Is the Bitcoin FOMO Trade Unwinding?

 

Bitcoin has been getting crushed. Cryptocurrency traders are now asking, is Bitcoin a buy? Should we sell Bitcoin? Will the new White House usher in more stringent rules? Will the fear of higher taxes drive up the popularity of cryptocurrency, and will crypto benefit from weaker global currencies?

Where We Are

The post-election momentum that helped Bitcoin shoot to the $41,962.26 peak on January 7th has given way over the past two weeks to a 24% decrease, including yesterday’s 9% plummet.

 

Twelve Months of Bitcoin on a Percentage Basis

The recent decline has not retraced even half the gains experienced since November. Still, traders are watching with poised trigger fingers as Bitcoin tends to trade on technical factors — a drop through perceived support levels may confirm a further march downward.

Catalysts

Former Fed Chair Janet Yellen, who is expected to head the U.S. Treasury Department, responded about cryptocurrencies when questioned at the Senate confirmation hearings on Tuesday, January 19th. Senator Hassan (N.H.) asked her about “the potential for terrorists and criminals to use cryptocurrency to finance their activities.” The former Fed Chair and macroeconomics professor responded that the U.S. should be aware of emerging tools for terrorist financing, “…we need to make sure that our methods for dealing with these matters, with tech terrorist financing, change along with changing technology, cryptocurrencies are a particular concern.” Yellen further defined her concern by saying, “I think many [cryptocurrencies] are used, at least in a transaction sense, mainly for illicit financing, and I think we really need to examine ways in which we can curtail their use and make sure that anti-money laundering [avoidance] doesn’t occur through those channels,”

The presumptive future cabinet member is well known by cryptocurrency followers for her distaste for Bitcoin. Many still have an incident etched in their memory of Yellen being photobombed by a man holding a “Buy Bitcoin” sign while she was speaking against it on Capitol Hill in 2017.  

 

Fed Chair Yellen Quotes: December 2017: “It is not a stable store of value and it doesn’t constitute legal tender. It is a highly speculative asset.” October 2018: “I will just say outright I am not a fan, and let me tell you why. I know there are hundreds of cryptocurrencies and maybe something is coming down the line that is more appealing but I think first of all, very few transactions [that] are actually handled by bitcoin, and many of those do take place on bitcoin are illegal, illicit transactions.”

 

Crypto is Not the Treasury’s Biggest Target

Crypto advocates claim Bitcoin is a superior currency because it is not prone to government-induced inflation. Their position has gained a level of credence over the past 12 months as central banks increased the money in circulation at record rates against the backdrop of lockdowns. The U.S. dollar has been falling relative to gold, the Euro, and the Yen.

However, cryptocurrency is not a high priority for Yellen. At the Senate hearing, she said her initial focus would be helping workers and businesses that have been hurt by the pandemic. Issues like unfair trade between the U.S. and China took a higher priority.  So while crypto holders and traders should pay attention to Yellen’s distaste for the electronic currency, there are no expected immediate plans to place controls on it. More positive is that another Biden appointee, the SEC Commissioner Gary Gensler, has taught cryptocurrency classes at MIT and is expected to advocate for its usage.

Take-Away

For quite some time, Bitcoin and other currencies were rewarding those that remained bullish on them. Through much of last year, there was an acceleration in interest in owning cryptos. As with other markets during the past nine months, the fear of missing out (FOMO) contributed to its dramatic rise.  Will fear step in and create the snowball effect now on the downside? As long as the regulatory climate is murkier, the enthusiasm and direction is more likely take a pause.

Suggested Reading:

The Federal Reserve and MIT are Experimenting with Digital Money

What Stocks do you Buy When the Dollar Goes Down?

Will the U.S. Continue to Subsidize Renewable Energy Projects?

Enjoy Premium Channelchek Content at No Cost

Sources:

Bitcoin Price Shoots Past 20,000

Janet Yellen Says Cryptocurrencies are a Concern

Janet Yellen, Bitcoin (Coindesk)

Photo: “Bitcoin Sign Guy” , 2017

 

NobleCon 17 Complete Rebroadcast

 

Investor Conference Season is in Full Swing Thanks to Technology

 

Each new year kicks off a new season of investment conferences. This year, despite the pandemic, the conference calendar hasn’t thinned at all. The big change, of course, is that most of the large conferences have gone virtual. For example, earlier this month, the Goldman Sachs Global Energy Conference was held online. The J.P. Morgan Annual Health Care Conference was conducted in a virtual setting last week.  The JPM conference overlapped in cyberspace with the Sidoti Virtual Investor Conference; investors could actually cherry-pick from each conference’s schedule and attend both. Next week over 2500 investors are registered to participate in a small and Microcap virtual event, as Noble Capital Markets holds their 17th annual investor conference, NobleCon 17.

In past Winters, NobleCon provided a setting where small and microcap companies presented to investors attending in person providing them with an opportunity to discover small companies with above-average potential. The 2021 virtual format has not changed this ability at all. In fact, it may have improved two factors that were limiting to some; time and money. A major benefit of attending a conference online and at no cost is that money and travel are not barriers. Another benefit is there is no wasted time. This is a plus for many institutional investors, family offices, self-directed investors, financial advisors, research analysts, and even presenting companies. They can all cut their travel time to zero minutes and their cost to near-zero dollars. Very little is lost if the event has solid conference planning and a well-orchestrated online platform. Participants cannot physically shake hands, but they can still meet face to face in real-time with the management and presenting companies — in the case of NobleCon17, over 80 companies.

Virtual Conferences Allow Access

When asked about holding a very “different” NobleCon this year, Mark Pinvidic, Noble’s Managing Partner said this about the popularity, “The mix of companies is as good as we’ve ever had at our 16 previous in-person events, and at press time, we had more than 2,350 registered, with a steady flow of investor registrations coming in each hour.” The acceptance and in many cases embracing the virtual format, as witnessed by Pinvidic, is not surprising, it fits a bigger trend toward access. Over the past few years, the financial markets have seen a number of hurdles disappear, reduced barriers that now allow small individual investors access to many of the same benefits of deeper-pocketed investors. These were also quickly embraced and include; no or low-cost trades, stock filtering and charting software, no cost top-tier equity research on sites such as Channelchek, and now a level playing field access to investor conferences and company management teams.

Looking Forward

The improved access (virtual) may again become more difficult next year. It all depends on whether the online formats continue. Despite the benefits to both investors and presenting companies, some transactions will always be more comfortable and therefore more likely when conducted with someone after you’ve been in their presence, when you’ve looked into their eyes, or after you have shared a cocktail. However, online events are not going away. They were rising in popularity before the pandemic. In the coming years, the “new normal” is more likely to see high acceptance for in-person, virtual, and a hybrid of the two.

Paul Hoffman

Managing Editor, Channelchek

Information on Noble Capital Markets Small and MicroCap Conference (NobleCon):

There is no cost for any investor to attend NobleCon17. The full conference agenda, preview videos, the registration link, and the conference book is available on this webpage: NobleCon17 Investor Tools

Follow or Subscribe to ChannelChek on your preferred social media:

 

Is the Post-Pandemic Recovery Move into Small-Cap Stocks?

 

The Russell 1000 Index, a subset of the Russell 3000 Index, represents the top 1000 companies by market capitalization in the United States. The public companies within the measure add about 92% of the total 
market capitalization of the full 3000 largest corporations. The market cap of the Russell 2000 or the remaining small-cap companies is approximately 8%. The Russell 1000 large-cap index is not quoted as often as the S&P 500; however, the Russell 2000 is usually the favored benchmark when referring to small-cap stock performance.

Despite the S&P 500 garnering much of the media attention, in 2020 the Russell 1000 exceeded the more widely quoted large-cap index’s performance. The S&P only returned 16% while the Russell 1000 returned 21%, or 5% more to investors. After the pandemic-altered economy, large-cap stocks received most of the attention, seeming to rise almost daily beginning in late March.  But small-cap stocks also had fantastic performance in the final measure of the up, down, then up again year. With a 20% return, they only trailed the high performing Russell 1000 large-caps by 1%.  A large portion of this performance was achieved beginning in early September. This trend may be important to watch as we look for follow-through buying in 2021.

The almost equal performances of the Russell 1000 and Russell 2000 in 2020 (up 21% and 20%, respectively) doesn’t tell the full story of the double-digit swings in leadership between the two indexes as the economic cards were being reshuffled in response to COVID-19.

 

Equity Market Returns Large vs. Small and Full Year Vs. Fourth Quarter 2020

 

US Small-Caps Experience Late Year Surge After Lagging Most of 2020

A weak correlation existed between large and small stocks. Much of the difference during late 2020 is attributed to the market sentiment regarding the post-pandemic outlook for a US recovery. These sentiment shifts are reflected in the chart below. It dissects both the Russell 2000 and Russell 1000 index’s full-year performance into five phases. Each seems to represent a pivot point and reaction to a revised outlook.

After significantly lagging behind its large-cap brethren during both the March run-for-cover sell-off and the summer invest-your-check lockdown rally, the Russell 2000 has been a leader since early September. The index rocketed in Q4, significantly eclipsing the Russell 1000. The reported change in sentiment came as positive signs in vaccine testing and generous monetary and fiscal support made headlines. The merger and acquisition activity spike toward the end of the year also helped smaller stocks, which are often M&A targets.

 

Five distinct phases of 2020 performance (% change)

Source: FTSE Russell. Data as of December 31, 2020. Past performance is no guarantee of future results.

 

Does the Russell 2000 Have a Cyclical Advantage?

The US small-cap rally may have also enjoyed a tailwind from the “broadening of overall risk” rally in Q4, away from the high-flying tech outperformers in the Russell 1000 and into the stocks viewed as more sensitive to the economic cycle. These include energy and financials, which are 18% of the small-cap index, compared to 12% in the large-cap. There is also a heavy weighting in the Russell 2000 toward Life Sciences and Healthcare. These sectors outperformed by approximately 5%.

The difference in composition is evident in the following chart of the top 10 industry contributors to each of the two indices’ 2020 performance.

 

Top 10 industry contributors to returns (% of total)

Source: FTSE Russell. Data as of December 31, 2020. Past performance is no guarantee of future results.

 

Take-Away

Since early September, the upward comparative performance of the Russell 2000 is largely a result of the ongoing rotation away from defensive plays into other sectors of the economy. The weakening US dollar may also play a part as U.S. goods become more competitive with overseas producers.

Though uncertainty is always the rule as far as investment markets are concerned, the late-year trend has remained intact during the first week of 2021 and is well worth keeping an eye on.

 

Suggested Reading:

The Federal Reserve
and MIT are Experimenting with Digital Currencies

How Good are Experts at Predicting the Market?

Is the “Small Firm” Effect for Microcaps Real?

 

Are you subscribed to Channelchek’s active YouTube channel?

 

Sources:

Investopedia Russell 1000

FTSE Russell Financial Data

Yahoo Finance (S&P) Data

 

 

Last Year’s Market Predictions – What was the Final Batting Average?

 

Here’s a look back to see how the experts’ projections stood up in the topsy turvy year of 2020. We unearthed a December 19, 2019 article on Yahoo by Emily McCormick that highlighted the 2020 predictions of 23 Wall Street strategists. Each provided a target for the S&P 500 for the year ending 2020, along with additional commentary. The majority of the reports were issued in the first two weeks of December 2019. The data and comments we are citing come directly from that article.

What Actually Occurred

Before we get into the observations, we would note the S&P 500 closed at 3,230.78 on December 31, 2019. It closed higher at 3,756.07 on December 31, 2020. That’s a 16.2% annual return. Obviously, that return masks a wild intra-year ride, as the S&P 500 bottomed out on March 23 at 2,191 (intra-day) and closed the day at 2,237.40. For those investors with perfect timing, the S&P 500 rose 71.6% from its March 23 lows to the end of 2020.

Forecasts

In mid-December 2019, the average of the 23 estimates for the 2020 closing S&P 500 index was 3,332, off by nearly 13% relative to what the actual closing level was in 2020. Obviously, COVID and all its implications were not factored into the prognosticators’ forecasts. The range of forecasts went from 3,000, implying a down year in 2020, to as high as 3,600, which was still more than 4% below the S&P 500’s actual performance. The 3,600 prediction was a true outlier as the next closest estimate was 3,450. If we looked at a distribution of the forecasts, nine of the 23 were below the 3,332 average.

So, in the year of wild market swings, impacted by a 100-year pandemic, the experts were clearly off by a significant factor.

There were recurring themes within the commentary from the strategists as to what could impact the stock market in 2020. As one would expect, the election, China/U.S. relations, especially as related to trade, and an accommodative Federal Reserve were mentioned prominently by most strategists.

Forecasts vs. Actual

But some of the other predictions did not play-out as well. For example, in assembling their forecast, most of the strategists predicted higher earnings for the S&P 500. In fact, many of the projections for S&P 500 earnings were in the $165-$175 range; when fully reported, earnings are actually expected to have dropped year-over-year to the $135 level from $163 in 2019.

Some strategists favored non-U.S. markets, predicting better returns overseas. But according to Yardeni Research, the MSCI Share price index for the U.S. was up 19.2% in 2020, well above the All Country Index of 14.3%. And in fact, the U.S. market outperformed each of the five other indexes: European Market, Japan, U.K., and Emerging Markets. To be fair, the Asian Emerging Market significantly outperformed the U.S., but the overall Emerging Markets average was held back by poor performance in Latin America.

Another prediction raised was a move from Growth stocks to Value stocks. This switch does not appear to have happened as much of the upswing in the Index was driven by the growth-oriented FAANGM stocks during much of the year.

One interesting prediction that seems to have come true was by
Julian Emanuel of BTIG, who stated that with “zero-fee online trading, 2020 could be the year the public falls in love with stocks again.” The rise of Robinhood seems to agree with this statement.

Take-Away

It is often said, with good reason, that it is easier to predict the stock market when given a longer time horizon, perhaps even ten years or longer. The reason is the smoothing that the impact of time and average growth has on the outlier years. Predicting what will happen tomorrow involves so many unknown influences that “experts” are befuddled by the exercise daily.

The predictions made in 2019 concerning the earnings of the S&P 500 were off in terms of direction (earnings were down, not up). This would cause one to expect lower stock prices than predicted. Obviously this didn’t happen either.  While knowledge and understanding of what market strategist predictions are is a useful guide to our own risk/reward assessments, it’s helpful to remember as we enter the new year and new sets of market predictions that the stock market is like a talented major league pitcher – they’re able to get even the most gifted hitters out more often than not.  Yet, we can still improve our own skills by observing the big bats go up against them. 

 

Suggested Reading:

Investment of Excess Corporate Cash

The Expected Pace of the IPO Market in 2021

What do Investors Look At?

 

Are you subscribed to Channelchek’s active YouTube channel?

 

Sources:

Emily McCormick/Yahoo Finance 12/19 Article

 

 

The Dollar Amount of IPOs in 2020 was Blistering. Will Deals Continue in 2021?

 

Despite the stellar year-over-year 2020 performance experienced by Wall Street, the bull icon was kept mainly under wraps. Instead, unprecedented use of the unicorn came to represent the spectacular deals surrounding private companies eyed by investors as they were brought public.

Investors put money into IPOs including those that fall into the unicorn category in totals that dwarfed all previous records. The explosion was not anticipated as 2020 began, and hopes were even more dim when lockdowns became certain. But a frenzy built as the value of tech companies grew during these lockdowns. IPO-mania is still very much alive; expectations and the current calendar of deals promise that this rampant pace will carry into 2021.

 

A unicorn is a term in the business world to indicate a privately held startup company valued at over $1 billion. The term was coined in 2013 by venture capitalist Aileen Lee, choosing the mythical animal to represent the statistical rarity of such successful ventures. Wikipedia

 

Without Precedent

The previous record for deals closed in a year was $107.9 billion. This prior record was set more than two decades ago amidst the apex of the dot-com era in 1999.  The 20-year old benchmark was blown away in 2020 by a total of 454 companies that raised $167.2 billion on U.S. exchanges (through Dec. 25).

The pandemic-related changes in market activity and flow of business caused the number and type of companies going public to follow an unusual pattern. IPO activity is typically busiest early in the year and quieter in the later months. In 2020, $67.3 billion was raised in the fourth quarter; this is roughly six times that which was raised during the first quarter.

Some Hindsight

When businesses were asked or forced to shut down on pandemic-related concerns back in March, seasoned IPO players were preparing for yet another disappointing year after a tepid 2019.  As parts of global economies closed and eventually in the U.S., it seemed that it would be very difficult to successfully bring companies to market at a fair price. There was a brief pause following the stock market fall in March; then, the Federal Reserve signaled it would take extraordinary measures to keep the economy sound. The stock market, which was already on the rebound, continued its climb. Several new equity offerings began to soar; this caused others to accelerate any plans they had to bring their companies public. Since then, there has been what seems like a race to be the next successful IPO. The fundamental reasons for this enthusiasm, low rates, a changing economy, and strong markets. These conditions are all still firmly in place as we begin 2021.

SPAC Impact

Almost half of all money raised in the IPO market in 2020 was for Special Purpose Acquisition Companies (SPACs). The total amount raised through SPACs last year is close to six times the amount the vehicles had raised in 2019 (which was the previous record-setting year).

There were 242 SPACs created in 2020. This is four times the number created in 2019, according to SPAC Insider. The average size of a SPAC in 2020 was $335 million, nearly ten times the amount back in 2009.

From Here

Jeff Zajkowski, head of U.S. equity capital markets at JP Morgan Chase & Co, was quoted in the Wall Street Journal, “With interest rates near zero, there are few asset classes out there that offer a return above inflation. And U.S. equities is one of those, including IPOs.” The ease and success that IPOs were launched within 2020 and the familiarity and comfort investors developed with SPACS makes it seem certain that we will see another above-average year of activity.

There is no shortage of interesting privately held companies that are worth over a billion dollars. Unicorns like Robinhood, which in December brought Goldman Sachs in to advise them on going public in 2021. Others include the bitcoin exchange Coinbase Global Inc. and grocery-delivery service Instacart Inc. There are also international companies that have signaled they have plans to go public and may seek listing on a U.S. exchange. One notable example is South Korean e-commerce company, Coupang Corp. All indications are there will be a full calendar of opportunities for investors to pick through.

 

Suggested Reading:

Will Robinhood be Fined on Charges of Gamification?

SPAC Activity
Accelerating in 2020

Investment of
Excess Corporate Cash

 

Are you subscribed to Channelchek’s active YouTube channel?

 

Sources:

ETFs to
Tap into Increased IPOs for 2021

December IPOs

Number of IPOs in the U.S. from 1999 to 2019

Stock Market Swooned

Fell Short of Expectations.

Goldman Analyzed 4,481 IPOs over 25 Years

If You
Think There’s Something Strange About the 2019 IPO Market—You’re Right

Fed Unveils Major Expansion of Market Intervention

The Year in Deals Can Be Summed Up in 4 Letters

IPO Scoop

 

 

After 2020 Stock Market Outperformance, What Are the Odds for 2021?

 

With the S&P 500 climbing to a new all-time closing high of 3,735.36, what are the stock market valuation indicators tell us? Although 2020 has been an outlier year in many ways, the S&P 500 is up over 70% from its March 23^rd pandemic lows, and year-to-date, the index has risen 15.4%. Notably, the YTD rise, if it were to hold through the end of the year, would rank 2020 as the 46^th best performing annualized return for the S&P 500 over the last 95 years. Not a bad accomplishment for such a turbulent year. The 2020 return is nearly double the average annual return of the S&P 500 since the 500 stock index was adopted in 1957.

Economists view the stock market as forward-looking, a leading indicator foretelling future economic pace. So, after the 2020 outperformance, what might 2021 look like?

What are the Odds?

The bad news is that the vast majority of historical valuation measures show a significantly overvalued market. For example, the Bull-to-Bear ratio is 3.7, well above the 1.0 neutral territory. The Consumer Comfort Index is 59.5, near the highest level seen since the late 1990s (what happened in late 1999/early 2000 brought pain to the stock market). The S&P 500 Price/Earnings-to-Growth (PEG) ratio of 1.9 is at its highest level since 1985. Tobin’s Q (or “Q Ratio” compares an asset’s market value to replacement value) for non-financials. Currently, at an adjusted 3.3, it is at its highest level since 1952.

The forward P/E ratios for the S&P 500 (large-cap) and the S&P 400 (mid-cap) are at their highest levels since 2006, while the S&P 600 (small cap) forward P/E is near its highest level since 2006. The Shiller P/E is 33.8x, versus a 20-year average of 25.6x and approaching its 20-year high of 37.3. The S&P 500 P/S ratio of 2.68x is at its highest since 2000 and well above the 1.50x median. Finally, market capitalization to GDP, often termed The Buffett Indicator, shows an overvalued market. The market cap of the Wilshire 5000 to GDP is 1.83, well above the 0.8 median average and the highest level since 1970. Looking at both the S&P 500 to GDP and Dow to GDP ratios, these are both at 70-year highs.

How is the Economy?

While above-normal valuations often go hand in hand with above-average economic growth, that does not appear to be the case this time. According to the U.S. Bureau of Labor Statistics, GDP is projected to grow just 2.6% in both 2021 and 2022. While this is better than the 2.1% average from 2010 through 2019, it falls far short of the 3-4% annual GDP growth experienced over the previous 40 years. Unemployment numbers, while well down from the pandemic highs, seemed to have stalled in the mid-6% range, nearly double the pre-pandemic numbers. While a COVID vaccine should help the economy recover to a more normalized state, how fast and far such an impact will have is unknown.

Bright Spots

On a more positive note: one should take into account the outsized influence of the FAANGM stocks on the P/E multiple. FAANGM stands for Facebook, Amazon, Apple, Netflix, Google, and Microsoft. These six stocks now account for nearly 25% of the S&P 500’s entire market capitalization. Since 2013, these six stocks are up 567.5%, compared to just 103.3% for the other 494 stocks. As mentioned previously, the S&P 500 forward P/E is 22.1x. The forward P/E for the FAANGM stocks is 40.1x. If you remove the FAANGM stocks, the adjusted forward P/E for the remaining 494 stocks falls to 19.3x, which is close to the modern era average CAPE P/E of 19.6x, suggesting, at least from an earnings perspective, the market is not as overvalued as it appears. In addition, according to Yardeni Research, the Fed’s Stock Market Valuation model shows the S&P 500 forward P/E at 21.7x, compared to a 114.9x P/E for bonds, implying, stocks remain the superior investment choice to fixed income.

 

Suggested Reading:

Will Robinhood be Fined on Charges of Gamification

The Federal Reserve and MIT are Experimenting with Digital Currencies

Investing
and Trading Skills

 

Do You Know a Student  Who Could Use $7,500 for College?

Tell them about the College Challenge!

 

 

The Most Studied Research, Most Popular Videos, and Most Read Articles of 2020

 

What do small cap and micro cap investors look at? We thought you’d want to know what we discovered when we took a look back at Channelchek’s most popular content of 2020.            

As part of our regular planning, we look at which articles are most popular with our readers. This allows us to continue to adjust our focus to give investors more of what they want. Then we look at the most-read company research and top video posts for more insight. We just completed our full 2020 review, you’ll want to know what we learned. So, we decided to share what was found had been most popular during the year. For your convenience, we’re providing links to each in top three categories. As much as this look-back will help us serve you better in 2021, it could also enlighten readers to what was of interest to others evaluating high potential stocks.

Considering the kind of year 2020 has been, the industries and content given the most attention were not overly surprising.  What about top-performing stocks? On the close of business December 23rd, we took a snapshot of the year-to-date performance of Noble Capital Markets sponsored-research companies posted on our platform. We felt sure our readers would want to know which companies we post analysis on are the highest performers to date.

Understanding this year’s top three read articles, most read research, watched videos, and top performers provide a good lesson on how investment expectations can change throughout a year as the winds shift. Next year is less than a week away; the following is a good reminder that we need to expect the unexpected and get regular updates on companies on our watch lists.

 

Top Three Articles

Number One – In mid-April, people were hungry for insight and information related to the new pandemic. At the time, the uncertainty of the impact a month-long lockdown would produce on many parts of the economy created anxiety. A series of Twitter posts by famed investor Michael Burry, who also maintains a license as a medical doctor, caught the attention of Channelchek staff. After all, Burry’s expertise, made famous by the movie “The Big Short,” is in connecting dots and understanding economic reactions to situations. He’s made hundreds of millions assessing situations and investing for unexpected outcomes. It’s no wonder the article, “The Big Short” Dr. Michael Burry’s Views on the Shutdown, remains extremely popular and is Channelchek’s most-read story.

Number Two – Oil companies have had a difficult year. They ended 2019 weak and continued trending down in early 2020 in part because alternatives were filling greater energy needs. Then, the novel coronavirus caused China to shut down parts of their economy, reducing their demand placing downward pressure on prices. Oil prices dropped further from reduced global demand as other countries reported cases. As global restrictions on travel and forcing people to stay home began, the glut of oil grew to the point where it seemed to fill every last storage facility. This accelerated the drop until oil-producing countries agreed on several cuts in production. 

Throughout the year, Channelchek updated readers with information on all aspects of the energy industry, including a series of articles on oil companies. These insights and updates are always widely read. In late October, we published a story that shows that mergers and acquisitions can happen in either boom or bust periods. ConocoPhillips Buys Concho and Pioneer Buys Parsley – What’s Next? This is the article our readers made second most popular.

Number Three  – When Dow Jones or S&P add or remove a stock to any of their indices, the action is unscheduled and often a surprise to the market. This isn’t true for another family of widely followed indexes. Did you know the Russell family of indexes follow a schedule and methodology that anyone with stock data can figure out? In early May each year, they rank securities based on public information and formulas available to you on their website; a month later, they publish to their website add/delete lists. Approximately two weeks later, they finalize the list, and on schedule, in late June, they open with a new, reconstituted index.

Some investors find opportunity looking at past history and maneuvering to game the activity around this reconstitution. Channelchek’s daily users are particularly interested in the Russell 2000. So, in May, we published The Annual Russell Index Revision and Stocks to Watch. It is the third most-read article of 2020. We have marked our calendar to againg help our registered users find opportunities during the reconstitution in 2021. (registration is free).

 

Top Three Research Notes

The more popular research notes on individual companies spanned the industries researched by Noble Capital Markets and made available at no charge to users on Channelchek. Investors had shown broad interests flocking to Channelchek to read about a biofuel company through the second half, private prisons drew attention mid-year; as economies reopened the popularity of mining companies escalated. Investors seeking strong players in weak industries brought interest to reports on restaurants, shipping, and energy. But, we saw the most interest in company research reports, filling all three top most popular positions during the year, was healthcare and biotech companies.

Number One – In-depth, always current research on the company Genprex (GNPX) provides investors of novel medical breakthrough technologies a place to stay current. Genprex Inc. is a U.S.-based clinical-stage gene therapy company. It is engaged in developing a new approach to treating cancer, based on its novel proprietary technology platform, including its initial product candidate, Oncoprex immunogene therapy.

Number Two – Does it make sense that investors were digging for more information on a company in preclinical testing on therapies for influenza, norovirus, and coronaviruses? Cocrystal Pharma Inc. (COCP) is a clinical-stage biotechnology company discovering and developing novel antiviral therapeutics that target replication. Noble Capital Markets initiated coverage of COCP during a time when not just investors, but the world was looking for information on companies doing work to eradicate resparatory viruses.

Number Three  – Rounding out the trio of companies with the most read research is another on a mission to help mankind by treating or eradicating disease. Onconova Therapeutics Inc. (ONTX)  has created a pipeline of targeted anti-cancer agents designed to disrupt specific cellular pathways that are important for cancer cell proliferation. They’re a clinical-stage biopharmaceutical company developing novel small molecule product candidates primarily to treat cancer.

 

Top Three Videos

There is an abundance of current video content on Channelchek, which includes C-Suite Interviews where management is interviewed by the Noble analyst that is a recognized expert in the industry and company itself. There are also video replays of online virtual roadshows. These provide users access to either attend or watch the replay of the up close and personal events at their own convenience. A complete listing is found at Channelcast videos provided on Channelchek.

Number One –  During 2020, the most-watched video is with Onconova Therapeutics’ (ONTX C-Suite).  Steven Fruchtman, M.D., CEO, and Ric Woodman, M.D., CMO meet with Noble Capital Markets Analyst, Dr. Ahu Demir. Onconova is a leading company in the treatment of pre-leukemia cancer. They are a late clinical-stage company that may soon transform into commercial stage-2 treatment of lung cancer.

During the interview, management answers provide insight into their portfolio outlook, current and upcoming clinical trials, and key value-generating catalysts.

 Number Two – The second most-watched video on Channelchek is an interview featuring David Raun, CEO One Stop Systems (OSS C-Suite), with veteran Noble Analyst Joe Gomes. This interview helps define the importance of edge computing and what “AI on the fly” means to the world of artificial intelligence. They also discuss why key management changes may bring better predictability.

This interview was fascinating as it discussed the challenge of self-driving vehicles on the ground and in the air. It also drew many positive comments from a follow-up discussion near the end where Noble Analyst Joe Gomes, CFA, and Noble’s Director of Research Mike Kupinski discussed their takeaways from the management interview with OSS.

Number Three – The biotech company PDS Biotechnology (PDS Biotechnology PDSB) is featured in the third most-watched video on Channelchek. The CEO of PDS, Frank Bedu-Addo, Ph.D., meets with Noble’s Dr. Ahu Demir and discusses their oncology and infectious disease portfolio, and other pipeline assets related to prostate, breast, colorectal and ovarian cancers. The segment in the video on a universal flu vaccine and potential COVID applications of one of their cancer drugs designed to train the immune system may have helped add this company to the watch list of many, if not to their portfolio. The two also discussed the company financials and priorities as well as a future value-generating catalysts.

 

Top Performers of Covered Companies on Channelchek

The average return of all companies for which Channelchek provides free equity research created by Noble Capital Markets is on track to close 2020 near 35%. The top three performers are as follows:

Number One – Genprex Inc. up 1200%

Number Two – Encore Energy up 354%

Number Three – Cocrystal Pharma, Inc. up 205%

Past results are not to be used to predict future results. However, regular visits to read or listen to what Noble analysts are saying, in addition to industry and market-related articles, may provide information on opportunities not well-covered on other websites or news outlets.

 

Take-Away

Channelchek provides a broad mix of investors who are interested in small and micro-cap stocks actionable information. Our users include everyone from top-hedge fund managers to self-directed investors, family offices, and everyone in between. The variety of articles, videos, research reports, and other content, although specific to small publicly traded companies, is created for this diverse audience. Registered users were able to stay on top of some of the industries that were in the spotlight in 2020, we will use what we learned to provide even more useful content in 2021. Noble Capital Markets is rapidly growing its list of interesting companies covered by their research analysts — more companies that can make a great impact on the world will be discovered or better understood by investors.

Paul Hoffman

Managing Editor, Channelchek

 

Suggested Reading:

Which Stocks do Well After a Presidential Election

Small-cap Stocks are Looking Better for Investors

The Advantage of Micro Cap Equities for Investors

 

Sources:

Channelchek.com

Channelchek RESEARCH/DATA

Channelcast VIDEOS

Equity ANALYSTS

Noble Capital Markets

 

Upcoming Events

 

 

Noble Capital Markets Announces Investor Outreach Campaign for NobleCon Investor Conference Boca Raton, Florida, December 21, 2020 – Noble Capital Markets, Inc. (“Noble”) announced today that it will begin its marketing campaign to investors for their Seventeenth Annual Small & Microcap Investor Conference (NobleCon17), to be held – virtually – January 19 & 20, 2021. Noble expects more than 100 companies to present. Noble is an S.E.C. registered / FINRA licensed broker-dealer, and the source of equity research available on Channelchek. All registered guests of Channelchek are automatically registered for NobleCon17. Noble had hoped to continue its long tradition of hosting this preeminent event in-person, but conceded that too much uncertainty remains to expect more than 800 to travel to the conference, as they have in the past. “Of course we are disappointed that social distancing constraints have forced us to host a virtual conference,” said Mark Pinvidic, Noble’s Managing Partner, “so we used that disappointment as motivation to produce an unmatched virtual experience for both public companies and investors.” To do this, Noble will again employ the award-winning video-webcasting technology of Mediasite (in 2005, Noble revolutionized conference webcasting with this HD video technology and has used it ever since at NobleCon conferences), albeit with a new twist. Multiple locations will be seamlessly integrated with the established end-user interface, resulting in a viewer portal that can be paused, PowerPoint and video feeds size-swapped (or a single feed of one or the other), and the functionality allows the viewer to stay on one sector-specific presentation track. “We have set very high standards for NobleCon and a series of Zoom calls is not going to cut it. We are determined to replicate the in-person experience as close as we can, and we’ve invested in the technology to achieve that,” said Pinvidic. The format for the conference also distinguishes NobleCon. Each presenter will have approximately 20 minutes for their formal presentation, during which investors are invited to submit questions. Afterward, a Noble senior equity research analyst will moderate a 20-minute Q&A session. In addition to the small & microcap public companies presenting, Noble is planning six key opinion leader panel presentations covering subjects such as advancements in life sciences and biotechnology, global transportation and logistics, the natural resources landscape, digital and conventional media, and what’s on the horizon for the cannabis industry. An “In Case You Missed It” re-broadcast of the entire NobleCon conference will be featured on Channelchek in February 2021. As part of Noble’s marketing plans, every attending company will have the opportunity to offer a preview of their presentation through a (Noble-produced) 60-90 second video, available to investors up to two weeks in advance of NobleCon. In addition, the traditional conference book available to investors at check-in at the in-person events will be distributed to investors about 10 days prior to NobleCon. Noble was established more than 36 years ago with an extensive distribution network throughout the investor community. Channelchek will be targeting potential investors who would not normally have access to these public company senior executives. Family offices, self-directed high-net-worth individuals, investment advisors and independent brokers will be on the Channelchek radar screen. Total distribution tops 50,000. To ensure the highest possible turn-out, Noble has limited registration requirements to only name and email. There is no cost to register and no obligation in invest at any level.

The first release of the presenting company list is scheduled for the first of the year. All registered guests of NobleCon will receive frequent updates from Noble as well as Channelchek. Here are important links to get more information on NobleCon17: NobleCon17 Website Presenting Company Registration Investor / Guest Registration Presenting Company Sample Preview Video NobleCon17 Agenda Channelchek About NobleCon Noble Capital Markets’ 17th Annual Small & Microcap (Virtual) Investor Conference – a multi-sector blend of emerging growth companies. Five presentation tracks run simultaneously over the two-day event. 20-minute interactive Q&A sessions between qualified investors and corporate executives, moderated by FINRA-licensed research analysts, following each presentation. Topical panel presentations open to all attendees. No-cost registration for investors is open to institutions, registered investment advisors, family offices, self-directed high-net-worth individuals, and independent brokers. All presenting companies featured on Channelchek.com. About Noble Capital Markets Noble Capital Markets, Inc. was incorporated in 1984 as a full-service SEC / FINRA registered broker-dealer, dedicated exclusively to serving underfollowed small / microcap companies through investment banking, wealth management, trading & execution, and equity research activities. Over the past 36 years, Noble has raised billions of dollars for these companies and published more than 45,000 equity research reports. www.noblecapitalmarkets.com email: contact@noblecapitalmarkets.com About Channelchek Channelchek (.com) is a comprehensive investor-centric portal – featuring more than 6,000 emerging growth companies – that provides advanced market data, independent research, balanced news, video webcasts, exclusive c-suite interviews, and access to virtual road shows. The site is available to the public at every level without cost or obligation. Research on Channelchek is provided by Noble Capital Markets, Inc., an SEC / FINRA registered broker-dealer since 1984. channelchek.vercel.app email: contact@channelchek.vercel.app

NobleCon17 – an online event. January 19 & 20, 2021

 

Is Robinhood Violating the Fiduciary Conduct Standard in Massachusetts?

 

A complaint against Robinhood has been filed by the state of Massachusetts. The action is based on a new state law that it began to enforce in September. This filing comes in the same week that the self-directed brokerage firm settled a suit with the SEC by paying $65 million. The new action is based on regulations unique to broker-dealers conducting business in Massachusetts, it charges the online broker with “gamification” of its platform.

Back in March, the Massachusetts Securities Division adopted amendments to one of their codes in response to the U.S. Circuit Court which threw out the Department of Labor’s fiduciary rule two years prior. The DOL regulation sought to curb conflicts of interest in financial advice by holding broker-dealers to the highest standard of doing what is in the clients’ best interest, rather than the lesser suitability standard they had been operating under. The amendment to the state’s existing code included language that held the broker-dealer community to a similar standard as wealth managers when providing investment advice.

What’s in the Amended Code?

The regulations cited in the action became effective on March 6, 2020, while enforcement of the regulation began on September 1, 2020. According to the Secretary of State for the Commonwealth of Massachusetts website, the regulations make a broker-dealer or agent subject to a fiduciary duty to clients when providing investment advice, recommending investment strategy, moving assets to an account, or the purchase, sale, or exchange of securities. Commissions are allowed under the current law; however, it requires that a broker-dealer or agent make recommendations and provide investment advice without regard to the financial or any other interest of anyone other than the customer. The fiduciary conduct standard also requires that the broker-dealer or agent must take all reasonably practicable efforts to avoid conflicts of interest and reduce conflicts that cannot reasonably be avoided.

Unsolicited trades, defined as one in which the client initiates the transaction without the idea having first come from the investment professional, have not been subject to the fiduciary conduct standard. The standard applies in connection with recommendations or advice provided by a broker-dealer. Activities of a broker-dealer in connection with unsolicited trades are subject to both state and federal conduct rules.

What’s in the Complaint?

Robinhood has 486,000 brokerage accounts in Massachusetts with total assets of $1.6 billion. The complaint alleges that Robinhood exposed Massachusetts investors to “unnecessary trading risks” by “falling far short of the fiduciary standard” The 24-page complaint from the Office of the Secretary, William Galvin, focuses on the tactics that Robinhood uses to keep investors engaged. The implication is that the self-directed broker-dealer encourages users on the platform through what it calls “gamification.” Examples cited within the complaint include one Robinhood customer with no investment experience that made more than 12,700 trades in just over six months.

Referring to Robinhood’s business practices, Galvin said, “They know that their investors are primarily younger. It’s because they think there are more unsophisticated investors among them — we heard from some of them”. He charged, “They’ve exploited the current situation with the pandemic. They contributed to the frothiness of the market, bringing people in who don’t know much about it. They’re not responsible fiduciaries.”

A Robinhood spokeswoman disputed the allegation, “Those who dismiss new and younger investors, who come from increasingly diverse backgrounds, as unsophisticated or unserious perpetuate the myth that investing is only for the wealthy,” she said. “History is littered with startups criticized by the establishment that are now strong, longstanding businesses.”

Robinhood plans to defend itself.

What it Could Mean for Robinhood?

There are two main charges in the Massachusetts complaint against the broker. First is that Robinhood encourages risky trading. The second is that they ignore their own options-approval rules by allowing margin accounts for users of their app with little or no market experience. Proving that they encourage risky trading because of the alleged gamification of the platform may be difficult. The marketing of most retail platforms includes some method of added appeal related to the target demographic. The challenge is in the difficulty of proving that Robinhood encouraged speculation. The second main charge seems to depend on more clear-cut evidence. The complaint alleges about 68% of Massachusetts Robinhood account owners that are approved for margin trading have been identified as having limited or no investment experience. Since margin accounts provide Robinhood with additional order flow and the ability to extend credit for which Robinhood does earn daily interest, they may be in violation. Their own rules on extending credit demonstrate they believe clients should have a minimum level of experience. If it’s accurate that the broker’s questionnaire records indicate 68% of Massachusetts Robinhood margin account owners did not have this experience when they first had margin made available to them, Robinhood’s conduct does not meet the state’s code and Secretary Galvin’s complaint is valid.

On December 8, 2020 Robinhood selected Goldman Sachs to lead preparations for an initial public offering (IPO) which could be valued at more than $20 billion. The Massachusetts complaint, or any fines stemming from it, are not expected to have a material impact on the companies plans or valuation.

 

Suggested Reading:

The Federal Reserve and MIT are Experimenting with Digital Currencies

Investing and trading Skills

College Scholarships for Esports Gamers

 

Do You Know a Student Who Could Use $7,500 for College?

Tell them about the College Challenge!

 

Sources:

Robinhood is Expected to be a Top IPO – Regulatory Actions Show Hurdles

After Courts Kill a Federal Fiduciary Rule, Massachusetts Launches Its Own

Massachusetts Fiduciary Conduct Standard for Broker-Dealers and Agents

Ahead of an IPO Robinhood Agrees to Pay $65MM to Settle Charges

SEC Charges Robinhood for Misleading Investors

Robinhood Accused of Gamification in Massachusetts

Massachusetts Regulators File Complaint Against Robinhood

The Fiduciary Rule Is Dead. What’s an Investor to Do Now?

 

 

Small-Cap Stocks Have Been Performing at a Multiple of the Large-Cap Sector

 

In October, Channelchek published an article titled, “Which Stocks do Better After a Presidential Election?” The article looked back over 40 years and demonstrated that there has been a consistent outperformance of small cap stocks and explained some of the reasons smaller stocks could outperform large caps again.

It has been two months and we see that small cap stocks had a great month over the past 30 days. During the 30-day period ending December 10, the small cap Russell 2000 (RUT) index had gained 10.69%, compared to the S&P 500 (^SPX) increase of only 2.67%, and Dow Industrials (INDU) with a 2.05% increase.

This chart shows the Russell Small Cap Index(red) had a fivefold increase relative to the Dow 30 (yellow), and more than threefold compared with the S&P 500 Index (green).

Source: Channelchek Advanced Market Data

Performance Drag:

Based on these performance numbers, someone who invested for 30 days in a fund mimicking the RUT would have earned an additional 8% over the same investment in an ^SPX fund. If the same investor had placed money in an actively managed mutual fund designed to beat the small cap index, they likely would have been much more disappointed.

The small cap fund sector has been experiencing a lot of inflows during the last quarter of 2020. This is why it’s rising; this is how momentum builds. For the portfolio manager in an actively managed fund, this creates a few problems. The first is that the new money coming into the fund has to be invested or left in cash. During a fast upward moving market, cash detracts from performance. Alternatively, suppose the portfolio manager instead decides to invest the inflows. In that case, they will be investing at a time when stocks have already run-up, purchasing them at less than optimal times. They may be forced into decisions they would not have made with a more level and predictable account size. This sector had already had a good run up into November; an active fund manager putting money to work after the run-up is at a disadvantage versus the stocks represented in the index.

There’s another disadvantage a mutual fund portfolio manager, compared to an indexed ETF or even an individual investor may have as a rising market meets fund inflows. During the month of November, $5 billion in net new money was put to work in index-tracking, broad-based small-cap exchange-traded funds (ETF). This represented about 4% of the ETF’s total assets. Active managers usually don’t have as broad of a base of holdings instead as an index fund. More common is they take a higher percentage of their positions in the larger, more liquid names in the sector. When inflows to broad-based index funds accelerate, the smaller companies in the small cap universe often get lifted disproportionately, active funds participate less in these gains. On average, small cap actively managed funds returned about two percentage points less than the benchmarks during November.

Looking Forward

Market participants have been expecting a strengthening in small and micro cap stocks for a couple of years. They had been underperforming and expected to revert to their mean average relative performance. The events of 2020 surrounding the pandemic drove a lot of investible cash to large tech companies leaving small cap stocks to have to wait a bit longer for their move.

The recent move in small stocks across the board remains strong. Profit-taking among the large cap sectors are fueling a rotation into the small sector as many still perceive it as undervalued.  Investors also recognize that continued low materials prices should help many companies keep costs of operating below their pre-2020 levels while expectations of a post-COVID world should bolster profitability.

 

Suggested Reading:

Which Stocks do Well After a Presidential Election

Small-cap Stocks are Looking Better for Investors

The Advantage of Micro Cap Equities for Investors

 

Sources:

Why the Small-Cap Rally is Just Getting Started

Small-Cap Stocks Soared Last Month

 

Upcoming Events

 

 

The Disappearing Broker-Dealer Equity Analyst – Why it Hurts Investors

 

Stock research or equity analysis is an irreplaceable resource for investors to determine the fair stock price of a company.  The value of in-depth research is understood by large institutional investors such as mutual funds, pensions, and insurance companies, this is why they hire in-house stock analysts. Portfolio managers at these firms immerse themselves in information from a variety of trusted sources, they then get guidance from their own staff of highly compensated stock and industry analysts.

Covered Companies Continues to Shrink

The number of covered names analyzed by bulge bracket investment banks has been shrinking in recent years.  Company analysis and research are now primarily reserved for the most lucrative corporate customers with several high-profit banking relationships. This has been causing private investment advisors along with self-directed investors that had relied on the research of the followed companies to look for other in-depth institutional caliber research to review. The reduction in coverage of smaller worthwhile companies left many with either fewer firms covering them or completely orphaned. For a company, coverage by several firms is ideal – astute Investors and advisors weigh consistency among research analysts in their stock selection.

Ongoing consolidation within the broker dealer industry of firms including TD Ameritrade, Eaton Vance, E*Trade, Charles Schwab, Morgan Stanley and others is further shrinking the research available to investors. This is because  many of the firms folding into each other had overlapping covered equites. This follows years where these same broker dealers were reducing their research coverage.

The absence of one or more research firms regularly reporting on once covered companies is putting money managers in a position with fewer names to choose from. This is especially true of those professionals that make prudent use of Investment Policy Statements.

Investment Policy Statement (IPS)

Prudent investment management on behalf of others dictates an Investment Policy Statement. The Chartered Financial Analyst Institute (CFA) defines the role of the IPS as:

“The investment policy statement (IPS) serves as a strategic guide to the planning and implementation of an investment program. When implemented successfully, the IPS anticipates issues related to governance of the investment program, planning for appropriate asset allocation, implementing an investment program with internal and/or external managers, monitoring the results, risk management, and appropriate reporting.”

Two common elements of most IPS are the Limits on Investments and Relative
Constraints section. Within these sections it is not uncommon for the IPS to have wording which includes analyst rating at or above their mid-rating.  Or, in other cases it may require the average of at least three analyst ratings above or at the mid-point. Other language may allow investing down to the lowest rating but limit the total portfolio percentage in this category. If a company isn’t rated it may not be allowed in consideration. There are of course other possibilities that eliminate a stock from being purchased in order to comply with what was agreed upon with the client or trust agreement. The reduction in coverage of companies by firms, and fewer firms covering those companies, eliminates many that otherwise would be a fit. That they can’t be considered is not good for the investor or the company.  

Alternatives

Other research is filling the information gap made even wider by Wall Street. Independent research firms and boutique research-oriented investment banks are providing research on the stocks that have been left hanging by Wall Street. This means that independent research firms are becoming a primary source of information on a high percentage of publicly traded stocks. Some of this is subscription-based from investors. Another model which is gaining more prominence and acceptance is fee-based research where the cost of high caliber research is covered by the company itself. This model, often referred to as company-sponsored research is beginning to fill what would be a widening gap with broker dealer consolidations. It provides investors adhering to an IPS that would otherwise be required to exclude uncovered stocks the ability to consider them. The research also provides investors with details on company projections they would not have otherwise had for use in making decisions at no cost to the investor.  Public companies securing this service have additional benefit since, unlike subscription-based, the research is available to all. 

Company Sponsored vs. Promotional

It’s important to differentiate between unbiased fee-based research and research that is promotional. Objective fee-based research is similar to the role of your doctor. You pay a doctor not to tell you that you are well, but to give you his or her educated and truthful opinion of your condition.

Professional fee-based research is an objective analysis and opinion of a company’s investment potential. This is not to be confused with promotional write-ups. These write-ups are short on analysis, long on hype, and often written by marketers, not investment professionals.

Look for these characteristics to determine a research firm’s legitimacy:

• They provide analytical, not promotional services
• They are paid contractually in cash, (not any form of equity)  
• They provide full and clear disclosure of the relationship between the company and the researcher

Some company-sponsored research firms have taken additional steps including requiring FINRA registrations  of its analysts to demonstrate a high level of understanding, promote ethical behavior, and subject the analyst and the firm to punishment including loss of career, if some guidelines are not adhered to. This additional step punctuates the ethics, diligence and authenticity under which the evaluations were conducted.

Companies That Would Benefit from Research:

• Its shares may be undervalued because investors are not familiar with the company
• It has fewer than two respected firms covering the name which may take it out of consideration by professionals
• It believes that its story, financials, and management can withstand objective analysis

Take-Away

The visibility, credibility, and investability of a company hinge on investors recognizing and understanding the company. It also has to meet the criteria of the IPS of those firms it would like to attract. The company should also try to avoid tarnishing its reputation by not associating itself with hype masquerading as research.  Similarly, a research firm may have its own criteria for selecting which stocks they want to analyze.  Investors should make certain they are looking at high caliber research and not hyped marketing.  The need left by large broker dealers, both by reducing covered companies, and also by merging with  firms where there was a duplicate coverage situation  is being filled by company-sponsored research firms. Their value is becoming better understood as the best solution to the problems left by the large Wall Street houses.

Suggested Reading:

Is Company Sponsored Research the Future for Small-Cap Stock Investors?

Small Cap Stocks Can Increase Your Portfolio Diversification

Large and Small Cap Return Probabilities

 

Do You Know a Student  Interested in Equity Research?

They Could Win Up To $7,500 !

Tell them about the College Challenge!

 

Sources:

Elements of an Investment Policy for Institutional Investors

Elements of an Investment Policy for Individual Investors

 

The Advantages of Micro Cap Equities for Investors

 

A micro cap stock is a publicly-traded company with, by most definitions, a total U.S. dollar value of outstanding shares valued between $50 million and $300 million. Micro cap companies have greater market capitalization than nano caps and less than small cap companies. The price of the stock itself does not indicate a company’s capitalization; for example, a company with shares trading at $2.50 and 25 million shares outstanding is larger than a company trading at $10 with 10 million outstanding shares.

The Small Firm Effect

A theory called “the small firm effect,” backed by empirical evidence, suggests there is a risk premium placed on smaller firms. The theory holds that the effect of this risk premium, perhaps coupled with larger management stakes in these small firms, on the group, allows smaller companies to outperform larger corporations over time.

The phenomenon has also been explained by the ability of smaller companies to have a sharper focus and the ability to be more nimble after seeing an opportunity or upcoming trends. While equity shares issued by smaller companies often experience more volatility, the small firm effect states that the opportunity to appreciate company shares may be superior versus those that are considered less risky and trade with less volatility.

Smaller firms are necessarily more streamlined and efficient. Their business model often dictates reducing waste and “dead-wood” employees.  This could put the smaller firms at a more competitive advantage when competing with larger firms within their space. A leaner, perhaps more simplistic model can also add to the company’s success in that decision making can be quicker with fewer people involved. A perceived opportunity in the marketplace can be capitalized on with little wasted motion, meetings, and memos. This translates to an increased ability to be first and be best. This allows capturing market share early and the momentum to hold onto and grow that market share even when the larger players step in to compete.

Investor Benefits

Small firms have been shown to have a positive impact on the potential returns of investors. While smaller companies lack the capital assets and distribution channels of large, deep-pocketed, and more established businesses, the ability to make decisions quickly on what might be a short-term event can add earnings to the bottom line. The earnings are a much more significant percentage of total revenue compared to larger firms. The effect over time is the shares of stock issued by smaller firms could rise as the increase in earnings are understood and known. The companies’ valuation would respond accordingly, as more deem them worthy of consideration for purchase as an investment. While investors have more volatility, the possible returns can often balance that risk and make allocations in select small cap stocks a good strategy for investors.

Many of the stocks that meet the definition of micro cap are not widely reported on and may even be lacking equity research coverage from reputable organizations. This lack of opportunity and being known can depress equity valuations as investors are less likely to take on assets they don’t clearly understand. Or understand on a surface level while trusting the expertise and regular reports of an industry analyst covering the company.

Take-Away

While the small firm effect is a theory that has been backed up with decades of both data and anecdotal reports, there are differences in thought on how to best measure it. The different measurements return different results. One large difficulty in quantifying data is the time frame. Suppose one looks at measurements on a year-to-year basis of companies that meet small capitalization criteria. In that case, each year may be excluding the greatest winners as they grow out of the definition. The same drawback to accuracy is on the downside, a study would also be eliminating those that dropped below the $50-$300 million set of companies.

The past year has brought tremendous focus on the performance of the most highly capitalized public companies. All of them were once micro cap and considered risky. These mega cap giants will all likely be dethroned one day by innovations coming about by companies that are barely on investors radar right now.

 

Suggested Reading:

Are Nano Cap Stocks Beneficial to Your Portfolio?

Financial Markets Lifted Household Wealth to Record Levels

Which Stocks Do Well After a Presidential Election

 

Do You Know a Student  Who Could Use $7,500 for College?

Tell them about the College Challenge!

Sources:

Correlation and Micro Cap Equities

Micro Cap Stocks, Investopedia

The Micro Cap Advantage