Small-cap stocks have been on fire and micro-caps will soon join the party. The Russell 2000, the U.S. index which is exclusive to the much smaller listed public companies advanced for eleven consecutive trading days from November 4 through November 18, 2016, when it closed at an all-time high. Over the period the Russell 2000 increased by 13.0% compared to the S&P 500's increase of 4.6%.
There are two post-election developments which have caused the Russell 2000 to substantially outperform the S&P 500:
1. U.S. dollar strength - The U.S. dollar has rallied sharply against all currencies since the election. It has advanced versus the Euro for the last ten consecutive days. The streak is the longest since the euro became Europe's primary currency in 1999. The dollar's strong rally has created a fierce headwind for the U.S.' large multinational companies, most of which are members of the S&P 500. Small companies do not have this headwind since most of their sales are generated in dollars and in the U.S.
2. Fiscal Stimulus - Upon fiscal infrastructure stimulus being applied the U.S. economy will be better insulated against a global economic slowdown. The large multinational members of the S&P 500 are more susceptible to slowdown of the world economy than smaller companies. Infrastructure spending will have more of an impact on the U.S. centric smaller businesses than it will have on large multinational businesses.
The chart below depicts that the Russell 2000 went back to historical premium above the S&P 500 after being at a discount for almost all of 2016. The chart also depicts that low priced shares and micro-caps remain deeply undervalued. This is even though the micro-caps are even better positioned to benefit from the strength in the U.S. dollar and fiscal stimulus than the small-caps. The micro-caps and companies with low share prices had tracked the Russell 2000 and the S&P 500 through 2012. The index consisting of low priced shares diverged to enter a ferocious bear market that was caused by the SEC's implementation of the Dodd Frank Act. Under Dodd Frank brokers became criminally liable for the first time in the history of the markets for recommending high risk shares to clients. Therefore, the brokers abandoned the micro-cap and low priced shares markets. Assuming that Dodd Frank is repealed as promised by Trump brokers will once again be able to recommend micro-cap and low priced shares companies. Regardless of whether or not Dodd Frank is repealed micro-cap shares have plenty of upside.
The above price chart for the Royce Low Priced Stock, Russell 2000 and the S&P 500 indices also illustrates the wide divergence between the micro-cap and low priced stocks and the indices with the larger company members. This divergence is one of the five bubbles that I had discovered that could potentially cause a crash upon any of the bubbles bursting. See my article "Five Super Bubbles Increase Market's Vulnerability to a Crash", October 16, 2016. There is no current or historical rationale that supports such a wide divergence. The math does not support the shares of micro-cap companies trading at a deep relative discount to the shares of larger companies for an extended period of time. Micro-cap companies by their very nature can potentially grow by double digits in an economy which is declining. Larger companies are constrained by an economy's growth rate.
The chart above which includes the Royce Low Priced and S&P 500 indices illustrates that upon a correction or crash happening the shares that recover and go to new highs the fastest are the low priced shares. After the dotcom (left red shaded area) and Lehman (right red shaded area) crashes the shares of small companies recovered quickly and significantly outperformed the S&P 500 for several years. Because there is a law of mathematics the gap between the S&P 500 and the low share priced and micro-cap companies will inevitably narrow. My prediction is that the S&P 500 will correct significantly to the downside while the shares of the low priced shares and micro-cap companies will spike upward. Another possible scenario is the shares of the small cap and micro-cap companies rallying significantly and outperforming for an extended period to catch up with the S&P 500. Under either scenario, low priced and micro-cap shares win.
The video below entitled "Crash! & 90/10 Crash Protection Strategy" provides more details on why the market can potentially crash. It also provides more details about how and why low priced and micro-cap company shares will outperform large companies in crash and recessionary environments.
One of my core areas of expertise throughout my 40 years in the markets has been to find micro-cap companies which have the potential to be ten baggers; shares of companies that have the potential to multiply by 10 times in price and produce long term capital gains.
While conducting research during the second quarter of 2016, I discovered a recurring stock price chart pattern or theme for all of companies which had share prices below $5.00. The strikingly similar pattern was that their two to three year share price charts depicted an "L". A stock price chart depicting an L was an anomaly during the first 39 years of my career.
The L illustrates a stock being on a cliff, falling straight down off the cliff and after hitting bottom, leveling out or flat lining for more than a year. With the vast majority of most of the companies with low priced shares having the same L pattern, I concluded that the market for small and micro-cap companies was the most undervalued throughout my 40-year career. After all, I had never seen such a phenomenon.
My newest quest is to find and recommend the 100 best of the micro-cap companies as soon as possible. The video below entitled "Diverging Markets Creating Rare Investing Opportunities" provides details about the sense of urgency. Micro-cap shares are ridiculously undervalued and are now on the verge of their share prices multiplying quickly. The plan is to also provide continuous coverage and buy and sell price limit updates on every company recommended.
For a company to be recommended its share price must have the potential to increase by at least 300% by 2020. To be among the 100 the company must have a business model that is capable of producing steady cash flow from operations (CFFO). The video below is about how I utilized my CFFO expertise to discover two low priced stocks. The share prices of both subsequently multiplied by 20 times in less than five years. One of the companies, Think or Swim/Investools was acquired by Ameritrade (NASDAQ:AMTD).
Below are five companies that I am adding to my recommendation list. They all have L chart patterns. Since they are all deeply undervalued my limit prices for all five are significantly higher than where their shares closed on November 18, 2016.
Accelerize (OTCQB:ACLZ) with a market cap of $26 million has grown its revenue for three consecutive calendar years. Based on its trailing 12 month financials its revenue will again increase for its year ending December 31, 2016. More importantly, for the first time in its history the trailing 12 months of Cash Flow from Operations (CFFO) for this 100% digital company were positive. Based on its latest market cap ACLZ is at a deep discount since its trading at one times revenue. ACLZ is in the position to become the Salesforce.com (NYSE:CRM) of digital marketing. Company has a 41 year old CEO founder who is very bright and is a visionary.
Live Ventures (NASDAQ:LIVE) with a market cap of $48 million has grown its revenue for three consecutive fiscal years. Based on its trailing 12 month financials the conglomerate's revenue will again increase for its year ending September 30, 2016. More importantly, after reporting negative CFFO for its last 3 fiscal years LIVE has produced positive CFFO for its last four consecutive quarters. Earlier this month LIVE announced that they had acquired a company for cash and debt that would take their revenue to $160 million and net income to $20 million ($1.21 per share). LIVE's business model is similar to Berkshire Hathaway's (NYSE:BRK.B) and has 33 year old CEO who is extremely disciplined. He reminds me of Buffet.
First Choice Healthcare Solutions (OTCQB:FCHS) with a market cap of $28 million has grown its revenue for the past three consecutive years. Based on its trailing 12 month financials the revenue for this provisioner of healthcare services in the U.S. will again increase for its year ending September 30, 2016. FCHS produced positive CFFO for its 2015 Calendar year. If it had not been for an accounting quirk ($9.2 million profit from the sale of a long term asset as a negative line item on its Cash Flow Statement) FCHS would have most likely reported record positive CFFO for its year ending December 31, 2016. The shares are now trading at one time sales and at two times tangible book which consists of current assets. It would not surprise me if FCHS utilized its cash to repurchase shares.
Intellicheck Mobilisa (NYSEMKT:IDN) with a market cap of $28 million is a pure play for the protectionist and illegal alien deportation policies to be implemented by the incoming new U.S. President. The company is a developer and seller of handheld and online identification systems which authenticate Drivers licenses and IDs, etc. IDN is not yet profitable and its CFFO has been steadily negative. However, IDN's gross margins increased significantly to 75% in its third quarter of 2016 from 66% for its fourth quarter of 2015. Additionally, based on comparisons of the company's 2016 third quarter with its last quarter of 2015, R&D and operating losses as a percentage of revenue declined significantly. Company recently announced that its newest product is capable of verifying the authenticity of drivers license via an online scanning. Click to enlarge
COPsync (NASDAQ:COYN) with a market cap of $11 million has grown its revenue for three consecutive fiscal years. Based on its trailing 12 month financials its revenue will again increase for its year ending December 31, 2016. COYN is another pure play for the incoming new administration. The company developed and operates a real-time law enforcement mobile data information system in the U.S. It presently generates more than 85% of its revenue from Texas even though its penetrated only 9% of the state's municipalities. With Texas accounting for 2/3 of the U.S.'s Mexican border company is well positioned to increase its share in the state. Since the beginning of 2016 COYN has more than doubled the number of U.S. states which it has penetrated from eight to 18. The company has the weakest Balance Sheet and is burning more cash than any of the other four above companies. However, I am recommending it since I like growing automated services businesses that have a recurring revenue stream and very low attrition.
The video interview below is about my finding an early stage private company and underwriting an IPO for the company when I was an investment banker. The company grew from less than $1 million to over $500 million in revenue and is presently listed on NASDAQ. The video is recommended since it explains the simple logic that I use to discover and recommend small fledgling companies.
Due to the plunge of the bond market and the spike in yields since the election the volatility and the risks to the downside have increased for large cap stocks. Until the bond market calms down and stabilizes all bets should remain off. Long-term positions for the following long-oriented ETFs, including the utilities sector ETF: (NYSEARCA:XLU), Dow 30 (NYSEARCA:DIA) and S&P 500 (NYSEARCA:SPY) should be avoided. The Dow 30 leveraged (NYSEARCA:DDM) and (NYSEARCA:UDOW) and the S&P 500 long ETFs (NYSEARCA:SSO), (NYSEARCA:UPRO), (NYSEARCA:VOO), (NYSEARCA:UUP), (NYSEARCA:IVV) and (NYSEARCA:IVE) have even more risk.
Conversely, I am recommending that shares of the Royce Micro-cap Trust (NYSE:RMT) be accumulated. I am also recommending that Russell 2000 ETFs (NYSEARCA:IWM), (NYSEARCA:UWM), (NYSEARCA:URTY), (NYSEARCA:IWO) and (NYSEARCA:IWN) be held.
For an overview about me and access to links to the subjects that I cover, including the digital economy, negative rates, perfect shorts, and micro-cap stocks please go to www.michaelmarkowski.net. The signals for the NIRP Crash Indicator which has been monitoring the markets for crashes since March 2016 are freely available at www.DynastyWealth.com and are updated after the close of the markets each day.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
Editor's Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.