Penny stock and small cap stock investors may want to get off the sidelines and into the game about right now, if the market has indeed made the bottom many experts think it has. Why? Because the early part of bull markets tend to favor these smaller companies, and by extension tend to reward forward-thinking stock speculators.
But has the market actually hit bottom? Yes, we think it has. We’re not naive to the lingering challenges the economy is facing. But, when the market’s average P/E gets close to single-digit levels, it’s historically been at or near a major bottom.
The argument against a market bottom already being made are rising unemployment, an economic retraction, and plenty of net losses from major corporations. All are valid arguments, but none of those symptoms have been permanent in the past. Successful investors simply recognize different stages of the market’s cycle, and get in or out of stocks when appropriate.
But just how precise does an investor’s re-entry need to be? There’s the rub - nobody really knows when the exact bottom has been made until after the fact, but nobody can really afford to not be in the market at the exact bottom.
On average, owning stocks from the exact market bottom to a point twelve months later translates into a gain of more than 32%. Waiting a mere three months to step into the same bull market whittles an investors’ gain down to less than 15%.
What about small caps during the early stages of a new bull phase? Same story, based on recent data. Coming out of 1990’s funk best served the Russell 2000 Small Cap Index in 1991, with a 43.7% gain that year. The S&P 500 gained only 26.3% in 1991. Following the 2002 bear market, the Russell 2000 easily topped the S&P 500 in 2003. The Russell was up 45.4% that year, versus a 26.4% gain from the S&P 500.
In other words, small cap stocks - and many penny stocks - have offered the biggest returns at a point in time when few investors were interested in owning any stocks at all. If that somewhat rings a bell, it may be because we’re seeing the same scenario now.
Sure enough, in the aftermath of 2008’s debacles and 2009’s stimulus efforts, many of these small cap stocks and penny stocks are starting to perk up … not unlike how we saw 1991 and 2003 unfold.
Take BioTime Inc. (OTC:BTIM) for instance. Despite no net profits, this biotech stock managed to gain more than 300% in calendar 2008. The basis for all the buying is the promise of profits in the distant future, though the foundation is being laid now. In other words, it’s perceived as undervalued relative to the opportunity.
MyStarU.com Inc. (OTC:MYST) is another one of those micro cap stocks that’s perked up more than its peers as the market has hinted at its next bullish phase. After bottoming at just above 3 cents in October and again in December, the move to more than 10 cents by the end of January represents nearly a 200% gain. And with a P/E of only 4.39, the gains are deserved.
CVR Energy Inc. (NYSE:CVI), despite being listed on a major exchange, is still one of those small cap stocks that may have actually benefited from its size during the contraction. This oil refiner swung to a profit during 2008, and has continued to widen its margins. Shares gained 136% between late October and late January.
In simplest terms, the real winners are starting to emerge from the rest of the crowd. And, a large portion of those winners are indeed small cap stocks and penny stocks. The media may be trying to keep investors terrified, but history - and recent results from select micro cap stocks - are offering opportunities for tremendous gains right now.
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