A (Healthy) Dose of Reality
Dear Wall Street Daily Reader,
If you’ve been reading Trend Trader Daily for any period of time, you know I’m one of the most bullish guys on Wall Street when it comes to micro- and small-cap companies.
After all, there’s absolutely no other area in the market where the “little guys” like you and me have a huge advantage over the “Smart Money” to make huge returns.
I’m not alone in this assessment, either.
For example, Warren Buffett famously said that he could guarantee he could make 50% per year — as long as he could invest in small- and micro-caps.
Why bring any of this up today? Because after writing about and investing in micro- and small-caps for the last two decades, I’ve learned a valuable reality:
All of us want the high returns of smaller stocks. But none of us want to suffer from the high volatility that comes with those returns.
Sorry. That’s not possible. And we’re living through that reality now.
That’s why my inbox is overflowing with emails from readers who’ve invested in small- and micro-caps on my urging. In summary, here’s what their emails say:
“What the heck is going on here, Lou?!”
(That summary, of course, doesn’t include the wonderfully colorful language that calls for my head, and questions my character and intelligence, among other things.)
Funny how a little bit of selling in the market brings out the cheekiest in us all, makes issues out of everything, and erases our memories about why we own what we own.
My response? Two can play the cheeky game. Only I’m choosing to serve mine up with a healthy dose of data and perspective to get us all on the same page.
First things first…
The Agony of High Returns
No one captures the pain before the mega-gain reality of investing in small- and micro-caps better — and backs it up with hard data — than Morgan Housel in his bookmark-worthy article in 2016 entitled “The Agony of High Returns.”
Read it. Memorize it. Consider it therapy.
Accept its wisdom that even the best-performing stock over two decades “could spend the majority of that time with returns that would make you want to vomit.”
Like after-a-big-night-of-too-much-tequila vomit.
Bottom line: The agony is real. But if we can learn to keep perspective — and keep our fingers off the red “panic sell” button — so are the rewards.
Speaking of agony and perspective, here’s some fresh “pain” and data…
As Bespoke Investment Group shared in a note Wednesday morning:
“Well, it’s just not looking like it’s going to be a week for the bulls as US stocks are poised for their third straight day of declines in what would be the longest losing streak since early March.”
Three freaking days of declines. That hasn’t happened since early March. We’re spoiled.
Just like there’s no crying in baseball, there should be no crying about the occasional three-day market decline.
Sorry. Stocks don’t always go straight up.
And we think millennials have entitlement issues?
But I digress. Today’s about perspective, not ranting. So let’s get back to the former…
So What’s REALLY Going on with Small- and Micro-Caps?
There’s a disconnect right now. The major market indexes keep hitting new records. And yet our teeny, unloved, under-followed, small stocks keep selling off.
The common refrain? “Why are the markets marching higher and leaving our stocks behind!?”
Waah-waah. Wake up people!
Small and micro-caps have been leaving large-cap stocks (way) behind since the market bottom last March. By insane margins.
Take a look:
At one point only a month or so ago, small-caps were up 107% off the bottom. Micro-caps were up a staggering 160%. And large-caps were only up about 50%.
Mind you, those are just the averages. We’ve watched individual stocks, like Vuzix Corporation (VUZI), for example, soar over 700%.
My point? We’re living through a huge and historic performance disparity based on market cap, which means there’s a ton of profits for the taking in smaller stocks.
So what’s behind the latest sell-off in small- and micro-cap land?
Spare me the conspiracy theories and complaints that every management team doesn’t get how to communicate with investors or is somehow screwing up the business materially in the last 30 days.
Nothing’s fundamentally changed for the worse at all of these companies to justify the recent sell-off. Instead, Occam’s razor applies:
It’s profit-taking. Plain and simple.
And excuse me — but can we blame anyone for taking profits? I’ve recommended that members of my premium research advisory, Micro-Cap Advantage, do it, too.
In fact, we’ve taken healthy triple-digit profits off the table in Vuzix and TFF Pharmaceuticals, Inc. (TFFP) and Atomera Incorporated (ATOM), among a dozen others in the last year.
Here’s the key: Even in light of the recent pullbacks, smaller stocks are still trouncing larger caps. In fact, after the recent sell-off, we’re still talking about 30 to 50 percentage points of outperformance for small- and micro-caps versus large caps, respectively.
I fully expect the outperformance to continue. Why? Because we’re on the cusp of a global reopening and economic resurgence, led by the United States, which will benefit smaller, domestic companies the most.
In other words, small- and micro-caps aren’t getting left behind at all!
We need to stop giving oxygen to that myth. It’s busted now, which means it’s time to move along to the next major gripe…
But What About Biotech?
It’s no secret here that in addition to small- and micro-cap stocks, I’ve been banging the table for you to buy biotech stocks, too.
And that’s been a great thing (until recently), as biotech has been one of the best-performing sectors off the market bottom, second only to semiconductors.
It’s also no secret that it’s getting brutal out there in biotech land.
So in our Monday release of the Friday Charts edition of Trend Trader Daily, I’ll share three charts and three reasons we should remain bullish on biotech.
So stay calm and stay tuned!
Ahead of the tape,
Editor and Founder, Trend Trader Daily