For today’s special edition of the Monday RiskHedge Report, I’ve brought in our microcap expert Chris Wood.
You may already know that microcaps are one of the most profitable investments in the market…
Chris has led his Project 5X subscribers to massive gains in these stocks, including 400% in just 16 months… and 256% in 8 months.
Today, Chris tells me why microcaps are so explosive… and how some, in rare circumstances, can grow their business 100X in a flash…
Chris Reilly: Chris, let’s get right to it… Why invest in microcaps?
Chris Wood: Well, the simple answer is microcaps, as a group, reliably generate much larger returns than larger stocks.
A famous research paper found that, since 1926, “big stocks” returned 9.4% annually, on average. Microcaps returned 11.6%.
That might not sound like a lot... but if you know how compounding works... it makes all the difference in the world...
The same paper pointed out that, if you’d invested $1,000 in “big stocks” in 1926, you’d now have $4 million. If you’d invested $1,000 in microcaps, you’d have $26 million!
And that’s just the long, slow outperformance you can expect if you close your eyes and buy a whole “index” of microcap stocks.
If you can identify the very best microcap stocks, the financial rewards are huge, and often immediate...
Do you know what the top 10 performing US stocks last year all had in common?
Reilly: What’s that?
Wood: They were all microcaps. 10 for 10... every single one.
Axsome Therapeutics (AXSM) soared 3,565%. It started the year as a tiny $84 million company.
Constellation Pharmaceuticals (CNST) catapulted $1,074%. It was only a $103 million company at the start of 2019.
Stage Stores (SSI) rocketed 997%... to a $20 million market cap.
You get the idea…
The top 10 performers of 2019 all rallied 500%+… and none of them had a market cap above $265 million.
Microcaps, by the way, are typically defined as having a market capitalization from $50 million to $300 million.
Reilly: 10 for 10 is pretty impressive… but it’s just one year. What if we look back further?
Wood: Good question. 2019 wasn’t a “fluke.”
In 2016, the average market cap of the top 10 performers was $264 million. For perspective, that’s about 1/1,000th the size of Disney.
In 2017, the best stocks clocked in at an average market cap of just $81 million.
Same thing in 2018—the average size of the best performers was $65 million.
Reilly: I’m sure readers are wondering why microcap stocks consistently beat larger ones.
Wood: Because of their small size, they’re able to grow in ways that are simply impossible for large companies.
Take a company like Adobe Systems (ADBE). Its “PDF” software changed how we read things. Most American professionals use it a dozen times a day without giving it a second thought.
Had you gotten into Adobe stock early on, when it was a microcap, you’d be sitting on gains of over 130,000%. That’s enough to turn even a small stake of a thousand bucks into well over a million.
Today Adobe is a $220 billion company. It’s a great business and a solid stock... but the life-changing profits have already been claimed. It can’t rise another 130,000% from here.
In fact, if it were to rise just 1,000% from here, it would be worth over $2 trillion. That would make it the largest publicly traded company on earth. Not happening.
Microcaps are different. They allow you to get in close to the “ground floor,” before the most explosive growth occurs.
Reilly: Speaking of trillion-dollar companies, you’re known for recommending both Amazon (AMZN) and Google (GOOG) way back... long before they grew into world dominators. Any interest in owning them today?
Wood: They’re both great businesses. But they’re gigantic already. Again, it’s mathematically impossible for either of them to grow, say, 10X. The best you can really hope for is a double.
I only want to buy tiny businesses taking on very large markets. Little-known stocks on the cusp of transforming big industries, like 5G… AI… healthcare… and computing.
This is how a company can set itself up to grow 10X–100X, which leads to a soaring stock price.
Reilly: Realistically speaking, how quickly can a microcap grow its business 100X?
Wood: I’ve seen a small business grow 100X within 3 years many times. Achieving it in a couple months is unusual, but possible.
And in rare circumstances, a business can grow its revenue 100X from a single announcement. Literally, overnight.
Reilly: 100X growth overnight?
Wood: Yeah, I know it’s hard to fathom if you’re used to gigantic businesses like Microsoft that grow 10% per year. But microcaps are very much “event-driven.”
What I mean is, because they’re very small, one event can change everything for a microcap stock. Sometimes all it takes is one big announcement... or one big breakthrough... or even one game-changing deal signed with a big customer to completely transform the business and send the stock to the moon.
Reilly: So you look for microcaps that are about to make a big, transformational announcement?
Wood: Those are usually the biggest and quickest winners, yes. And often, what my analysis comes down to is distinguishing between “inevitable” and “imminent.”
Reilly: Go on...
Wood: “Inevitable” is usually a question of verifying the technology. If a microcap has a game-changing technology that no one else has because it’s patented, I can comfortably predict its stock is going to be a big winner.
For example, last month I flew out to a lab in Santa Barbara to see a game-changing 5G technology firsthand. What the CEO showed me was really incredible. I think it’s inevitable that this tiny company’s tech will soon be in tens of millions of 5G phones, and my Project 5X subscribers will be very happy with the pick.
Reilly: Okay, can you elaborate on the “imminent” part?
Wood: So, having a breakthrough technology is one thing. Convincing the world you have breakthrough technology—and selling that technology in large numbers—is another.
That’s less about tech, and more about relationships. And that’s the other thing I love about microcaps...
I’m old school in that I like to look a CEO in the eye, shake his hand, pick his brain over a few beers.
I’ll probably never have a beer with Jeff Bezos. But microcaps are tiny, often employing only a dozen or so people. So I can really get to know the CEO, CFO, and the whole business very intimately. That gives me good insight into when a big announcement might be coming.
Reilly: Any big announcements on your radar today?
Wood: This stock has one in the works, I believe. I call it the “109X microcap” because its impending announcement could cause its business to grow by 109X—literally overnight.
I’m pretty certain the game-changing announcement is inevitable. Is it imminent?
Well, I’m confident it’ll occur by Q1 next year. But, huge announcements like these have to be kept confidential—which means it could happen at any moment. It could happen tonight, and the shares could double or triple by the morning.
So, if you’re interested in investing this way, the smart thing to do is get positioned now, before the announcement.
Reilly: Thanks—readers can go here now to read your full case for this stock and decide for themselves.
Wood: Yes, there’s one stock that has an impending announcement that I believe will cause its business to grow 109X. But I can’t name it here, Chris. It’s reserved for my Project 5X subscribers. But I can say the important thing to do is get positioned now, before the announcement.
Executive Editor, RiskHedge