The right microcap can be a life-changing investment, says expert
The first two decades of the 21st century have been full of technological breakthroughs and scientific discoveries that have the potential to change history.
Many investors have gotten fabulously wealthy off early investment in the start-ups that have grown on the back of these breakthroughs.
The speed of advancement is only going accelerate — bringing greater opportunities for astute investors to invest in the latest innovation and hopefully generate returns in terms of multiples rather than percentages of a share price.
There is a general view that to invest in the latest and greatest, Australian investors need to look to overseas exchanges. This is simply not true.
Opportunities to invest in the hottest drone technology, wearable health monitors, cloud-based crop management systems and cutting-edge artificial intelligence (to name a few) are readily available on the ASX in the micro-cap space.
Microcaps are so much more exciting and full of potential than the “safe” companies most people refer to as “blue chips”.
The tiny end of the market is not without its risks. The mention of micro caps has some Australian investors conjuring up images of speculative short-term stocks exhibiting volatile shares prices and poor fundamentals.
Cynics would say the purpose of micro-cap stocks is to facilitate the transfer of wealth from investors to corporate advisors and management.
While that image can be somewhat correct in some cases, it is worth remembering all companies started somewhere and many of the largest listed companies had their humble beginnings as micro-cap stocks.
Some of the best-performing listed companies ever, including Alibaba (NYSE: BABA), Microsoft (NYSE: MSFT), Apple (NASDAQ: AAPL), Netflix (NASDAQ: NFLX), and many others started as micro-cap companies.
Microcap companies are generally small, young, emerging companies with short operating histories.
There is no exact definition of what constitutes a micro-cap stock. The general rule of thumb is stocks with a market capitalisation of less than $200 million.
An analysis of the best-performing stocks on the ASX over the last five years — with any stocks that had a market cap of greater than $200 million five years ago screened out — is compelling.
Analysis shows 237 companies were up 100 per cent over the past five years — and 24 companies were up over 1000 per cent.
The top five companies were up anywhere from 1700 per cent to 2500 per cent in the five years.
This confirms that finding the right microcap stock can see investors return five, ten even 100-baggers.
This can be a life changing investment. Just ask the early investors in Fortescue (ASX: FMG) or Blackmores (ASX: BKL) who held on to their stock.
Investors only need to find one great company every few years to beat the market and to change their life.
It’s not easy, but with solid research it can be done.
Chris Robertson is a Sydney-based Investment Manager who has been working in the investment management industry globally for more than 25 years. In his monthly column Chris brings insights to Stockhead honed by years at the investment coal face. He is on Twitter @ChrisRobbo01.
This article does not constitute financial product advice. You should consider obtaining independent advice before making any financial decisions.