When Does A Micro-Cap Arbitrage Opportunity Exist & How Can GeoInvesting Help You?

An arbitrage exists when a disconnect between equity prices and the public information available on a company is noticeable and monetarily worth pursuing. Sometimes, the mispricing of microcaps can be substantial.

GeoInvesting’s forte is culling out the best from thousands of publicly traded Micro-Cap stocks, many of which can produce high returns. One only has to take note of the returns GeoInvesting has generated for its members who bought our micro-cap selections to witness this potential.  50% of  our top selections have risen more than 50% and we have found over 50 multi-baggers.

These companies generally have market capitalizations under $300 million and can trade on the OTC Markets, AMEX, or NASDAQ exchanges.  (However, we don’t exclude markets capitalizations outside this range if the story is compelling enough).

Micro-Cap stocks can provide significant diversification to your portfolio.  Even a small allocation to such stocks can give your portfolio alpha.  Also, Micro-Caps tend to march to the beat of their own drums with very low correlations with other U.S. equity classes.  Still, investors associate the following risks with Micro-Caps;

  • Many micro-cap stocks trade on the Over the Counter (OTC) market.
  • Micro-caps tend to be illiquid often trading at extremely low volumes resulting in wild price swings when investor sentiment changes.
  • Promoters, pumpers and dumpers. All too often paid newsletters promote micro-caps into the hands of  unsuspecting investors.

Despite all of the risks associated with Micro-Cap stocks, with risk there is opportunity.  The perceived risk in the micro-cap space creates a significant chance to buy quality companies that are being shunned by Wall Street and deep discounts.  We help investors navigate these risks to find the best micro-caps.  For example, we track pump and dump promotions in our database to cross check against stocks we may want to buy. We generally want to avoid these companies. As for liquidity issues, even liquid stocks become illiquid when it matters. Earlier this  year shares of NYSE traded LinkedIn (LNKD) dropped 43% in one trading session after the company issued weaker financial guidance than Wall Street was looking for.  The one thing that defines your risk exposure above all is good research.  When you are right you are rewarded and when you are wrong you are punished, regardless of liquidity. But when you buy illiquid stocks you are buying them at a discount relative to liquid stocks, giving you a chance to capture extra alpha when you are right as investors flock to your stock.  Now, it is true that lack of liquidity can be a concern when markets experience outlier crashes such as was the case in 2008. However, we don’t believe the outlier event should define an investment strategy. Just invest smartly with a sensible sell discipline and be ready to pounce on opportunity when markets crash.

GeoInvesting Helps You Find Micro-Cap Opportunities

Superior micro-cap companies are often underfollowed and therefore undervalued.  Smaller firms that do not generate investment banking fees rarely benefit from research coverage by Street analysts.  It therefore takes more time and effort to analyze micro-caps so you have to either do your own original research or find somebody who does.

The work can be well worth the while, as micro-cap stocks often trade well below their fair values, creating pricing inefficiencies that savvy investors can exploit.  It may be difficult for an individual investor to conduct the in depth original research required to uncover these micro-cap gems: that’s where the GeoTeam can help you.  Even if you have the time we will provide you with a quality pipeline of stocks to jump start your research.