Small-Cap and Micro-Cap Stocks

Small-cap and micro-cap stocks outperform large-cap counterparts in the long term but show particular strength after economic shakiness

A small-cap stock is defined as shares of a company with a market capitalization between $300 million and $2 billion.

Small-cap stocks offer an attractive risk-reward profile, as these companies usually have a higher growth potential than large-cap stocks. Although small-cap stocks have a high amount of volatility, they appear to be lucrative bets when the economy is expected to boom.

Micro-cap stocks represent companies with a market capitalization between $50 million to $300 million. Micro-cap stocks have a world of potential. Often they are in niche markets with emerging business ideas or technologies, so there’s a massive growth window for a company that can manage to it its stride.

Also, micro-cap stocks aren’t nearly as well-known as the blue-chip names. If you’re an astute investor, you can get in early before the average investor buys in.

Small-cap and micro-cap stocks are inherently more volatile than those blue-chip established names. That means potentially greater reward and greater risk. To invest in these micro-cap stocks, you should have a pretty high risk tolerance and be ready to ride the waves.

Most companies start out as small-caps or micro-caps, but by continually growing their earnings, their share prices appreciate. This can increase the market capitalization (share price times shares outstanding) of the company to large, or even mega-sized, while investors along for the ride reap the profits.

Big names like Microsoft, Apple and Amazon were all small-caps at one point. But not all small-caps flourish like those giants have. Many fail or stop growing, which means losses or little profit for investors. Great companies reveal themselves over many years and decades by continually producing quality earnings and sales growth.

You can find the best small-cap stocks by looking for companies with strong earnings and sales growth. Analysts must also be forecasting continued growth into the future. In addition, weed out companies with erratic earnings or that are issuing shares excessively, which dilutes earnings and shareholders’ equity.

All stocks should trade on U.S. exchanges, have a share price above $2, a market cap between $250 million and $2.5 billion and have three-month average daily volume of at least 200,000 shares.

Expected EPS growth. Companies are only included if analysts predict at least 7.0% yearly average growth over the next five years. Current-year EPS growth is also expected to be positive (above 0%).

Recent EPS and sales growth. Earnings and sales have increased an average of at least 7.0% per year over the last five years. Earnings were also higher than the prior year for each of the last three years.
Profitable. All stocks on this list have had positive earnings for the last three years.
This methodology focuses on companies that are already profitable. While unprofitable companies can see their share prices rise too, profitable and growing companies have already proven they can do it. It is a less speculative way to play this segment of the market, as opposed to hoping a struggling company can eventually turn it around.

investing in stocks is all about returns, the next step when analyzing small cap stocks is to see how their performance differs from large or mega cap behemoths.

Purchasing Power Risk

“Inflation is taxation without legislation.”

Inflation reduces the value of money held by the public, similar to a tax. The impact of inflation on purchasing power acts as a hidden cost on consumers’ wealth.

Inflation functions like a tax because it diminishes the real value of money. When prices rise, the same amount of currency buys less, effectively reducing people’s wealth if their income doesn’t increase at the same rate. This erosion of purchasing power affects everyone who holds money, making it a universal ‘tax’.

However, unlike traditional taxes imposed by governments, which are debated and legislated, inflation can occur without any direct legislative action. It’s often the result of complex economic factors, including monetary policy decisions by central banks, supply and demand dynamics, and changes in production costs.

Purchasing power risk, also known as inflation risk, refers to the potential decrease in the value of money over time due to inflation. When inflation occurs, the general price level of goods and services rises, meaning that each currency unit can buy fewer items than before. This risk is particularly relevant for investors holding cash or fixed-income securities, as the real return on their investments may be reduced when inflation is high.

In simpler terms, if you have a certain amount of money today, you might be able to buy a basket of goods with it. However, if prices increase over time due to inflation, that same amount of money will buy you a smaller basket of goods in the future. This erosion of purchasing power can affect not only personal finances but also investment returns and overall economic health.

Central banks often adjust interest rates to try to control inflation and maintain the currency’s purchasing power. One common measure of purchasing power in the U.S. is the Consumer Price Index (CPI), which tracks the average price change over time for a basket of goods and services, including transportation, food, and medical care3. Monitoring CPI and other economic indicators can help individuals and policymakers understand and mitigate the impact of purchasing power risk.

Source:  https://haikhuu.com/education/purchasing-power-risk

2024 SoFi NBA Play-In Tournament

The 2024 SoFi NBA Play-In Tournament will include teams with the 7th through 10th-highest winning percentages in each conference and take place April 16-19.

The SoFi NBA Play-In Tournament will determine the teams that fill the seventh and eighth playoff seeds in each conference for the 2024 NBA playoffs.

The Play-In Tournament will take place Tuesday, April 16 – Friday, April 19, with the games played after the regular season concludes and before the first round of the NBA playoffs begins.

While the teams that finish Nos. 1-6 in the standings of each conference are guaranteed a playoff spot, the teams that finish Nos. 7-10 in the standings will enter the Play-In Tournament. These teams will battle for the seventh and eighth playoff seeds.

Each conference’s No. 7 team in the standings will host the No. 8 team. The winners secure the No. 7 seed in the playoffs. The losers will get another chance to earn a playoff spot.

Each conference’s No. 9 team in the standings will host the No. 10 team. The winners will advance to the final stage of the Play-In Tournament. The losers are eliminated.

The losers of the No. 7 vs. No. 8 matchups will host the winners of the No. 9 vs. No. 10 matchups. The winners secure the No. 8 seed in the NBA playoffs for its conference. The losing teams are eliminated.

If the regular season ended after games played on April 7, the matchups would be:

Western Conference:  (7) Pelicans vs. (8) Kings and (9) Lakers vs. (10) Warriors

Eastern Conference:  (7) 76ers vs. (8) Heat and (9) Bulls vs. (10) Hawks

Warren Buffett’s Investment Strategy

An initial investment of  $10,000 in Berkshire Hathaway when Warren Buffett took over in 1964 would now be worth more than $438 million!

Despite his reputation for picking winning stocks, Berkshire chairman and CEO Warren Buffett wrote to investors in his 2022 Berkshire Hathaway letter: “Charlie [Munger] and I are not stock-pickers; we are business-pickers.”

Over the decades, Buffett has refined a holistic approach to assessing a business—looking not just at earnings but also at its overall health, deficiencies, and strengths. He focuses more on a company’s characteristics and less on its stock price, waiting to buy only when the cost seems reasonable.

In short, Warren Buffett’s investing strategy is not complicated:

  • Buy businesses, not stocks. In other words, think like a business owner, not someone who owns a piece of paper (or, these days, a digital trade confirmation).
  • Look for companies with competitive advantages that can be maintained or economic moats. Firms fending off competitors have a better chance of increasing intrinsic value over time.
  • Focus on long-term intrinsic value, not short-term earnings. What matters is how much cash a company can generate for its owners in the future. Therefore, value companies use a discounted cash flow analysis.
  • Demand a margin of safety. Future cash flows are, by their nature, uncertain. Always buy companies for less than their intrinsic values to compensate for that uncertainty.
  • Be patient. Investing isn’t about instant gratification; it’s about long-term success.

Other investing virtues prized by Buffett include candid communication with shareholders, patience in letting an investment bear fruit and emphasizing practical vehicles over investing fads.

Patience Pays:  An initial Investment of  $10,000 in Berkshire Hathaway when Warren Buffett took over in 1964 would have purchased approximately 808 company shares at a stock price of just $12.37 per share.

As of the end of 2023, Berkshire Hathaway’s Class A shares (which have existed since 1964) traded for just over $542,625 per share. The stock has produced an overall gain of 4,386,621% from 1964 to 2023. Your initial $10,000 investment would now be worth more than $438 million!

While Berkshire Hathaway’s past 60 years have been an impressive growth story, Buffett cautions that the company’s size has become too large to sustain the same 20% growth rates over the long term. He believes future gains will not be as dramatic as those of the past 60 years.

Nevertheless, Buffett’s core investment strategy prioritizes thinking like a business owner and viewing investments as actual companies, not just as stocks.

He has long advocated for “boring” investing and the notion that real moneymaking happens when you sit back and trust in a long-term plan instead of strapping in for a wild ride seeking short-term profit. He continues to focus on lifelong learning, whether that means unpacking what a new product is all about or reading up on interdisciplinary subjects.

And he intends to give away 99% of his wealth to philanthropy.

Source: Susan Dziubinski, How to Invest Like Warren Buffett, Morningstar, March 13, 2024.

Investing and Building Wealth

“Leaving the question of price aside, the best business to own is one that over an extended period can employ large amounts of incremental capital at very high rates of return.” – Warren Buffett, 1992 Berkshire Hathaway Shareholder Letter.

Investing is putting money into different securities or investment vehicles, hoping these securities will increase in price and payout profits.

In particular, investing in the stock market involves buying shares of companies that then rise in price. Some companies also pay dividends on their shares at regular intervals.

The end goal of investing is to spread your wealth in different vehicles that grow your money over time.

“Don’t be afraid to overpay for a stock with a history of rewarding shareholders. Winning stocks tend to keep winning if you have a long-term outlook.”  Charlie Munger convinced Warren Buffett that sometimes it’s worth paying a premium for a great business.

A company’s intrinsic value is the present value of all of its future free cash flows (meaning from now until the end of time- all the free cash flows that it will ever generate).

Free cash flow (FCF) is the amount of cash the firm generates from its operations minus the amount of money it reinvested into its operations. Cash flows are “free” because they can be used to pay off debt, buy back shares, pay dividends, or leave in the firm’s bank account.

If you own a private company, this is what you would think of as “real earnings” that you can pay yourself with, given that you don’t have to reinvest those funds into the operation.

”Good things happen to cheap stocks of out-of-favor, industry-leading companies.” ~ Nancy Tengler

The most crucial quantitative evidence of an economic moat is a high return on invested capital (ROIC).

Return on invested capital, or ROIC, is a financial metric that helps understand how efficiently a company generates profits. The less capital it requires to produce earnings, the better.

For example, what does an ROIC of nearly 920% mean? It basically says that a company like Apple can generate massive profits with little investment.

The formula for ROIC is highlighted below. To reinforce, the larger the numerator (NOPAT is the after-tax operating profit) relative to the denominator (which can be defined as fixed assets plus net working capital), the more efficient the company is.

ROIC = NOPAT/Average Invested Capital

ROIC = NOPAT/Average Invested Capital

Investors— both shareholders and creditors— require a certain level of return in exchange for providing a company with the funds it needs to run its business. This is called the weighted average of capital (WACC). A company generates excess returns if its ROIC consistently exceeds its WACC.

For example, imagine little Joey wants to open a lemonade stand. He needs $100 upfront to buy a table, a pitcher, lemons, sugar, ice, and cups. This is invested capital. Joey borrows $50 from Mom and promises to pay her 5% interest ($2.50). Dad has a higher risk tolerance, so he buys $50 of common stock in Joey’s lemonade stand. Dad equity return (this is called the cost of equity).

Buffett created a concept called owner earnings. It is a measure of the firm’s potential free cash flows if it weren’t reinvesting them:

Owner Earnings = Earnings + Depreciation & Amortization + Other Non-Cash Charges – Maintenance Capital Expenditures

Attaining prosperity and financial freedom and building wealth through investing in the stock market for the long term is fundamental.


References:

  1. https://www.forbes.com/sites/qai/2022/01/19/financial-freedom-in-2022-investing-in-stock-market-ideas
  2. http://www.comusinvestment.com/blog/growth-returns-on-capital-and-business-valuation
  3. https://einvestingforbeginners.com/buffetts-return-on-invested-capital-formula-daah/

Spending More Than You Have Never Ends Well

Spending more than you have never ends well.

Spending more than you have is indeed a precarious path. It’s like diving into a stormy sea without a life jacket, or standing on a brick wall while simultaneously removing one brick at a time. It can lead to financial stress, debt, and instability. Whether you’re young or mature, wise financial choices are essential.

Remember, financial stability and planning are like a well-anchored ship. They can provide you with financial peace of mind, lead you to financial independence, and help build wealth.

Keep in mind:  In the ocean of expenses, sail with care,

Overspending waves can lead to despair.

Budget your voyage, trim the excess sail,
And watch your financial ship weather the gale.

So, set sail wisely, and may your financial compass always point toward prosperity and abundance!

Here are some prudent tips to avoid falling into the overspending trap:

  1. Budgeting: Create a realistic budget that outlines your income, expenses, and savings goals. Please be sure to stick to it diligently.
  2. Emergency Fund: Build an emergency fund to cover unexpected expenses. Having a safety net helps prevent overspending during crises.
  3. Track Expenses: Keep a record of your spending. Use apps or spreadsheets to monitor where your money goes. Awareness is key.
  4. Prioritize Needs Over Wants: Distinguish between essential needs (like rent, groceries, and utilities) and discretionary wants (like dining out or shopping). Prioritize needs first.
  5. Avoid Impulse Purchases: Pause before making a purchase. Ask yourself if it’s necessary or if it’s an impulsive desire.
  6. Limit Credit Card Usage: Credit cards can encourage overspending. Use them wisely and pay off balances promptly.
  7. Set Financial Goals: Establish short-term and long-term financial goals. Having a purpose for your money helps curb unnecessary spending.

Remember, financial well-being is a journey. By practicing mindful spending and making informed choices, you can avoid the precarious path of overspending.

Superior Investors are Lonely

“Large amounts of money [or wealth] aren’t made by buying what everybody likes. They’re made by buying what everybody underestimates.” ~ Investment Books

If everyone likes a stock or company, it’s likely the asset has been mined too thoroughly, and has seen too much capital from investors flow in.

“Large sums of money or wealth are not made by investing in what everybody likes. They are made by investing in what everybody underestimates. This implies that if everyone is investing in a stock or company, it has probably already been thoroughly researched and too much capital has already been invested in it, leaving little room for any bargains to exist.

Furthermore, if everyone likes a stock or company, it is highly probable that its price is overvalued and inflated, which means it is at risk of falling if the crowd changes its collective mind and decides to sell.

Successful investors, therefore, tend to identify and purchase assets when their price is lower than their intrinsic value or when they are mis-priced and undervalued by the crowd or market. This means that superior investors often spend a lot of time being lonely since they buy assets that others do not recognize or appreciate.

In essence, superior investing involves two primary elements: identifying a quality or economic moat in a company or stock that other investors do not recognize, and having it turn out to be true (and accepted by the crowd and market).

It is essential to note that macroeconomics may influence a stock price in the short term, while microeconomics dominate in the long term. Therefore, investors should look for situations where macroeconomic factors depress prices.

Ultimately, if a company delivers consistently quarter after quarter, year after year, the price will eventually follow.”

nto it for any bargains to still exist.

If everyone likes the stock or company, there exist significant risks that the stock’s price has become too inflated and overvalued, and will fall if the crowd changes it collective mind and moves to the exit.

Superior investors know—and buy assets—when the price of a company’s stock is below its intrinsic value or is lower than it should be. And the price of an investment can be lower than it should be when the crowd does not recognize its merit.

Large amounts of wealth are not made by buying what everybody likes or following the proverbial crowd. Wealth is made by buying what everybody or the crowd underestimates or mis-prices.

In short, there are two primary elements in superior investing:

  • Seeing some quality or economic moat in a company or stock that other investors don’t recognize or appreciate (and it’s not reflected in the stock’s price)
  • Having it turn out to be true (and accepted by the crowd and market)

That is why it is said that successful investors spend a lot of time being lonely.

Source:  https://x.com/investmentbook1/status/1759534213752102957

Macroeconomics determine a stock price in the short term. In the long term, microeconomics dominate.

If a company delivers quarter after quarter, year after year, eventually, the price will follow.

Look for situations where macro depresses prices.

Dividend Kings

The highest yield is only part of it when finding the best dividend stocks. Income investors know there’s no substitute for regular dividend increases over the long haul.

Dividend Kings are a unique class of stock that offers investors a phenomenal track record of annual dividend increases.

These elite members of the Dividend Aristocrats, which are companies in the Standard & Poor’s 500-stock index that have raised payouts once a year for 25 years running, have far more extensive track records. Specifically, Dividend Kings must have at least 50 consecutive years of uninterrupted annual dividend hikes.

Dividend Kings’ appeal should be evident after 2020’s COVID-19 outbreak. Many dividend stocks cut or even suspended their payouts amid uncertainty and disruptions. Income investors who had hoped these companies were lower risk simply because they paid dividends received a rude awakening, as the payout cuts often came along with deep share price declines.

With half a century of increasing distributions, however, Dividend Kings have an excellent track record that adds a layer of stability in an otherwise uncertain market environment. Nothing is ever certain on Wall Street, but these are 15 of the best stocks for dividend growth. The names featured here are all longtime leaders who exhibit more than 55 years of increases – including one pick with a track record of 69 straight dividend hikes – making them a bit more trustworthy than your typical income investment.

Warren Buffett and Berkshire-Hathaway’s Annual Letter

“For whatever reasons, markets now exhibit far more casino-like behavior than they did when I was young. The casino now resides in many homes and daily tempts the occupants.” ~ Warren Buffett

Berkshire’s goal is simple: “To own either all or a portion of businesses that enjoy good economics that are fundamental and enduring. Within capitalism, some businesses will flourish for a very long time while others will prove to be sinkholes. It’s harder than you would think to predict which will be the winners and losers. And those who tell you they know the answer are usually either self-delusional or snake-oil salesmen,” writes Warren Buffett, legendary Chairman and CEO of Berkshire-Hathaway.

At Berkshire, they “particularly favor the rare enterprise that can deploy additional capital at high returns in the future. Owning only one of these companies – and simply sitting tight – can deliver wealth almost beyond measure,” writes Buffett.

Be patient when you find a wonderful business

“When you find a truly wonderful business, stick with it,” Buffett writes. “Patience pays, and one wonderful business can offset the many mediocre decisions that are inevitable.”

Never risk permanent loss of capital

The stock market is becoming more and more like a casino, offering daily temptations to ignore a long-term investment strategy and quickly turn over holdings when “feverish activity” brings all number of uninformed or ill-intentioned actors out of the woodwork.

He writes: “At such times, whatever foolishness can be marketed will be vigorously marketed — not by everyone but always by someone.”

The late Charlie Munger, Buffett’s long-time friend and business partner, argued that there were two types of individuals who buy shares in the stock market: investors and speculators. The investors tend to be disciplined, hard-working, and thoughtful when buying assets. But the speculators are those who seek nothing more than a quick buck without care for the intrinsic value of the underlying business they’re buying.

He notes do not fall for the marketing of the foolishness, or the scene could turn ugly, and the average investor may walk away “bewildered, poorer, and sometimes vengeful.”

Number One Rule

“One investment rule at Berkshire has not and will not change: Never risk permanent loss of capital. Thanks to the American tailwind and the power of compound interest, the arena in which we operate has been — and will be — rewarding if you make a couple of good decisions during a lifetime and avoid serious mistakes,” states Buffett.

The final statement from Warren Buffett as stated in Berkshire Hathaway’s Annual letter to shareholders:

“Berkshire can handle financial disasters of a magnitude beyond any heretofore experienced. This ability is one we will not relinquish. When economic upsets occur, as they will, Berkshire’s goal will be to function as an asset to the country – just as it was in a very minor way in 2008-9 – and to help extinguish the financial fire rather than to be among the many companies that, inadvertently or otherwise, ignited the conflagration,” commented Buffett.

Source:  https://www.berkshirehathaway.com/letters/2023ltr.pdf