Happy Friday, everyone!
I’ve been saying it since May, and I’ll continue until I’m blue in the face…
And I mentioned it again on Wednesday in my Market Update video because it needed to be repeated…
This is the “summer of penny stock love!”
Penny Peace Sign (Source)
But it’s not only penny stocks…
The whole small cap sector is on fire.
Stanley Druckenmiller called it too when he cut his position in Nvidia Corp. (NASDAQ: NVDA) by around 84% during the first quarter.
And what did he replace it with?
Call options on the iShares Russell 2000 ETF (NYSE: IWM), a popular small-cap ETF. As of the end of March, that’s the largest holding in his fund.
I’d say he bet big that small caps would make a comeback.
But who is Druckenmiller and why should you care what he thinks?
He’s a billionaire investor and former hedge fund manager. He closed his hugely successful hedge fund, Duquesne Capital, in 2010. He now manages money through his Duquesne Family Office LLC.
This guy is viewed as one of the best investors in the world, rumored to have generated 30%+ a year over 30 years without a single down year.
So, yeah, he’s probably someone who knows what he’s doing…
And if he makes a major pivot towards small cap stocks, my antennae go up and so should yours!
Table of Contents
First of all, let’s define a small cap stock…
Small cap stocks are shares of companies with a relatively small market capitalization, typically between $300 million and $2 billion.
It’s not always the case, particularly with penny stocks, but these companies are often younger and have more room for growth compared to their larger peers.
Why would you want to trade small cap stocks?
Growth Potential
Small cap stocks often represent companies in the early stages of their growth cycle. This means they have the potential to expand significantly, offering substantial returns to investors who get in early.
Unlike large cap stocks, which are typically well-established and may grow more slowly, small caps can see explosive growth.
And best of all, for traders with small accounts, these types of stocks are much more accessible than, say, Microsoft Corporation (NASDAQ: MSFT).
Big returns can come from under-covered stocks like these.
Large cap stocks are usually followed by the big Wall Street analysts and institutional investors. That makes it difficult to find undervalued diamonds in the rough. By the time you’re ready to buy, the market has already priced in their value, so large returns are hard to come by.
Small caps, on the other hand, often fly under the radar. This lack of coverage can allow you to find undervalued stocks before the broader market catches on.
Volatility equals opportunity.
The volatility of small cap stocks can be both a blessing and a curse…
For traders, this volatility translates into more trading opportunities. Price swings can be dramatic, allowing for profitable trades if you can time the market correctly.
Diversification
Including small caps in your portfolio can enhance diversification because they often perform differently from large caps and other asset classes.
By spreading your investments across various types of stocks, you can lower your risk and potentially improve your overall returns.
Imagine if you had gotten in on these stocks when they were small caps…
Look at Netflix Inc. (NASDAQ: NFLX) and TSLA Inc. (NASDAQ: TSLA). . .
Yes, there was a day when these were small cap stocks.
Early investors in these companies saw massive returns as they expanded and dominated their respective markets.
Remember, not every small cap will become a Netflix or Tesla but, “Yes, Virginia there is a Santa Claus.”
And actually there is a way to get in on the action of Tesla without buying TSLA stock…Frankly, it’s too expensive for many traders.
Elon Musk is making a pivot towards a $23 trillion market that has nothing to do with SpaceX, Twitter or cars.
It’s called Project X.
And it’s not just TSLA that will benefit….
Five small cap “silent partner” companies are also involved in Project X.
The growth potential of this $23 trillion market could send Tesla and these five companies soaring.
Find out more about Project X here.
My top tips for trading small cap stocks:
Research and due diligence is key when trading small caps. Look into the company’s financials, management team, growth prospects, and industry position..
Technical analysis can help you find opportunities by analyzing price patterns, volume, and other market indicators.
Risk Management is essential due to the high volatility of small cap stocks. Set stop-loss orders, diversify your portfolio, and don’t invest more than you can afford to lose.
Stay updated on the news: Small caps can be very sensitive to news and market sentiment. Keep an eye on press releases, earnings reports, and industry developments so you have an edge in predicting price movements.
Here at StockstoTrade, we have a tool that alerts you to news and other company and industry announcements many times before anyone else sees it.
It’s called Breaking News Chat, a trading chat room led by Wall Street veterans, each with over 20+ years of experience.
Check out Breaking News Chat here.
My final thoughts:
The growth potential, lack of broad analyst coverage, and volatility of small caps present tons of opportunities if you know how to find them and trade them.
Jump into the world of small cap stocks and start exploring the potential for high returns. With the right strategy, you might just find the next big winner in your portfolio.
Have a great day everyone. See you back here on Monday.
Tim Bohen
Lead Trainer, StocksToTrade
P.S.
Earnings season is upon us, so learning how to interpret and trade on that information is more important now than ever.
Lucky for you, my friend and veteran trader Ben Sturgill has been working on an algorithm that he uses to predict earnings winners. . . He’s been testing it for the last 18 months and the success rate is pretty unbelievable.
Ben and I are going live next Thursday, the 24th, to show you how to take advantage of the incredible opportunities his earnings tool reveals.
Register here for Operation: Master Calendar. You don’t want to miss it!