You’ll notice that last year was a great time to be a small-cap investor. More than nine stocks on the ASX rose 1,000% or more. Will 2018 be just as good? I personally think it’ll be even better. Stocks have fallen initially. But it’s only a matter of time until they rebound. And when they do, it will be you on the other end of massive gains. So where could you see these 10-baggers for 2018?
The technology industry has been extremely active in the last decade. You always hear about a new tech start-up trying to disrupt an industry. Whether it is fintech, blockchain or cyber security, technology is always striding ahead. So how can you profit from new tech start-ups, innovation and a changing landscape?
I believe small-cap investing could be profitable whether the economy is doing well or poor. You should be aware of how these external factors might affect your investing. Interest rates, economic down turns and the supply of credit can all affect small-cap stocks in the short-term. But long-term, what impacts small-caps far more is their earnings potential.
Today, we’re going to look at something a little different. We’re going to look at when you should sell your small-caps stocks. It’s not always an easy decision to make. But it’s an important part of investing. If done wrong, it could significantly reduce your returns. But if done right, you could lock in profits and minimise your risk at the same time.
For small-cap stocks, cash flow is extremely important. I would argue it’s even more important for small-cap than it is for Blue Chips like IBM. And that’s because they have far fewer options. Unlike IBM, small-caps don’t have as much power to renegotiate lending terms.
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. 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.
Small-caps are an amazing opportunity. They have far more volatility, but that’s the point. Not all small-caps are worthy investments. Some could be amazing. Others you’d be completely crazy to buy. Today we’re going to look at how to approach small-cap investing. Specifically, we’re going to look at how to limit our losses.
Blue Sky Limited shares are currently trading at $4.08, the lowest price for the company in almost three years. Blue Sky’s share price has dropped a total of over 64% in the past month alone, from $11.43 on 27 March.
Let’s look at the large blue chips. These are usually companies with a market cap of $10 billion and over. Some typical blue chips are BHP Billiton Limited [ASX:BHP] and Commonwealth Bank of Australia [ASX:CBA]. BHP has a market cap of $156 billion and CBA has a market cap of $139 billion.
Big institutional investors, for example, usually don’t venture into the small end of town mainly because of their size. Many of these money managers have hundreds of millions to put to work — they simply can’t invest in smaller stocks. That’s why I’d argue small-cap investing is perfect for individual investors, like you.