It is hardly news that the bull market for stocks just hit its five-year anniversary.
But the tripling of the Dow Jones Industrial Average from March 2009 has not lifted all stock prices, especially for those in the small cap sector. For every small cap like Quadrant 4 System (NASDAQ: QFOR) that is up more than 800 percent for the last 52 weeks of market action, there are great publicly traded companies in that group like SoupMan (OTC: SOUP), LaborSmart (OTC: LTNC), and Americas Petrogras (OTC: APEOF) that have increasing revenues with the stock price not following as it seemingly should.
A major reason for this is that the individual investor is pulling back with institutional investors like hedge funds, high frequency trading groups, mutual funds, and others dominating more of the stock market. That provides a huge opportunity in small cap stocks for the savvy investors. Due to the guidelines under which these massive institutional investors operate, many excellent small cap stocks are tremendously undervalued. As an example, many mutual funds cannot buy a stock that sells for under $10 a share.
Eventually, as goes the efficient market theory, assets will be fully priced based on all the information that is available, no matter the share price.
For small cap stocks, that obviously takes longer. That is not due to the lack of quality in those publicly traded companies. It is due to the lack of resources available to fully value these entities for the investing community. Some small cap stocks like Quadrant 4 System have 3 analysts following the company (all are bullish on it). Others, like SoupMan, Americas Petrogas, LaborSmart, Premium Exploration (OTC: PMMEF), Octagon 88 (OTC: OCTX), High Performance Beverages (OTN: TBEV), and Mondial Ventures (OTC: MNVD) do not have any.
With the Internet, an individual investor can step in, perform the due diligence, and profit from the oversights of institutional investors.
Two good places to start are increasing revenues and little, if any debt. Legendary investor Warren Buffett makes an excellent point that a business should be able to operate from its revenues without borrowing heavily. In this regard, High Performance Beverages, Mondial Ventures, Premium Exploration, and the others have clean balance sheets.
Shifting over to the income statement, an investor should look for increasing revenues.
For Quadrant 4 System, Americas Petrogas, and LaborSmart, revenues are soaring. According to Yahoo! Finance, revenues are increasing at a quarterly rate of 40 percent for Quadrant 4 Systems. For LaborSmart, it is almost 150 percent. SoupMan has revenue increasing at a quarterly rate of nearly 40 percent, too.
It is also best if the company has a product that is selling and easy to understand.
For SoupMan, it is great soup. High Performance Beverages is in the booming sports and energy drink market. Quadrant 4 System has the QHIX exchange, which helps clients find the best insurance coverage under the Affordable Care Act, or ObamaCare. Americas Petrogas, Premium Exploration, and Octagon 88 have promising natural resources holdings.
At present, individual participation in the stock market is at its lowest level since 1998.
That means that too many missed out on the Dow Jones Industrial Average tripling since March 2009. But with great small caps like SoupMan, Labor Smart, Quadrant 4 System increasing revenues and others that are undervalued such as High Performance Beverage, Mondial Ventures, Octagon 88, and Americas Petrogas, investors willing to do the research should do well over the long term when the market eventually fairly prices the stocks.
Photo Credit: ddpavumba
Are you taking advantage of undervalued small cap stocks?
Jonathan Yates is a financial writer with degrees from Harvard, Johns Hopkins and Georgetown University Law Center. While much of his career was spent working for Members of Congress on Capitol Hill, he was also General Counsel for a publicly traded corporation; and worked in the research department of a brokerage house.
Money Beagle says
There seems to be very little ground with small caps, they either make you rich or make you poor. Too risky to hold except as a small portion of your portfolio in my opinion.
thefrugalweds says
Great info. I really did not know much about this. Thank you for giving me a good starting point for my research.