The recent market action suggests the decade-long bull market is pushing forward.
Stocks followed a similar pattern during the fall, and the S&P 500 Index gained 23% in less than four months.
But large stocks like those in the S&P 500 aren’t the best way to play this market. With investors in buy mode, microcap stocks have the most to gain.
The Smallest Stocks Are Often Mispriced
Over the past year, the Russell Microcap Index has returned 129% vs. the S&P 500’s 53% return, almost 2.5 times more.
Microcap stocks have valuations between $50 million and $300 million, 18 to 108 times less than the smallest stock in the S&P 500.
Since the stocks have small valuations, the reward-to-risk ratio has the potential to be much higher. As investors, we should seek to maximize the reward-to-risk ratio for our investments whenever possible.
Small stocks are often small for a reason, which isn’t always glaringly obvious. News for smaller companies is harder to find, and analyst coverage is low.
Many institutions can’t buy small stocks due to minimum market cap and volume thresholds. And the smallest stocks are often mispriced since buying and selling by institutions typically helps with price discovery.
When mispricing translates to undervaluation, investors have an opportunity to make huge gains.
Microcaps’ Returns Can Be Massive
Research and stock selection are critical for smaller stocks. But the returns can be massive.
In 2020, the top 10 performers in the Russell Microcap Index delivered an average gain of 593% — crushing the top 10 performers in the S&P 500.
I expect microcaps to continue their outperformance for years to come. Investors who position themselves in the right stocks have the chance to make huge gains.
And on Wednesday, Ian King is recommending a microcap stock to subscribers of his New Era Fortunes research service.
It’s a small tech company with over 450 patents and pending patents, and Ian believes it has the potential to soar to new highs.
So, if you haven’t joined New Era Fortunes yet, today is a great time to do so. You can learn more about Ian’s service by clicking here.
Research Analyst, Automatic Fortunes