"I missed it."
How many times have you said that to yourself after having a good idea for a stock but then seeing that it has already made a big move? Investors look at charts as if they will learn something about the future. The truth is, the chart can only tell you where the stock HAS been.
The reason you buy a stock in the first place is the expectation of what it will do, not what it has done. That said, too often I see investors complain that the big move has already happened and that they are too late.
From my experience this is the type of mindset that sets you up for failure. Passing on a winning idea, even one that has seen a move from $4 to $7, can turn out to be more than just an opportunity cost! Right now is the time for investors to stick with the stocks that are working, especially the small priced stocks that look to continue to climb higher.
Small Change, Big Percentage Gain
If there is one lesson that seems to haunt nonprofessional investors more than any, it is the fallacy of the big dollar move. Everyone dreams of buying a stock that runs and runs, but the nonprofessionals want to see the stock move in huge point movements.
They yearn for the $40 stock to move up to $65 - and all they can think of is that $25 difference. Yes it is $25 a share more than what you paid for it, but is it as attractive as a stock that moves from $4 to $7?
The move from $4 to $7 is a bigger win for an investor than the move from $40 to $65. It is a simple mathematical fact. Investors should be looking at the percentage gain, not the dollar gain. And when it comes to big percentage gains, a low entry price is a great way to start.
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Big Gains From Small Caps
Another simple fact of investing is that small caps have huge growth potential. Think of it this way, those mega cap stocks were once just ideas. Those ideas then grew into small companies that eventually went public. Before they could become big caps, they had to be small caps.
As those small caps grew, you could often see a stock moving from the low single digits to the high single digits. That may not sound like much, but a move from $4 to $8 is still a double!
The real question becomes what do you do with that $8 stock that started at $4? Do you take your profits and move on or do you stick with it and ride it for triple digits? The biggest gains often start with the smallest prices, so whenever possible I am all for sticking with what works.
Late Cycle Buys
Over the last few years you have heard about a bull market that is getting "long in the tooth." This means that many believe we are close to the end of a long term bull market. Bull markets tend to go out with a bang, and before that happens companies get desperate.
They become desperate for that next source of growth. If they can produce it organically, then there is no need for acquisitions and that is the best case scenario. When you cannot make your own growth you have to go out and buy it.
Often times, a surge in M&A can signal the end of a bull market. Wise investors that have a portion of their nest egg in small caps are most likely to benefit from this as they can cash out near the top. When several small caps begin to sell off to mid-cap and large cap competitors, it could be time to adjust your risk profile.
Rumors Vs Facts
Good economists predicted 9 of the last 7 recessions, or so goes the old joke. Calling for more recessions than there were makes the call the event. That said, the idea of a blizzard of M&A, which could signal the end of the bull market, just hasn't transpired.
There are plenty of rumored deals floating around in today's market, but none are signaling that the end is near. In fact, many suggest the time is just right to be looking harder and longer at low priced stocks. This will be the space that big companies look to for bolt-on or tuck-in acquisitions.
Another simple fact of investing is that while it is a good idea to buy the rumor, it is maybe more important to understand the facts. The fact is we are not seeing the volume and type of M&A that would lead investors to believe the end is near. On the contrary, the current environment is signaling now is the time to look for great deals.
That is why it's such an exciting time for Stocks Under $10, one of the portfolios I manage at Zacks. The market looks to be marching toward new all-time highs, and stocks with low entry prices are very attractive.
Of the thousands of low-priced stocks out there, my goal is to find 10-15 companies with the best prospects for long-term growth. I'm talking about doubles and triples as time rolls on.
We get in when the fundamentals point to success ahead, and ride them to their maximum potential. I also keep a sharp eye out to ensure we cut losses quickly.
So if you are interested in low-priced stocks, with improving fundamentals and impressive upsides, you should consider looking into Stocks Under $10.
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Good Investing,
Brian
Brian Bolan is Zacks' Aggressive Growth Strategist and the editor of the Zacks Stocks Under $10 portfolio.