Gold has been another outperformer of late. My watch list of junior gold miners is on fire. The challenge there is that they’ve rallied hard several times over the past four years, but each time it’s been a head fake—the long-term trend is still down. If a number of these companies can get off their backs and stand strong for a few weeks, I’ll consider adding one to our portfolio (most on my watch list now trade well below 1.00). But to be perfectly honest, my preference is to focus on companies that are developing valuable products, not digging for gold.
This updated chart of sector performance for both large and small caps so far this year should put a little more context around the discussion. I think it speaks for itself.
We’ve been through this before, most recently in 2011 and, of course, in 2008-2009. While many of the details that are driving stocks now are different, my game plan remains much the same: focus on emerging pure-play small caps with significant exposure to major global and/or regional growth and recovery trends.
Good candidates need to have great business models. They need to have excellent products now, and show evidence that more excellent products are coming in the future. And they have to show solid fundamentals, including revenue and earnings growth. Even if they’re not profitable now, the earnings trend needs to be up. There also has to be at least a few upcoming milestones and events that can energize shares and build long-term shareholder interest.
The window of opportunity to buy these companies at great prices often comes during market corrections such as this. The challenge is that only in hindsight does it become obvious when the right time to buy (or sell) was. We will take some hits as the market searches, and eventually finds, a bottom. Stick to stop-loss levels (I use 30%, you should use what feels appropriate for you), average into positions (this is up to you since I record prices on the day a stock is recommended) and don’t do anything too drastic. When the market turns, we will participate in the upside.
This is an excerpt from Cabot Small-Cap Confidential, which features little-known stocks with big potential. It offers a limited number of subscribers the opportunity to discover overlooked, low-priced stocks that have the potential to skyrocket. This advisory is best suited to experienced investors who embrace volatility.