The stock market is uncertain but what is certain is that no one can accurately predict the expiration date of the coronavirus. The current volatility is turning the market into a casino. However, many investors are turning the odds in their favour by creating coronavirus strategies. Do you want to turn the odds in your favour?
The coronavirus strategies we have covered so far include:
- Inverse Exchange Traded Funds (ETF)
- Investing in Gold
- Snapping up quality blue-chip ASX stocks for a fraction of the price (US version)
- Riding the waves of trending stocks throughout the virus (Hand sanitiser, toilet paper stocks or COVID-19 Vaccine companies)
However, today we are discussing the micro-caps strategy, the risks involved as well as comparing it to the other four strategies above.
Micro Cap Strategy Blue Print
A micro cap is any public company which has a market capitalisation between 50-300million (US). Some examples of ASX micro caps would include Zip co (ASX: Z1P), Paradigm Bio Pharmaceuticals (ASX: PAR) and Near map (ASX: NEA). Before, we share the strategy you might be thinking why micro-caps?
Micro-caps are reasonably priced, can outperform the market and could grow into a market leader. Just imagine, if you got into Ford when it was a mirco-cap. On top of that Micro-caps, unlike Blue-chips, do not have “every man and his dog” investing in the company. Meaning, you have time to gather your thoughts, properly dissect the financials and make an investment decision with little capital before it is too late.
Step 1) Pick stocks with pre-coronavirus momentum
Here the stock should have experienced a bullish trend in the years or possibly quarters leading up until the coronavirus. Why? Because stocks that were outperforming the market years before the coronavirus are likely to continue their momentum once the ‘you know what’ fizzles out.
Mirco-caps that were only rising months before the virus will probably experience no growth for an extremely long time. Also, following micro-caps that saw growth in the last couples of months is called ‘trend watching’. Which is dangerous because there is no historical data to indicate any recovery once the virus is eradicated.
Step 2) The stock must be undervalued
So you found a stock with pre-coronavirus momentum, what is next? The company must be undervalued. Luckily for you, the coronavirus fear, as sad as it is, is dragging quality micro-cap companies into the undervalued zone.
Step 3) Forecasted or historical earnings growth
Stocks with pre-coronavirus momentum should also show strong earnings growth unless it is a biotech. Consistent increases in profit further supports the argument that the stock should continue its upward momentum once the market returns to normal. Because, most investors, view year on year earnings growth as a green light for investing.
Strong micro-caps with negative forecasted earnings for the next 6 months should not scare away investors. Only, if the company has an impressive track record of year on year growth.
Here is a promising list of momentum-driven and undervalued small-cap stocks. Subscribe to Youth Investment Group below for free to access more coronavirus strategies.
Despite, the fairytale appeal we must consider the risks. Why? Because YIG believes that young investors deserve to have a balanced perspective on investing strategies before entering the treacherous waters of the stock market.
Firstly, investors are relying on pre-coronavirus confidence to rally behind the stock again. However, the coronavirus could see people forget about the stock or not jump back on for a long time.
Micro-caps, are more towards the illiquid side. Possibly creating a trap where you invest and the low trading volume causes you to sell at a lower price (capital loss). To add insult to injury, micro caps experience less market coverage than blue-chips, especially with the coronavirus.
Also, if the coronavirus causes a recession or even a depression, then an endless number of micro caps would collapse or at least see its current price become the new price.
Above all else, micro caps do not usually offer dividends. Meaning you are relying on a capital gain to make you money because the stock is not a cash flow asset.
Which coronavirus strategy is the best for you ?
Beginners - Blue-chip stocks
Intermediate investors - Micro-caps - Inverse ETFs - Gold
Experienced investors - Micro-caps - Inverse ETFs - Gold - Riding the waves of trending coronavirus stocks
The above guide, is just that a guide. YIG is not liable for any personal investment decisions relating to these coronavirus strategies above. Also, feel free to choose strategies outside your investing level. However, that is at your own risk and is highly unrecommended.
The YIG team is and will continue to provide you with some of the simplest yet effective coronavirus strategies out there. Stay tuned and subscribe for free if you want access to more strategies.
- Have investors jumped the gun on the recent market surge
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The information above should not be taken as financial advice. Youth Investment Group has no liability for personal financial interests or investment decisions. You should make your own investment decisions based upon your own research and what you believe is best for you.
Written by Patrick McLoughlin, Manager at YIG.