Many investors avoid micro-cap stocks. Known for huge gains, crushing losses, and all-around high volatility, micro-cap investing isn’t for everyone. At the same time, the opportunities in the category are legendary.
While it’s easy to believe that micro-caps are all sketchy pink-sheet penny stocks, nothing could be further from the truth. Micro-caps are simply companies that have market capitalizations between $50 and roughly $300 million, and trade on an official exchange like the Nasdaq or NYSE.
Now, it is true that the enormous potential gains are balanced by equally high risk. But if you’re willing to accept that, here are a few of my favorite micro-caps for you to consider.
1. Sorl Auto Parts (Nasdaq: SORL)
Shares of this Chinese automobile brake and safety equipment maker are setting up to be an ideal breakout candidate. Sorl supplies automobile brakes and safety equipment to over 75 original equipment manufacturers, most of them in China.
The stock has soared over 90% this year, thanks to improved fundamentals for first six months of 2017. Net sales increased 29% to $164 million, compared with $127 million in the first six months of 2016. At the same time, operating income increased 110% to $18 million from $8.8 million at the same period last year.
Net income attributable to stockholders moved higher by 66% to $13 million, or $0.67 per basic and diluted share, against $8 million, or $0.40, in the same period of 2016.
The stock just broke above its 200-day simple moving average (SMA), but the price is approaching a possible double top. Investors will need to be patient and wait for the stock to cross $6 per share before buying. Based on the technical and fundamental growth, I expect to see shares trading above $11 within the next 18 months.
2. B.Riley Financial (Nasdaq: RILY)
This unusual microcap operating as a FINRA-licensed broker-dealer and an independent investment bank is setting up to be an ideal buying opportunity.
Riley seeks to purchase small-cap companies and other assets it views as undervalued. The company posted total revenues of $92 million in the third quarter 2017, compared with $57 million during the same time last year.
This improvement can be attributed to higher revenues from recent acquisitions by the capital markets group. These and other additions will continue to power the shares higher.
Shares have been channeling between $16 and $17 for the last six weeks, with the 200-day SMA acting as support. Purchasing on a breakout above the channel and 50-day SMA at $17 per share makes solid technical sense. I expect to see the stock in the $20 per share zone within the next 52 weeks.
3. ShotSpotter (Nasdaq: SSTI)
Unfortunately, violence seems to be becoming a way of life in the United States. Nearly every day there is a new incident of extreme behavior from an individual or group. ShotSpotter is a $190 million company that is trying to do something to stem the tide.
SSTI specializes in a unique gunshot detection system that helps law enforcement officials and security personnel identify, locate, and deter gun violence.
As you probably expect, quarterly revenues are soaring from the same time last year. In the third quarter 2017, ShotSpotter posted revenues of nearly $7 million, crushing same-period 2016 number by 72%. Revenue guidance for the full year 2017 was also ramped higher to $23 million on the back of 50% margins. Gross profits soared by over 110% during the same quarter.
Looking forward into 2018, the company fully expects to see a revenue range between $30 and $32 million. Bullishly, ShotSpotter became debt-free last quarter, freeing up resources for expansion.
I recommend entering long now in the $17.50 to $18.35 range. I expect shares to surpass $26 within the next 52 weeks.
4. Full House Resorts (Nasdaq: FLL)
A tiny company with a market capitalization of just $75 million, Full House owns, operates, and invests in casinos and other hospitality properties.
Full House posted a tremendous third quarter, pushing shares higher by over 20% in November alone. The planned Cripple Creek expansion combined with a massive increase of gaming in Pennsylvania fundamentally supports the shares moving higher. Also, the company is planning a series of improvements that should continuously provide enhancements on the bottom line.
The stock has been erratically upward-trending since June, but has hit resistance near $3.60 per share. Smart investors should enter the trade now between $3.10 and $3.30. I would not be surprised to see this stock in the $6 zone within the next 12 months.
5. Marathon Patent Group (Nasdaq: MARA)
The riskiest company on our list, Marathon’s shares are trading lower by over 85% this year. Technically a nano-cap company, Marathon’s portfolio consists of over 10,000 patents and other types of intellectual property.
While the company is struggling right now, what has me bullish is a radical change in business direction. The company recently entered the cryptocurrency business via an acquisition. Marathon acquired 100% of Global Bit Ventures, a cryptocurrency mining technology company.
GBV powers and secures blockchains by running custom hardware and software confirming blockchain transactions. The company possesses 250GH/s of GPU mining servers and plans to add 14PH/s of ASIC hashing servers.
“This acquisition provides investors an opportunity to invest in one of the first Nasdaq-listed public companies to enter this rapidly growing industry,” stated Marathon board chairman Merrick Okamoto.
As cryptocurrencies grow in popularity and use, Marathon should steadily improve revenues with the GBV purchase.
Make no mistake, this is a risky investment, but the upside could be substantial. Purchasing shares now at $1.30 per share makes sense as a bottom-fishing entry. I would not be surprised to see the stock trading in the $4 area within the next 18 months.
Risks To Consider: Micro-cap stocks are inherently more volatile than their larger counterparts. The volatility can lead to massive gains and devastating losses. Be prepared for wild price swings and even some stocks going into the penny stock graveyard. Only use money you can afford to lose when investing in the micro-cap arena.
Action To Take: Do your homework first, but experienced, risk-embracing investors should consider adding one of more the above micro-caps to their portfolio.
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