Please Announce the Terms on Small Cap Stocks

I hate when a public company says, "Terms were not announced."

If the terms were so good, wouldn't they announce them?

This type of public relations really turns me off. In 90% of all cases, terms were not announced because the terms were simply not that attractive.

I'm still waiting for the opportunity when I see an announcement that says, "Terms were just too good."

That's the stock I want to own.

Buy Small Caps for a Reason

"Buy a stock for a reason and when that reason no longer exists, sell it!!!!"

If you don't believe that this is not one of the best pieces of advice you ever received, I'll prove that it is.

Below are several scenarios. If you fit into one of these scenarios, I win. If you don't. I lose.

You heard that Company X is coming out with an announcement. It is supposed to be next week. Three weeks later, there is no announcement. You hold onto the stock and you lost money.

You heard that Company A, a healthcare company, is issuing a press release regarding one of their products which cures or treats something. The press release is issued, the stock doesn't go up, but you continue to hold on. You lost money.

You heard that Company B, a technology company, is getting a big contract. They receive the contract but the announcement says terms will not be disclosed. The stock goes up some but over a few days, it falls right back to the price that you paid. You continue to hold on and then, you lost money.

You hear that Company E is going to beat earnings. Earnings are up slightly or flat. The stock trades flat for a day but you hold on and eventually, you lost money.

This rule applies to all stocks. In fact, most professional traders and investors will tell you that this is the most difficult thing to do but it's essential if you want to be successful.

Are you one of these people? Betcha I won.

Stock Floats

I never really understood the value of floats.

It's like saying, " The man is 200 lbs., 6 feet three inches, and has a 36 inch arm." Unless I am engaging in a boxing match with that individual, I don't care about his arm length.

I cringe when I hear people asking, " What's the float?" First of all, they probably don't even understand what they're asking for. Second, does it really matter?

Here is the only time float matters to me. I see a stock running on Nasdaq and it's up 15% for the day. If I see that the company has 30 million shares outstanding and a float of 3 million, I may be more hesitant to buy that stock knowing the reason for the run could be lack of supply. Using the same example, I would be much more willing to buy a stock if there are 30 million shares outstanding and the float is 24 million.

Float allows to me to apply the theory of supply and demand to any stock run. That's the only thing it's good for other than ice cream. A little humor for the holiday season !!!

Share Price Doesn't Mean Much

Heh???????

You'd be amazed how many times I witnessed the following scenario. I just completed a presentation to a friend, colleague or investor about the investment merits of a public company.

Then someone asks, "What's the stock trading at?"
I respond, "One dollar and 25 cents."
I hear, "Wow, that's cheap. Or 6 cents, that's cheap. Eighty dollars, wow that's expensive."

This mode of thinking was confirmed when I heard a client remark after a 2 for 1 stock split, " Wow, it's much cheaper now." I still believe that until this day, my client actually never realized that the stock was trading at the same price. If you think this type of thinking is restricted to novice investors, you're probably wrong. Why do $150 stocks on the NYSE split? Because their cheaper at $75 or $50.

Warren Buffet, arguably the most successful investor of all-time understands this better than most. I wish I had a few drops of sodium pentothal to give old Mr. Buffet. I'd ask, " So how come you never split the stock.?"
I'd probably hear, " Less shareholders, everybody thinks it's too expensive."

We must all remember that we are ultimately investing in a public company. After you've done all your research, shares outstanding multiplied by stock price determines if a stock is cheap. If one company has 1 million shares outstanding at $1 a share and the other has 5 million shares at 20 cents, which is cheaper? I hope you get the point.

This topic and this post are extremely relevant to investing in the small cap stock market. I'd guess that over half of all investors never even bother to find out how many shares are outstanding. The share price doesn't mean much. Sad but true.

47 Cents Can Help You Save Thousands

I attempted to contact a company the other day to do some research. The phone number listed on their 10K was disconnected and there was no forwarding number. I would also bet that if I sent a letter to the company, it would be returned by the post office with a stamp that reads "No such addressee".

Sometimes, the art of investing is an application of good old fashioned common sense. A disconnected number with no forwarding number and a bad address listed on an SEC filing indicates that something is not right. At the very least, it tells me that management of that company isn't very responsible.

With about 5 minutes of your time and about 47 cents of your hard earned dollars (10 cents for the phone call and 37 cents for the stamp), you can save yourself of a lot of money and lost sleep.

What should you say in the letter you ask?

Dear Sir:

I am an interested investor and I just wanted to make sure that a company actually exists at this address.

Sincerely,

Smart Investor

Revenues or Earnings

Most investors know what the term PE means. It simply means price of stock divided by the earnings per share. It is a basic and yet important measurement to determine the pricing of a stock. Is it overpriced or cheap? As we become more sophisticated in our analysis of public stocks, we will use the PE of a stock to compare the value of that stock to other stocks in the same sector. We can even value the stock based on a PE to the overall market. It's a basic but important analysis tool.

When I invest in small cap stocks (For purposes of this blog, it usually means OTCBB or Pink Sheet stocks), I tend to disregard net income, earnings per share and PE's unless the company is doing at least $10 million in revenues. In the small cap market, I really am focused on the revenue growth. Let me explain.

Take for example a company that in 2004 did $2.7 million in revenues and earned $900,000. Most investors would conclude that the profit margins are good. But in the following year, what would excite me more?

1. $2.9 million in revenues and $1.3 in net income.
or
2. $9 million in revenues and $150,000 in net income.

Scenario number 2 will cause a buzz among sophisticated in investors. Scenario number 1 typically leads to a good, healthy yawn. Why?

Scenario 1 doesn't tell me much. Does the company have room to grow? Did they lay off employees? Did they cut back on advertising expense? Did they save on a new healthcare plan?Does management know how to grow the company?

Scenario 2 tells me one thing. The company is growing and many more people are now buying their product or service. A few years down the line and if profit margins are still low, I'll start to ask questions about the business margins. However, at the early stages of growth, I am always interested in the revenues more than earnings. It's a good rule to remember. If I want profit margins, I'll buy blue chips. If I want Scenario 1, I'll invest in the local restaurant.