Why tiny stocks consistently beat larger ones
This article appears courtesy of RiskHedge, LLC.
Should I invest in 5X Phase stocks?
It’s been one of our most asked questions since we aired Chris Wood’s 5X Phase Summit.
And while Chris breaks down exactly what makes 5X Phase stocks so lucrative here…
I can tell you one thing: They’re tiny.
Longtime readers know I focus on larger disruptor stocks in my flagship newsletter Disruption Investor. Chris goes after early-stage names in his Project 5X advisory. And he’s a true pro at finding the right ones…
Since the “corona crash,” Chris has closed a total of 11 positions in his Project 5X portfolio for an average gain of 193%.
During the Summit, Chris explained why today’s market setup is presenting a great opportunity to buy the right tiny stocks.
I encourage you to watch it right here if you missed it—we’re shutting down the replay soon.
Next, make sure to read my interview with Chris below. Read on to see if tiny stocks are right for you, and how Chris’s approach helps him and his readers pinpoint the best ones.
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Stephen: Chris, I’d like readers to learn about the growing opportunity in tiny stocks. And there’s no one better to shed some light on the subject than you.
So let’s get right to it… why invest in tiny stocks?
Chris: Well, the simple answer is they outperform large-cap stocks… by a lot.
Tiny stocks are the most explosive—and misunderstood—corner of the $51 trillion US stock market. And buying the right tiny stocks is hands down your best shot at booking big winners.
I’m not just pulling this out of thin air. The facts back me up.
Do you know what the top 10 performing US stocks so far this year all have in common?
Stephen: What’s that?
Chris: They are all tiny stocks. 10 for 10... every single one!
Indonesia Energy Corp. (INDO) is up 735%. It has a market cap of $174 million.
Hycroft Mining (HYMC) has catapulted 344%. It has a market cap $277 million.
Integrated Media Technology (IMTE) has rocketed 340%. It has a market cap of $183 million.
The other seven names on the list have all soared triple digits, too… and all market caps under $300 million as of this writing.
You get the idea…
Stephen: 10 for 10 is pretty impressive… but we’re only three months into the year. What if we look back further?
Chris: Good question…
Most folks don’t realize this, but the top-performing stocks every year are almost always tiny stocks. In 2020, the nine best-performing stocks in America were ALL tiny stocks.
It was the same story in 2019.
Same thing in 2018—the average size of the best performers was $65 million.
In 2017, the best stocks clocked in at an average market cap of just $81 million.
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.
Stephen: I’m sure readers are wondering why tiny stocks, as a group, consistently beat larger ones.
Chris: 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. Adobe’s software was a driving force behind the whole “going paperless” trend that swept through American offices.
Had you gotten into Adobe stock early on, when it was an early-stage disruptor, you’d be sitting on gains of over 200,000%. That’s enough to turn even a small stake of a thousand bucks into well over a million.
Today, Adobe is a $217 billion company. It won’t rise another 130,000% from here.
Generally speaking, tiny stocks are companies with market caps of $2 billion or less. By investing in companies this small, you’re essentially getting in on the “ground floor.”
Their upside is much more explosive than a $1 trillion company that’s already handed investors life-changing profits.
Stephen: 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?
Chris: 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 artificial intelligence and AR/VR.
This is how a company can realistically set itself up to grow 10X–100X, which leads to a soaring stock price.
Stephen: Got it. Why else should people consider tiny stocks?
Chris: They’re not as widely followed as large-cap stocks. This gives you a distinct advantage.
Think about it. The big stocks are covered by hundreds of analysts. Everyone knows everything about them. There’s no way to gain an edge.
With tiny stocks, you can find early opportunities hardly anyone else knows about.
And I should add that institutions and big money are often prohibited from touching tiny stocks. The SEC has strict regulations that make it difficult for some large funds to establish positions in these tiny companies.
Stephen: So there’s less competition in tiny stocks.
Chris: Right. And not only that... as a tiny stock grows, more and more big funds are able to buy in. The right tiny stocks become magnets for big money.
This is a very powerful piece of information that many folks don’t fully grasp. It can lead to a situation where momentum snowballs and produces huge profits much faster than many folks assume is possible.
Stephen: It’s like front-running the smart money. Get in early, ahead of the big funds, and you benefit from them pouring in cash.
Chris: Exactly. That’s a key reason why being early to a disruptive tiny stock can hand you outsized returns.
Stephen: You’ve achieved some great wins for your readers over the years. You called graphics chip maker Nvidia (NVDA) in 2013, before it went on a 1,600% run. You called tiny solar stock Enphase (ENPH) at $1.14 a share... and it trades for around $200 today.
How do you find these specific tiny stocks that go on to achieve huge profits? Especially when there are so many hyped-up stocks—both tiny and large—that fail to deliver?
Chris: That’s really the crux, isn’t it? There’s a ton of “fool’s gold” out there... stocks with great-sounding stories that never pan out.
I wish I could tell you I have a sixth sense for stock picking. But it’s not that sexy. Like most worthwhile things in life, I acquired this skill the hard way—working late nights and early mornings for years on end. It’s almost embarrassing to admit—but I’ve been studying tiny stocks for 15 years now!
Eventually, through years of trial and error, I homed in on the five key traits that 500%+ tiny stock winners have in common. I codified this into my proprietary stock-picking system…
Stephen: Go on…
Chris: I evaluate a stock based on several different metrics. For example, I look at the size of a company, and the size of the industry it’s disrupting. A tiny company flipping a huge industry on its head can equal a massive opportunity.
I also factor in ownership of the company, and how much “hype” the company is generating.
At the 5X Phase Summit, I went into detail about the most important metric of all—revenue acceleration. In short, when revenue acceleration is present, it’s the ultimate signal to investors that the company is primed to grow and grow.
It’s not easy to find the right tiny stocks. In fact, only about 1 in 85 stocks I feed into my system earn a passing grade.
I like to explain it like this—finding tiny stocks with 1,000% or greater profit potential is like finding a needle in a haystack. Putting stocks through my system allows me to home in on truly disruptive stocks and discard all the others.
Stephen: Thanks, Chris. Any final tips for RiskHedge readers who are thinking about dipping into this space?
Chris: Look for tiny stocks disrupting large industries. That’s where you can find the most explosive gains.
Right now I’m focused on five massive industries ripe for disruption, two of which I mentioned earlier: AR/VR and artificial intelligence. The other three are 3D printing, psychedelics, and the “revamp” of Moore’s Law.
For active buys in these ideas, I encourage readers to join Project 5X, where they’ll get immediate access to multiple stocks with the potential to appreciate 500% or better.
Stephen: Thanks again, Chris. Here’s that link one more time for anyone interested in discovering more about your strategy and how to become a member of Project 5X. There’s also a transcript of the Summit available here.
Stephen McBride
Editor — Disruption Investor
Stephen McBride is editor of the popular investment advisory Disruption Investor. Stephen and his team hunt for disruptive stocks that are changing the world and making investors wealthy in the process. Go here to discover Stephen’s top “disruptor” stock pick and to try a risk-free subscription.
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This article appears courtesy of RiskHedge, LLC. RiskHedge publishes investment research and is independent of Mauldin Economics. Mauldin Economics may earn an affiliate commission from purchases you make at RiskHedge.com