Investing legends like Peter Lynch, Warren Buffett and John Templeton may approach investing from different points of view, but they all have one thing in common: They zig when others are zagging and zag when others are zigging. In other words they profit from investing in stocks that the crowd avoided. That is why we are constantly on alert for stocks that react negatively or have muted reactions to good news or no news at all.
Sometimes the market delivers a perfectly wrapped gift in the form of stock price pullbacks, or what we sometimes refer to as a contrarian opportunity to monetarily pursue a potentially profitable investment. Although we are long-term investors, exploiting these kinds of pullback opportunities is one of the staples of what we do at GEO to pad our long-term returns with some tremendous short-term gains.
Misunderstood company developments, misappropriated emotion, or even overall market sentiment can cause investors to panic and contribute to a stock’s pullback. Whether these types of overreactions are the result of market gyrations or the inability of investors to properly digest the full scope of a particular event, they often have nothing to do with company fundamentals. Said differently: we should be basing our long-term investment decisions in stocks on the fundamentals of the business, not by the volatility of the stock chart.
At the start of 2016, we introduced “Buy on Pullback” Model Portfolios that generally consist of 5 to 7 stocks unfairly punished by the market. Our intent is to quickly take advantage of these mispricing scenarios.
So far at GeoInvesting, we have opened and closed nine “Buy On Pullback” (BOP)model portfolios, and as of August 18, 2021, we opened our 10th BOP portfolio.
Nothing better illustrates the success of this strategy than the returns of all nine closed portfolios, which all posted solid returns at their close date.
The most startling take away from going under the hood of these portfolios is the hit rate. For example, 48 stocks have occupied these portfolios and 37 showed growth before the portfolio in which they resided was closed. The past 9 portfolios showed an average return of 82.08% by the time they were fully closed, and if all of the portfolios were still open today, the average return would be 111.64%. Our best performing stock, which was included in 2 of the portfolios, BOP #3 and BOP #6, gave us closing returns of 336.13% and 376.17%, respectively.
And now we have launched #10, which I believe has the chance of exceeding the returns of any of our past BOPs.
Even though overall stock market indexes are trading near their all-time highs, some first-rate microcap companies have experienced major pullbacks. These are companies that we believe meet most, if not all, of the standards we look for in what we like to call “Tier One Quality” microcaps. In case you weren’t sure as to what those qualifications were, here they are:
- Long operating history, at least 20 years
- Strong management
- Management focused on business, not stock price movement
- Generating revenue
- At or near profitability
- High probability turnaround stories
- High insider ownership
- Manageable debt burden
- Ability to grow without excessive equity raises
- Shares outstanding are not excessive.
Our main goal is to find great companies selling at great prices. Many stocks that we follow in our coverage universe reported great earnings in Q2 2021, but have fallen hard, or have yet to have experienced a concerted upward movement in their prices. We believe that part of the stagnation is a result of a few things:
- Lots of stimulus money found its way into microcaps in 2020, and now that money has disappeared.
- The implosion of Special Purpose Acquisition Companies (SPACS), many of which were microcaps, helped to create an overall negative sentiment in the entire microcap universe .
- Microcaps had a huge run over the last two years, so a pullback was inevitable.
Baron Rothschild is quoted as famously saying, “the time to buy is when there’s blood in the streets.” In less grim words, “Buy when a quality asset is on sale.” We would love you to explore this strategy with us!
Please join us and find out why our subscribers stick with us year after year.
And just so there’s no confusion, a Premium subscription to GeoInvesting gives you access to all of our model portfolios based on different strategies, research and stock picks, not just the Buy On Pullback Model Portfolios discussed in this email.
Also, if you are weary of recurring billing, we just added a new payment option which will not auto renew at the end of your subscription period. First, let us prove to you that we are worth coming back for.