Superstock Summer is Here
I caused CNBC to change the rules.
Back in 2007, I had a weekly spot on CNBC picking offbeat stocks. Here's the problem: often the stocks I would talk about were worth less than $1 billion. Because, "offbeat" means they are a bit smaller and not the usual large caps (Apple, Google, Microsoft, Exxon, etc) that everyone else talks about.
At the time I was running a fund of hedge funds that focused on microcap stocks. We were probably invested in hundreds of microcaps through the funds I was invested in. I knew a lot about a lot of companies.
And because I did so much research and presented such compelling arguments about these stocks, they would often go up 40 or 50% or more in a single day if I mentioned them on CNBC. So many CNBC viewers would crowd into these smaller stocks that they would bounce up huge.
You can't get Microsoft to bounce up huge just by talking about it. Microsoft has billions of dollars a day invested in it so it's hard to move the needle.
But if you talk about a small stock that makes air conditioners and is trading for only two times earnings (meaning the earnings the company makes would be able to buy back the entire company in just two years – twenty times earnings is more "normal"), then that stock might have only a million dollars worth of trading a day happening and so any extra amount of investing would cause the stock to zoom.
So CNBC changed the rules and said, "No more talking about stocks worth less than a billion!" Which is a shame really because every talking head on CNBC is always blabbering on about Apple.
The way to have an edge in anything in life is to know things that other people don't.
If everyone is talking about Apple or Nvidia it's hard to know things that other people don't. Maybe 10,000 people with PhDs working for the top hedge funds are researching Apple or videotaping the parking lots at Walmart to see if they are crowded.
It's too much competition.
But microcaps are where you can get a real advantage.
Top Stock of the Decade
There are 8,000 public companies in the United States. Last year, seven of those 8,000 went up so much that it drove the entire stock market up.
After a period like that, people say to themselves, "Well, the large cap stocks have already gone up, where else can we find opportunity?"
The answer, of course, is the smaller, unheard-of stocks that dot the landscape of the microcaps.
And that is what is happening now.
On average, the S&P 500 is trading for 28 times earnings. Everyone has been buying them all the way up.
The microcaps have been left behind. On average they are trading for 13 times earnings. So microcaps have to more than double TODAY, to catch up to the large cap stocks.
Now, there's a reason some companies are small. Because they are awful companies. Most of the 8,000 companies out there are no good.
So if the microcap companies are going to double it means only the best of them will go up. But they won't just double. They will go up 1,000% or even 10,000%.
Do you know what the top-performing stock was in the decade from 2000-2010?
It was a little-known company (at that time), called Monster Energy.
The stock went up over 10,000%!
So if large-caps have been outperforming microcaps in the past few years, what is different right now?
The Great Transition
The US economy is suffering from a giant case of "EconCovid". We are sick and have been sick since March 2020.
40% of all the money printed in the history of the US was printed in the six months after Covid started in March 2020. It was printed to help bail out all the businesses and people who were either going bankrupt or unemployed during this period.
According to Milton Friedman, the greatest economist ever, inflation is purely a "monetary phenomenon."
Meaning, if there is more money in the world then there will be more inflation.
Well, they were wrong. Inflation hit as high as 9% in just a year and some change later.
Enter the Federal Reserve (again). They overshot by printing too much. So now they have to reduce the money that is out there. How do they do that? By raising interest rates!
The Federal Reserve has just increased interest rates at the fastest pace in history.
And now with retail sales down, manufacturing down, and the hint of DEFLATION, it looks like they overshot (once again).
In order to stop a recession (or worse) they are going to have to immediately (September) start cutting rates and continue to cut rates.
This is good for all companies. But it is GREAT for microcaps.
Microcaps rely on two things:
- Borrowing.
- Customer spending (consumers and companies are more likely to buy from big established brands than smaller unknown companies).
Right now, microcaps are about to lift off. The Federal Reserve teed it up by increasing rates the fastest ever and now they will have to rapidly decrease rates.
The market is about to undergo a massive transition.
The last time we saw a transition like this was after the Great Recession in 2008/2009 and after 2002.
These were both times that microcaps went up huge.
For instance, in December 2008, I published a book where I recommended mostly microcap stocks that one should hold forever. The timing was perfect as it happened to coincide with the Federal Reserve beginning a massive rate cut regime.
The book was called The Forever Portfolio.
Most of the small stocks I recommended were doing so well that bigger companies ended up acquiring them.
Here are a few of the microcaps I recommended…
For instance, Axon Enterprise, Inc. (AXON), which went from $5 to $320 currently – a gain of over 6,000%.
Then there's ResMed Inc. (RMD), which was $8 when the book came out and has been as high as $300, and more recently at $205.
Also, IDEXX Laboratories, Inc. (IDXX) is now at $500 and it was $15 when the book came out.
This just goes to show you that under the right circumstances, microcaps can hand you some monstrous gains.
And the stars are aligning now to set up for a massive runup in microcaps again.
Which is why just last week we sent out an urgent trade recommendation on how we think you can play this trend right now…
