Microcaps Thriving While Big Stocks Struggle

Microcaps Thriving While Big Stocks Struggle

Earnings season can be one of the most frustrating times of the year for many investors. Frustrating because your positions can fluctuate on performance or sentiment…or for no particular reason at all…

Earnings are important — let’s not play that down too much. But when it comes to microcaps, financials aren’t the be all and end all of a stock.

However, a particular type of investor puts great importance on company financials. For these investors, it’s the only thing they really look at. These are ‘value’ investors.

They pay little to no attention to market noise. It doesn’t matter if the ASX 200 drops by 50% tomorrow; they care only for the financials of individual companies.

They use a methodology that we call a ‘bottom up approach’.

This is when you analyse the company first, before looking at the overall industry. The last thing they consider in their analysis is the wider economy.

For example, the ASX 200 has lost 1.31% of its value over the last month. This will typically have no effect on the decisions of value investors. The RBA’s recent decision to cut rates will barely even register on their radar.

But a lacklustre earnings season…now that’s something that weighs heavily for a value investor.

The biggest stocks on the ASX are battling for earnings growth. BHP Billiton [ASX:BHP], still Australia’s second biggest company, recorded an $8.3 billion loss. And the Commonwealth Bank of Australia [ASX:CBA], Australia’s biggest company, recorded net profit growth of just 2% over the previous year.

Things aren’t expected to get any better anytime soon for the ‘big boys’ on the ASX.

The Australian Financial Review asked six top fund managers about their thoughts on Australian equities. Their concerns focused on two things: slow economic growth and sluggish revenue generation.

Anton Tagliaferro, fund manager at Investors Mutual, told the AFR:

It remains very difficult for many companies to grow their revenue line given the sluggishness of most economies around the world as well as the intensity of competition in many sectors such as retail, telecommunications and banking.

Olivia Engel, fund manager for State Street Global Advisors, said:

There’s not much real growth around. We see a slight fall in dividends but not because investment is picking up, it’s just to bring payout ratios back to earth amid subdued earnings.

So why are we talking about large-cap stocks, when my headline was about microcaps?

Aussie Blue-Chip ‘Crushers’

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Microcap Stocks

Well, sometimes it pays to remember why microcaps are so much more exciting and full of potential than the ‘safe’ companies most people refer to as ‘blue chips’.

We don’t mean to slam large-cap stocks. After all, most of Australia owns them through one superfund or another. But it’s times like this, during the Aussie earnings season, when we’re thrilled to be advising you on tiny, fast-moving stocks in our premium services, Australian Small-Cap Investigator and Microcap Trader.

The largest stocks on the ASX are petrified about growth. Yet microcap stocks often care little about the sluggishness of the overall market or blue chips stocks. Share price movements for microcaps are more likely to be correlated to company action rather than the woes of the market.

While the broader market slowly grinds along, some of our Microcap Trader tips are thriving. Not every microcap will pay off, but the sheer size of the explosive growth when some do can more than make up for those that don’t.

And meanwhile, the stocks we look at in Australian Small-Cap Investigator may not be quite so small or volatile, but the story is similar. I recently recommended that my readers sell a small-cap stock that had brought us better than 1000% gains.

When moves like that are on offer, it’s hard to get too worked up about a few percentage points gained or lost in the big end of town.


Sam Volkering,
Editor, Money Morning

Editor’s note: Sam Volkering and Kris Sayce’s Microcap Trader looks at the tiniest of the tiny stocks on the ASX. In order to avoid excessive volatility in such tiny stocks, Microcap Trader is limited to 500 subscribers, and is currently closed to new members. Sam’s Australian Small-Cap Investigator also looks at the small end of town, but not quite so small, volatile or risky as Microcap Trader. You can learn more about Australian Small-Cap Investigator here.

The above article is an edited extract from Microcap Trader.

Sam Volkering
Sam is Editor for Money Morning and it's small-cap and technology analyst. He spends his time hunting down the most exciting stocks on the planets, whether they’re potential-packed volatile small-caps or tech firms transforming our future through cutting-edge technologies. You can find more of Sam’s work over at Australian Small-Cap Investigator, where he shares the best small-cap stocks he finds on the ASX, or at Revolutionary Tech Investor where he reveals the latest breakthrough tech investment he’s discovered. If you’d like to more about Sam’s financial world view and investing philosophy then join him on Google+. It's where he shares investment insight, commentary and ideas that he can't always fit into his regular Money Morning essays.
Sam Volkering is Editor for Money Morning and its small-cap and technology analyst. He’s not interested in boring blue-chip stocks. He’s after Australia’s rising stars — companies whose shares trade for cents on the dollar — and are often shunned by those in the financial services industry. His mission is to make you big money, from small stocks.
If you’d like to learn about the specific companies Sam is recommending you buy for turbo-charged stock returns, take a 30-day trial of his small-cap investment advisory Australian Small-Cap Investigator here. But that’s not where Sam’s talents end. From discovering the Apple 2e and Macintosh in the mid-80s, to the rise and fall of the Mini Disc in the 90s…to building internet apps in the 00s...Sam is an amazing talent at finding new, cutting edge technologies and translating that research into how the future will look — and where the opportunities lie.It’s his job to trawl the world to find, analyse, research and — in the right situation — recommend investments in the world’s most innovative and technologically advanced companies.He recommends the best ones he finds in his breakthrough technology investment service Revolutionary Tech Investor.This revolutionary investment advisory is dedicated to finding the best ways to profit from technological developments across the globe. If the best action is in Australia, Sam will find it. If it’s in Silicon Valley, Frankfurt or Tokyo, Sam will find it there too.To find out more about how Revolutionary Tech Investor can help you profit from breaking developments in the tech world click here to take a 30-day no-obligation trial today. Official websites and financial e-letters Sam writes for: (You can find a list of recent articles written by Sam at the bottom of this page.)

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