Investing in the footsteps of legends like Peter Lynch, Warren Buffett, and John Templeton involves a unique approach: going against the crowd. These iconic investors thrived by seizing opportunities in stocks that the masses avoided or where there was panic selling. This week, we delve into the concept of capitalizing on stock price pullbacks, often referred to as contrarian opportunities, and a strategy we have used to enhance long-term investment returns with shorter to mid-term gains in the microcap space. In fact, it has produced consistent returns, delivering an average return of 49.72% since 2016.
In January 2016, GeoInvesting introduced the “Buy on Pullback” (BOP) Model Portfolios, aimed at swiftly capitalizing on mispriced opportunities in the market, identifying stocks experiencing negative or muted reactions to positive news or downside overreactions to negative news that we see as temporary.
Misunderstood company developments, emotions, or negative market sentiment can often be at the core of the mispricing, so the pullbacks often stem from investor overreactions and may not necessarily reflect the underlying fundamentals of the business.
Since 2016, GeoInvesting successfully launched and closed ten BOP model portfolios that typically consisted of 5 to 7 stocks unfairly punished by the market.
Nothing better illustrates our success in the Buy on Pullback strategy than its returns.
9 out of 10 of our portfolios posted solid upticks at their close dates, while 1 just about broke even when we closed it. We admittedly had it open for far too long going into the 2022 market shakedown, even though it reached an interim peak high return of 49.72%
The most startling take away from going under the hood of these portfolios is the stock picking and portfolio success “hit rates”
For example, 53 stocks occupied these portfolios, and 38 showed positive returns when the portfolios in which they resided were closed, for a hit rate of 72%.
A couple of other interesting stats that emerged from the data set were, 79% of the stocks reached a return of at least 20%, and 24 stocks rose at least 50%.
Our first 10 portfolios showed an average return of 43.42% by the time they were fully closed, and an average peak return of 79.61%.
The average time it took us to close a BOP was less than 12 months, with the shortest time to close being 4 months
We are finally launching our 11th BOP Portfolio. The first four companies are being added to the model portfolio, and we plan to add 1 to 3 more. The expected return we believe these for stocks can achieve within 4 months to a year translates to an expected portfolio return of 80.58%.
The market environment since 2022, which includes higher interest rates and inflation, has created extreme fear among investors. This can cause investors to panic sell stocks during market volatility and in reaction to weaker than expected earnings releases.
For example, we are currently seeing a lot of scenarios where a company may have reported great growth in sales and earnings for a particular quarter, and slightly missed analyst estimates, causing investors to panic sell. This is very common with the microcaps we invest in.
One of the strategic moves that we make during earnings season is to read conference call transcripts so that we can determine if management addresses any issues that popped up in the related earnings press release, conveying a message that certain negative events might be temporary or one-time in nature.
Another one of our favorite BOP strategies is to buy stocks that fall sharply when a company initiates a non-dilutive secondary stock offering. This may occur when a large institutional shareholder needs to sell its stock, but can’t do it on the open market because the stock may be too illiquid.
In these situations, the secondary offering is often completed at a stock price significantly lower than the current share price, sending the price much lower. If this situation occurs with a solid undervalued company that has great growth prospects, the stock can often recover quickly.
The key point to a non-dilutive secondary offering is that there are no extra shares being offered in the offering. One of my favorite case studies on one of our past high conviction model portfolio holdings portraying this scenario was with Bluelinx Holdings Inc. (NYSE:BXC). On October 10, 2017, the company announced a secondary offering at $7.00 per share. In this scenario, an institutional holder of 51% of the stock wanted to sell its position. Within two months of the offering, the stock doubled and within 7 months after the offering, the stock surged to over $40.
Geoinvesting is a research platform founded in 2007 to publish premium research on microcap stocks that meet a certain set of criteria that we have proven leads to superior returns. Empirical evidence proves that investing in microcap stocks beats the returns of larger cap stocks by 8.24% per year. Even Warren Buffett and Peter Lynch have said that if they were to invest in one type of stock, it would be microcaps. We provide our subscribers with an even bigger edge by combining the microcap investing edge with our own tested strategies to find the best stocks that are undervalued relative to their growth prospects or other positive catalysts. Our approach is based on qualitative and quantitative factors that finds stocks a point where they are going through significant changes that the market has yet to identify. This opportunity is only available in the Microcap world, an area ignored by institutions, Wall Street and the financial media.
Over the last 15 years, we have also built a expert Microcap investor network who contribute ideas to our subscriber base.
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