Cap Stocks: How to Be One of the Wall Street Warriors

What do Wall Street Warriors like Timothy Sykes and Peter Leeds do that sets them apart from the rest of Wall St? Think big or go home. This is the maxim by which most of the successful penny stock and micro-cap investors live by. Stock picks don’t need to be blue chip investments all the time. Big ideas and big percentage gains come in small packages sometimes from penny stock picks. You can become one of the Wall Street Warriors and find a winner on Wall St. in the penny market, micro-cap market, just as easily as Timothy Sykes does.

Everyone wants to be a winner, one of the Wall Street Warriors; at least, they think so. Unfortunately, most novice investors are not willing to do what it takes to become a consistent winner and opt out to pay for advice from those advertised names and sites like Timothy Sykes or Peter Leeds. There is a saying in life that there are only three types of people: People who make things happen, people who watch things happen and people who wonder what happened.  No one has a monopoly on a good idea. If they did they would patent it like Steve Jobs did. Winners achieve success because they focus on their goal. Being focused lets winners stay committed to the tasks at hand. Almost all winners do the hard work themselves which sometimes includes doing the dishes, the mundane duties. What sets these people apart from the rest of the micro-cap and penny stock traders is that they trade with the “I am responsible for both my failures and successes” attitude. Paying for advice from a so-called “penny stock guru” just gives you someone to blame for your mistakes.

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So, where does the would-be trader start to become one of the Wall Street Warriors?

There are over 10,000 publicly traded securities in the U.S. according to OTCMarkets.com.  Most Wall St investors immediately think you can only make money on the largest companies traded on the major exchanges, such as the Dow Jones Industrial Average, the S&P 500 or the Nasdaq. Wall Street Warriors think differently. They seek out the overlooked micro-cap stocks and the misunderstood penny stocks of smaller companies in the investing universe that are worth a closer look.

Micro-Cap Stocks

By micro-cap stocks, we’re referring to the smaller companies, the penny stocks. These companies have market capitalizations between $50 and $300 million. You will almost always find them on the Over-the-Counter Bulletin Board (OTCBB) or Nasdaq exchanges. Wall Street analysts hardly ever talk about them but it doesn’t mean that micro-caps are a myth or an abyss; in other words, you are going to come across many companies that you recognize among their ranks like American Airlines, Kodak and even Smith & Wesson.

Micro-cap stocks have kicked the crap out of both the S&P 500 large cap and Russell 2000 small cap indexes over the past five years. Micro-caps are a great way to diversify your portfolio. Although they typically have a very low correlation with other U.S. equity classes, micro-caps carry higher risks than many other asset classes which is why the also provide higher profits.

Analyzing Micro-Caps

Wall Street firms normally charge big fat investment banking fees which can be higher than the entire market capitalization of one of these micro-cap companies which is why they rarely get covered by analysts. As a result, it takes more time and effort to research and analyze a small company than it would for a large one. With fewer published reports, the Wall Street Warriors must do their own, original research. Since many find that micro-cap stocks often don’t trade at their full values, the stock price inefficiency is where those like Timothy Sykes and Peter Leeds charge lazy investors a monthly fee so they too can benefit.

When you analyze a micro-cap company, you do the same process as you would for a larger company. Just like any investment idea, you may start out by looking at the volume trend, the simple moving average or assessing the current stock price against its 52-week high/low trading range. Looking too deeply into the valuation ratios, such as the price/earnings multiple or price/book multiple may scare you away from what could be the next Apple since many of these micro-cap companies are still in the development phase or have large start-up costs still to absorb. Financial statements are the key ingredient. When you review the company’s financial statements, you learn how they make their money, how much net profit is being earned on revenues, how high debt levels and whether the company is generating money or burning it.

What you’re going to find most of the time is that micro-cap companies aren’t making any money yet. Earnings will be negative which means the traditional stock valuation ratios make no sense. The deficit in shareholders’ equity will almost always scare the pants off of you since you’re used to seeing a positive number there. Don’t freak out!

Almost every has suffered from this at one point.

Glass Half Full vs. Glass Half Empty

With a micro-cap company, research is reversed in a sense. Unlike the large cap companies where historical financial performance is the window to the future, non-financial information of a micro-cap stock holds much more value. Wall Street Warriors spend 80% of their effort on understanding the company’s strategy and business model, making sure the management team in place is the right one to be able to pull it off, making sure the industry that the company is operating in big enough and growing, and making a judgment call on whether the company is better than any or all of its competitors. Bottom line: spend 20% of your time valuing by the current financial results.

For a start-up, expanding company, financial statements mean crap since they are out-of-date the very moment they’re filed. If the company doesn’t file financial reports with the SEC, kick them to the curb. If they don’t file on time, find out why and how often they have done so. Look at the insider transactions; are the insiders buying, selling or even worse, getting huge stock options off the books which would allow them to pass them to a third party without any notification to the SEC.

When an OTC stock doesn’t have timely reports filed, it receives a short grace period by the regulators. They will not hesitate to remove them from the exchange or give them an additional letter to their ticker symbol to indicate they are late filers. Delayed filings, unusual auditing issues and unusual trading activity are all major red flags.

Wall Street warriors stay informed on consumer and industry trends. If you are going to be as good, or better, than Timothy Sykes and Peter Leeds in choosing the winners from the losers, you are going to have to be informed as well. Advances technologically and changes in the mood, trend, tastes and lifestyles of consumers can make or break even the strongest companies. Think about how strong Nokia was before the iPhone and Android were released. Things to think about when you think you found the right penny stock to buy:

  • Did this company invent a product or service that blows away the rest of the market place?
  • Did this company re-invent the wheel and have a better way of doing old things?
  • Will this company’s product or service be in demand in the future regardless of the economic cycle?

The potential to profit huge returns on micro-cap equities sometimes comes with a price. Volume of stock traded affects liquidity. It can be limited at times meaning you might be stuck with a micro-cap stock since getting out fast enough to minimize losses may be an issue if things go wrong. It could also be difficult to conduct the depth of original research required. Subscribing to newsletters like the one we offer cuts off some of the fat since someone is there to do most of the research. Be warned though that micro-cap companies and their penny stocks sometimes are like shooting stars: the sizzle can fizzle just as fast as they light up the sky.

Always be cautious and only risk as much money as you can afford to lose. Think of buying stock in a micro-cap company like loaning money to your cousin Jake in Alabama. If he pays you back, great. If he pays you interest, Fantastic!  And always remember that valuing the penny stock of a micro-cap company is especially challenging if you don’t know how to read a 10-k or 10-Q.

So how do you manage the time needed to be one of the Wall Street Warriors?

Develop the skill to do the necessary due diligence. Pro-athletes watch film to go over what can be done better. When you see a stock that you own, or don’t own, shoot through the ceiling, go look at their 8-K, 10-Q, the company’s news and find out why it happened. Consider tracking exchange-traded funds such as the Russell Micro-Cap Index. Also, subscribe to all the free research ideas from independent companies you can get. These firms, like ours, issue stock reports and alerts on many interesting penny stocks of micro-cap companies that just might be right for your investment style.

Success comes before work only in the dictionary. Companies that are successful weren’t born that way. They were made and they had to work their way from an underprivileged beginning and work their way up the ranks just like everyone else. Some stupid investors think they can find the next “big thing” by scouring through penny stocks and be the first ones to spot the next Apple or McDonalds. Do this and you will be guaranteed to be unsuccessful. Fixating your hopes of being a Wall Street warrior by investing only in penny stocks could leave you holding a sign “will work for food” in the near future.

 




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