Buying micro-caps is like a lot like playing with fire: It's easy to get burned.
I believe that there are a lot of public companies out there that shouldn't be public. In fact, they shouldn't even be in business at all. It's ugly out there in the micro-cap world; there are so many scams, criminals, hoaxes and other shenanigans that I wouldn't be surprised to see a good number of micro-cap CEOs end up in jail before the party is over.
So a word of warning: Before you wade into this world, do your homework about the company. And be nimble, because many of these issues trade very thinly, so you might find yourself caught in a stock, unable to get out as it plummets.
That said, if you find the deep-value opportunities in this space -- companies that have real assets and are growing their businesses -- the returns can be enormous. Many specialists in the micro-cap world have posted their portfolios and analysis on Stockpickr, including the
. This portfolio monitors the stock holdings of the
newsletter, run by Thomas Kelly. The
seeks out attractively valued stocks traded on the OTC Bulletin Board and pink sheets -- again, these can be dangerous stocks for those trading them.
is one of Kelly's favorite stocks. It is a $400 million market cap company that specializes in helping brokerage firms, trading firms, hedge funds and other institutions trade energy derivatives, energy futures and so on. Here's what the
has to say about Optionable, taken from the portfolio on Stockpickr:
The Nymex has agreed to take a 19% stake in the company. It is growing at 100%-plus year over year, with good earnings visibility because it reports trading volumes every month. The valuation might look high, but the company will grow into this valuation rather quickly once the next two quarters are announced. Fundamentals look very good, and there is a good chance that the company will either become listed on a bigger exchange or be bought out by the Nymex at some point in 2007.
is another name held by the
. Here's what Kelly has to say about it, also taken from the portfolio on Stockpickr:
NutraCea has a proprietary technology to stabilize rice bran, which is a byproduct of rice milling. The product can be used for both human and animal food. Revenue is exploding, and a rash of insider buying has taken place in the last four months. The company's product is more nutritious than wheat bran products, and therefore commands a higher price. I think it is a very interesting story going forward because as corn prices continue to rise, the product becomes cost-competitive, but is more nutritious and therefore better for animal feed. The substitution of stabilized rice bran for animal feed could be a huge driver going forward, and the company is having a lot of success with its products for human consumption as well. There is huge upside potential here, as the company is the only one in the world doing this sort of work and can sell all it can produce at the moment.
Also worth checking out is the
, posted on Stockpickr. This is a list of stocks that Kelly doesn't currently own but is looking at as potential targets.
On another note, I like keeping track of the portfolio of a blogger who calls himself the
. In addition to his main portfolio, he has two other portfolios with interesting collections of picks. There are the
, a collection of nonfinancial micro-caps with dividends of 2% or higher, and the
Another successful hedge fund manager who focuses on micro-cap and small-cap situations is Thom Waye. He has posted his
Go to Stockpickr to see a number of mutual funds that focus on micro-caps, including the
, which has a five-year annualized return of 15.58%; the
; and the
Please note that due to factors including low market capitalization and/or insufficient public float, we consider NutraCea and Optionable to be small-cap stocks. You should be aware that such stocks are subject to more risk than stocks of larger companies, including greater volatility, lower liquidity and less publicly available information, and that postings such as this one can have an effect on their stock prices.
At the time of publication, Altucher and/or his fund had no positions in stocks mentioned, although positions may change at any time.
James Altucher is a managing partner at Formula Capital, an alternative asset management firm that runs several quantitative-based hedge funds as well as a fund of hedge funds. He is also the author of
Trade Like a Hedge Fund
Trade Like Warren Buffett
. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Altucher appreciates your feedback;
to send him an email.
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