Analysts and Small Cap Stocks

Around the year 2000, I had the fortunate experience of being involved in a stock that made a move from 35 cents to over 50 dollars. At the time, I was a stockbroker in New York managing money for very high net worth individuals. Yes, you could win with small cap stocks, For the purposes of this blog, small cap stocks usually mean OTCBB or pink sheet securities.

Over the years, I've always asked myself the question, "Why don't analysts recommend small cap stocks?" Here are the most conventional answers.

1. They're too thin and the analysts could move the price erratically.

2. Too risky.

Although there is some truth to these answers, I believe it goes much further than this.

1. Analysts are in the business of helping Wall Street develop banking fees. How much could the banking fee be for a company only trading with a $20 million capitalization?

2. Yes, they are risky but so is Google at $400. The difference is that most OTCBB and Pink Sheet companies will not be around in 2 years. Although Google may be $200, most people forget that an analyst told you to buy it at $400. But if an analyst tells you to buy a stock at 70 cents and it goes to 0, people usually don't forget.

3. In addition, it is correct that the small cap stocks are thin. Unfortunately, so is a stock trading at a $100 million dollar cap that's been around for 10 years, spent hundreds of millions of dollars in shareholder money, and has never created $1 in operating revenues.

In the end, it comes down to 2 things.

1. Small Cap Stocks don't offer the investment banking opportunities of companies trading on more senior exchanges.

2. Analysts define the herd mentality on Wall Street.