Investing in Small and Micro Cap Stocks Investing in Small and Micro Cap Stocks: Make profits on Wall Street the Tweedy way. With His Bushy Beard...Giant Potbelly...And Old Suspenders... He had a very bushy mustache. He wore suspenders and had a big potbelly. And if you saw him walking down the street today, you'd probably laugh. But if you knew what he knew, you wouldn't laugh long. That's because this man figured out the Five Simple Keys to Making Money on Wall Street...strategies some of the world's greatest investors use to build their fortunes. His name was Forrest Berwind "Bill" Tweedy. No one really knows when he was born or where he came from. But if you happened to walk past 52 Wall Street in the 1920s, chances are you'd see him working at his cluttered desk - busy writing letters and looking through company reports. Business was his life. He never married, never had any children. If fact, every day he ate lunch at the same time...at the same restaurant...even in the same chair. He owned a small niche brokerage house that specialized in trading small-cap stocks. His method was unusual...to say the least. Investing in Small and Micro Cap Stocks: A Brilliant Way to Pick up Big Profits Day after day, Tweedy scoured the market for publicly traded companies that only had between 50 and 150 shareholders of record. He attended their annual meetings, wrote down all the shareholders' names and sent them personalized letters. His goal was to find out who wanted to buy and sell their shares. From there, Tweedy paired the buyers with the sellers and brokered the deals himself. It was a brilliant idea. Tweedy quickly became one of the only small- and micro-cap brokers on Wall Street. In fact, many shareholders turned to him when they couldn't trade the shares anywhere else. His reputation as the "broker of last resort" gave Tweedy a virtual monopoly in the small-cap market. Tweedy's business was successful throughout the 1920s and into the 1930s. But it was about to get even bigger! Investing in Small and Micro Cap Stocks: Join Forces With One of the World's Greatest Investors In the early 1930s, Tweedy developed a relationship with a man named Benjamin Graham. If that name doesn't ring a bell, it should. He literally wrote the book on value investing - THE way to make reliable profits in the stock market. (In fact, if you haven't read his landmark guides - Security Analysis and The Intelligent Investor - I urge you to pick them up today.) What Graham proved was nothing short of revolutionary: You could make a fortune investing in companies that were selling for a huge discount to their real value. In other words, if a company trades far below what it's worth, over time, the company's true worth will be discovered...and anyone who invests while it was cheap could walk away much richer. Think of it like this... If you went to a flea market and found a rare three-legged 1937D Buffalo nickel selling for $900, you would buy it - knowing the real value of that nickel was somewhere between $3,000 and $4,000. In other words, if you sold it later and ONLY got the nickel's fair value, you will still make about 233-344% on your investment. Not a bad deal, right? Well, that's exactly the philosophy that Graham used to buy shares of a company. He looked for bargains - companies selling for 60-70% LESS than they were worth. And it just so happened that many of the small, illiquid companies Tweedy tracked fit Graham's 'value' model. Investing in Small and Micro Cap Stocks: From $88,000 to $10 Billion Thanks to their shared investment strategy, Tweedy quickly became Graham's "go-to" broker. And Graham became Tweedy's largest customer - so big that he moved his office right next to Graham's office. Over the years, Tweedy's business grew. Howard Browne (who started his career as a runner on Wall Street at the ripe old age of 16) became Tweedy's partner in 1945. And the company slowly grew from a simple brokerage house (with about $88,000 in capital) to a full-fledged investment advisory business - that currently manages over $10 billion in assets. Bill and Howard looked for stocks trading for huge discounts to their real worth. And over the years, they identified five keys to discover the best discount investment opportunities on Wall Street - companies Graham himself would be proud to invest in. And today, you don't need to pay enormous brokers fees...or trust hype-happy analysts...or even have a monkey throw darts at The Wall Street Journal to find great stocks with fantastic profit potential. You can use the exact same formula Tweedy developed to find extraordinary stocks on your own! In a second, I'll show you exactly what that formula is. Investing in Small and Micro Cap Stocks: A Road Map to Stock Market Millions My name is James Boric. I write a newsletter called Penny Stock Fortunes. I've always known that the best way to get rich on Wall Street is to buy stocks that are undervalued and have room to grow. In fact, over the past few years, I've recommended stocks like SIRIUS Satellite Radio (which soared 233% in two months)...China Yuchai Intl. (which skyrocketed 146% in under eight weeks)...and Coeur d'Alene Mines (which jumped 110% in just a few months). But to be honest, I can't take full credit for the success. That honor actually belongs to the computerized stock-picking system I developed - the CXS Money Multiplier System. The CXS Money Multiplier System scans every single stock on Wall Street for 10 stringent criteria. And as you've seen, the stocks it finds have a habit of skyrocketing - giving you a chance for big profits. In fact, in 2003, it found a winner 72.7% of the time. But as good as the CXS System is, I was intrigued by Bill Tweedy's method, too. After all, it helped transform an $88,000 specialty business into a $10 billion behemoth. So I tinkered with the CXS System a bit, tweaking it to look for everything old Bill would like in a stock. And what I discovered was astounding - two companies that could jump 509% or more by Nov. 1, 2005.
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Tweedy's 5 Investing Secrets And you can use them, too. Here's how... 1. Find a Company That's Worth More "Dead" Than "Alive" Think back to that 1937D buffalo nickel I talked about earlier - the one that cost less than it was worth. That's exactly what you want to see in a company. In stocks, a company's value is called its book value. Essentially, if you sold everything the company owns - inventory, buildings, even the desks and chairs - how much would be left over? Now take a look at what the market thinks the company is worth. You'll find that in its market cap - the number of stock shares the company has times the stock's current price. That's how much money you'd need if you wanted to buy every single share of the company's stock. See where I'm going yet? Say a company has a book value of $10 million...but a market cap of just $5 million. You could buy every share of its stock for $5 million...and get $10 million worth of stuff! That's a 50% bargain!
One study even showed that if you had invested $1,000 in all the companies trading for 30% of book value or less in 1970 and kept rolling that money each year into the next group of stocks that were trading for 30% of book value or less - just 12 years later you would have been sitting on $23,298. Of course, study results are one thing, and actual results are another. So let's take a look at a real-life example from the pages of Penny Stock Fortunes... Small & Micro Cap Stocks: 25% in a Month From an Overlooked Bargain In July 2004, my CXS Money Multiplier System selected Salton - a leading designer, marketer and distributor of small appliances, home decor and personal care products. Its famous brands include the George Foreman grill, Toastmaster and Farberware. Truth be told, there were a handful of problems with this company. Its North American business brought in $22.8 million LESS than it did a year ago. It recently violated a deal with one of its lenders that caused its stock price to plummet to an all-time low of $2.50. And it just incurred a huge quarterly loss of $58 million - part of which will be used to implement a restructuring plan that will save the company $40 million in the future. But Salton was trading for just 0.3 times book value. That means if you sold its assets for market prices, the company would be worth 3.3 times MORE than its shares! That's an incredible bargain for such a famous company. And with the company's restructuring plan, I knew Salton's financial problems wouldn't last long. It was time to buy...before the rest of Wall Street woke up to the opportunity. I immediately sent a buy recommendation to my Penny Stock Fortunes readers...and not a moment too soon. The shares began to take off...and when I recommended selling in September - a little more than two months later - the shares were up 25%. Not bad for eight weeks! And that's just the first step in Tweedy's incredible discovery. 2. Look for Companies With Reasonable Profit Expectations Tweedy also learned to only buy companies with reasonable profit expectations. The most time-tested way to judge that is with the price-to-earnings ratio, also called the P/E. That's the company's current price per share divided by its earnings (profits) per share. The higher the P/E, the more profits investors expect the company to make in the future. Think of it like this - a company has a price of $5 a share, while its profits over the past year have been 50 cents a share. That's a P/E of 10. In other words, investors are paying 10 times more for the company than what it made last year. But let's say the company only made 5 cents a share last year. That's a P/E of 100...or 100 times more than what the company made last year. The only reason to buy such an overpriced company is because you think that earnings will eventually catch up to the stock price. The higher the P/E, though, the more earnings have to rise. Tweedy found that if you invested $1,000 in the highest P/E stocks between 1967 and 1984, you would have ended up with just $2,810 for your trouble. Putting your money in the lowest P/E stocks, however, could have led to $12,220 profits! Now, I know what you're thinking - 17 years is a bit long to wait for a big payoff. And you're right. But you can use Tweedy's rules to make money much faster... $3,100 in Just Four Months In April 2003, a small aerospace company called Orbital Sciences caught my eye. It's a leading developer of smaller, affordable space systems - providing essential parts to everything from communications to research satellites. Some pretty advanced stuff. Of course, like anything tech-related, the business was hammered in the 2000 - 2001 recession. The company lost over $406 million between 1998 and 2001...its debt was mounting...and its stock sunk from $7 to as low as $1.38. Now, most investors dismissed the company as a goner. But I saw some positive things... The company sold off underperforming divisions...paid off debt...and lined up new clients and contracts. In fact, in 2002 it racked up deals worth $1.37 billion. In other words, the company was back on the plus side. Meanwhile, with multiyear multimillion-dollar contracts piling up, its earnings would grow for a long time to come. With a great opportunity staring me in the face, I immediately alerted my Penny Stock Fortunes readers. And when I recommended selling just four months later, they had the chance to be 62% richer. Imagine, if you had invested just $5,000 when I recommended Orbital Sciences, you could have cashed out in four months with an extra $3,100 in your pocket. 3. Find a Company With Optimistic Leaders Here's another rule that investors just don't seem to understand...and it's already cost some their entire life savings. Remember when Enron CEO Ken Lay told people, "Now is the time to buy Enron stock" - even as the company headed for financial ruin? Obviously, he was lying...and investors lost millions when the truth came out. But it didn't have to be that way. That's because there is an easy way to really measure management's enthusiasm...just look at how much of their own stock they're buying with their own money. You see, company executives and members of the board of directors are required to disclose when they buy and sell shares in their own company. It prevents the kind of dishonesty that led to Enron's demise. Of course, there are many reasons a company executive might want to sell shares of their stock - it could be a bad sign, or it could mean he or she just needs some cash. But when insiders start buying - it can only mean one thing: They're optimistic about the company's future. It makes sense, doesn't it? You don't invest in something you think will lose value. You only buy if you expect it to go up. Insider buying has been proven as one of the most reliable indicators for a company's future growth. In fact, Tweedy's research uncovered studies that show investors who follow insiders' leads often make twice what they would have made following the major stock indexes! Even better, having a stake in the company's profits motivates the executives to do the best job possible. The better the company does, the higher the stock goes...and the more money the insiders can make. Buy into these companies, and your money will jump alongside theirs - just like it did for Penny Stock Fortunes readers who followed my advice in August 2002. Follow the Insiders for 179% or More
In August 2002, Midway Games popped up on my CXS System's radar. Just a few weeks earlier, a member of Midway's board, Sumner Redstone, picked up 496,000 shares of the stock when shares were selling for just $4.60 - or a total of $2.3 million of his own money. That's usually enough to grab my attention. But then I saw something even more optimistic... Redstone kept buying more shares...at higher and higher prices. Between August 2002 and June 2004, he shelled out more than $48 million to buy more Midway stock. And each time he added to his collection, he paid a little bit more for the stock. Heck, that's not just optimistic...it's downright enthusiastic. Sure enough, today the stock is up 179% from when Redstone started his buying spree. If you had followed his lead and invested just $1,000 in Midway, you'd be sitting on $13,950 today! 4. Buy Stocks That No One's Brave Enough to Own These days, the smallest bit of bad news can send a stock tumbling. Low earnings...a lawsuit...a labor strike...even a negative comment from an analyst. All can be lethal. But it turns out these are exactly the kind of stocks you want to buy. Tweedy's research found a study showing that the 35 worst-performing stocks over a five-year period beat the major indexes by an average of 18% just 17 months later. Meanwhile, the 35 best-performing stocks for a given five-year period underperformed the market by 6% 17 months later. Let me say that again. Wall Street's worst-performing stocks - companies investors wouldn't touch with a 10-foot pole - did 18% better than the major indexes! I'm always on the lookout for beaten-down stocks. In fact, my readers recently had a chance to play one former hot stock for a chance to make 66% in two months. 66% in Two Months No industry has been beaten down more than Internet companies. From its high in March 2004, the tech-heavy Nasdaq index has fallen 62%. The stocks of major companies like Cisco, Amazon.com and even Yahoo are still down 71%...61%...even 76% from their highs. And once-famous names like Pets.com and MP3.com are completely out of business. So I was a little surprised when my CXS System identified drugstore.com as a potential winner in February 2003. True, the company had survived the Internet bust...but just barely. A major restructuring plan put the company $282.8 million in the hole in 2001...and the stock had fallen 95% from its high! But the CXS System noticed something most analysts had overlooked - things were turning around for the company. Sales were rising...and profits were up 82%. Business was only getting better. This fallen angel was about to fly again. I recommended shares at $2.50. And sure enough, within two months they had jumped to $4.14. That's a 66% gain in just eight weeks...or enough to turn $5,000 into $8,300. The lesson: If you're bold, you stand to make a lot of money. And smart investors know that most well-run companies usually revert back to their old selves before too long. 5. Buy Companies on the Verge of Becoming Household Names Market cap is one way to judge how well known a company is. As you probably know, stock prices are determined by supply and demand. The less demand there is, the lower the price will be. And there's almost no demand for a company that no one's ever heard of. In fact, there are many, many fine companies that are just too small to catch the big brokers' notice. But these companies tend to have higher growth rates and higher rates of return versus their larger, more established counterparts. That means they have more room to expand...and become well known.
That proves the best time to buy a company is when it's small - before it's touted by every Wall Street analyst in a suit and tie. That was the case with a company I recommended just last year...China Yuchai Intl. More Than Double Your Money - In Under Eight Weeks! The name China Yuchai probably doesn't ring a bell. But that's the point...few people know about this company, one of the largest diesel engine maker in China. That's BIG - because China is in the middle stages of morphing from an agricultural nation to a fully modern one. It's spending billions of dollars building new roads, repairing old ones and manufacturing cars, buses and trucks - as well as manufacturing the engines that run those cars, buses and trucks. That meant brisk sales for China Yuchai. Its sales and net income grew 97% and 64%, respectively, last year. On top of that, its net income was up to $49.8 million from $30.3 million a year ago - a healthy 64.4% increase. Even with all this going for it, people still weren't buying in...and shares were selling for just $7.50 each in July 2003. But I knew it was only a matter of time before Wall Street caught on to the opportunity. In fact, it happened less than two months later, when the shares jumped to $18.50 each! If you had followed my recommendation, you could have picked up 200 shares for just $1,500. And just two months later, in September 2003, you could have sold them for $3,700! That's a profit of $2,200 - in just over eight weeks! My CXS Money Multiplier System helped my readers cash in on the China trend before it became front-page news. And now, using Tweedy's accurate stock-picking guidelines, you have a chance to discover two more great companies before Wall Street catches on. You can cash in too... sign up for Penny Stock Fortunes today! Investing in Small and Micro Cap Stocks: High Returns Without Fail These five investment criteria discovered by Tweedy have been proven to make money in the stock market over long periods of time. But you don't need high-priced help to put their formula to work for you. In fact, I programmed my computerized CXS Money Multiplier System to find stocks that Tweedy would invest in if he were alive today. As you can imagine, the results were astounding... Here's to a long and prosperous future, AND sign up for Penny Stock Fortunes today! Editor, Penny Stock Fortunes P.S. Be sure to sign up for a FREE subscription to Penny Sleuth, written by some of the smartest researchers in the field of small-cap stocks. Penny Sleuth explores the tiniest investments out there... at least tiny for now... that have the biggest potential for profitability. Don't miss out on your chance to read about current and upcoming trends in microcaps every weekday, delivered straight to your e-mail inbox! Related articles about Investing in Small and Micro Cap Stocks: January Is A Month For Fools - By James Boric "Articles are written about absurd phenomena like the 'January Effect' - which is about as useful to investors as a six-pack of O’Doul’s is to an alcoholic." Other helpful small and micro cap investing links: Yahoo! Finance - Get stock quotes, market news, mortgage rates... Looking for more on investing in small and micro cap stocks? Copyright 2006, Agora Financial, LLC and Penny Sleuth,808 St. Paul St., Baltimore, MD 21201 All rights reserved. No part of this report may be reproduced or placed on any electronic medium without written permission from the publisher. Information contained herein is obtained from sources believed to be reliable, but its accuracy cannot be guaranteed. |
As you'd imagine, bargain stocks like these have a history of going up over time. In fact, Bill and Howard found that stocks with low price-to-book ratios can return five times as much as companies with high price-to-book ratios!
According to research, stocks with low market caps outperformed the largest companies year after year. In fact, over 17 years, the largest stocks on the market only yielded about 9.5% a year. The smaller stocks, however, did over three times better - going up an average of 33% a year!
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