How to Get Your Hands on a 10-bagger

small cap stocks to buy

Welcome back to your Extreme Small-Cap Profits email course.

We’re now on Day 5 of 12.

If you missed the email I sent you yesterday, it was all about limiting your risk.

The worst thing for your investment track record is large losses.

For example, a 10% loss means you need a 20% rise to get back to your original amount. A 50% loss means you need 100% just to break even.

It’s almost impossible to never lose money during your time in the market. But it’s clearly in your best interest to have as few losers as possible.

To limit losses you could use stop-loss orders. These orders sell a stock when they drop to a certain price, i.e. 50% below your purchase price. You might also only invest what you’re willing to lose.

Today, we’re going to see where small-cap gems are hiding.

So if you want the potential to find more 10-baggers…keep reading.

Hunting grounds

In 2017, it was almost too easy to make money.

The tide came in, as they say, and lifted all boats (stocks, property, commodities and cryptocurrencies).

But what happens when the tide goes back out? Will your investment be able to stand up against bearish views?

It’s important you make good investments now. That way, when investors become extremely bearish, your positions won’t be beached on the sand.

So where will you find potentially profitable small-caps regardless if investors are bullish or bearish in 2018?

It’s a bit of a trick question.

You can potentially find profitable small-caps all over the market. They’re not specific to a sector or industry.

Small-caps ready to double, triple and quadruple can be found in the resource, tech, finance and a whole bunch of other sectors.

But when trying to grab a 10-bagger, it helps to look in growing markets.

How to look for exploding stocks

One example of a growth market is China’s thirst for baby formula.

Chinese parents, like all others, are extremely concerned with what they feed their children. They only want the best.

To China, the best quality usually means international brands, specifically, Aussie brands.

Chinese consumers are driving future earnings for companies like a2 Milk Company Ltd [ASX:A2M] and Bellamy’s Australia Ltd [ASX:BAL].

But these stocks have already had massive runs. It’s unlikely they’ll run up more than 1,000% in a short space of time.

Yet if we look in the market — infant formula and baby food — we might be able to find a lesser known business ready to make its market.

Had you dug though this growth market, you would have stumbled across Wattle Health Australia Ltd [ASX:WHA].

Wattle Health manufactures diary and wellness products. A lot of their products focus on baby food and formula.

As you can imagine, investors are extremely eager to see how Wattle Health performs in China.

The company is still very young. They listed on the ASX last year in March. But already they’ve got products to sell and are growing revenues rapidly.

Over the past few months, Wattle Health has been developing a distribution network across China and Australia. Their network is 500 outlets strong.

In addition, Wattle Health has also created an e-commerce store to get as much product into China as possible.

Will Wattle Health follow in the footsteps of a2 Milk?

Investors seem to think so.

Last year the stock ran up more than 1,200% in less than 12 months.

Money Morning Chart/Graph 19-04-2018


Source: Google Finance
[Click to enlarge]

Wattle Health now has a market cap of $175 million, with the potential to climb even higher, thanks to the market they’re in.

In the most recent quarter, Wattle Health grew sales by more than 895%. Sales in China were increasing on a monthly basis.

What’s more, the company raised more money to aggressively grow in the immediate future.

I suspect the gains for Wattle Health won’t stop just yet. 

The same could be said about Panorama Synergy Ltd [ASX:PSY].

The company helps to develop miniature sensors for multiple purposes.

For example, last year Panorama was asked to develop an unmanned bomb detecting drone. Such a drone needed light-weight spectroscopy and imagining capabilities.

They’ve also have the potential to develop sensors for agricultural, automation and connectivity purposes.

The company has potential to exponentially grow revenues from here.

Investors showed their support for the small-cap by bidding it up 100% before the first month of 2018 ended.

Money Morning Chart/Graph 19-04-2018


Source: Google Finance
[Click to enlarge]

That’s right. This small-cap doubled in days.

You won’t find stocks like Wattle Health and Panorama every day. But if you dig around in growing markets, you could potentially find a whole bunch of extremely profitable small-caps.

Application, Potential, Growth

Let’s recap.

You’re looking for small-caps with the potential to grow earnings. How do you know earnings will grow?

Well, maybe it’s as simple as looking at the industry.

In Wattle Health’s case, continued growth is likely to come from China’s massively growing consumer market.

For Panorama, growth could come from multiple industries in need of light-weight sensors.

Basically what you’re looking for is application.

Does this small-cap have a product or service, which could see sales sky rocket as the company gains traction?

If yes, then you may have found yourself a great investment.

If no, then keep looking.

The beauty about investing is you don’t have to make every bet that comes your way, nor should you.

You should only invest in what you believe will be a sure winner. And by the end, hopefully you’ll have a whole bunch of them.

That’s it for Day 5.

In Day 6 we’re going to dig deeper into the business side of investing.

You probably already know there’s a business behind every stock. And it’s usually the health of that business that determines whether you should buy or move on.

That’s all coming up tomorrow. Stay tuned.

Cheers,

Härje Ronngard,
Editor, Money Morning

Harje Ronngard

Harje Ronngard

With an academic background in finance and investments, Harje knows how simple, yet difficult investing can be. He has worked with a range of assets classes, from futures to equities. But he’s found his niche in equity valuation.

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