Reasons To Own Small Cap Value

If you want to earn the best returns on your stock portfolio, you need to own small capitalization (less than 2 billion), value oriented stocks. Here are the reasons by our experts at Paradigm Capital Management:


1) They Outperform Every Other Class of Stock. Period.


Ibbotson Associates analyzed data from 1926 to 1997 and concluded that small cap value stocks outperformed the general market by 4.3% annually – more than any other class of stocks. Vanguard published data that showed, from 1927-2004, small cap value outperformed large cap value, blended, and growth portfolios. A Fama and French study shows this class outperforms all others in recessionary periods as well. Another study by Fund Evaluation Group shows that small cap value has outperformed every other group, and by a wide margin.

If we want the best returns for our portfolios, we have to invest in the best performing class of stocks.


2) The Market’s Valuation of Small Cap Stocks Is Inefficient


Stock analysts overwhelmingly cover large, well known companies. Their clients prefer to be in stocks of companies they know, and the investment firms they work for are forced to purchase large cap stocks so as not to exceed statutes by owning too much of a firm. When funds are operating with billions of dollars of assets, it doesn’t make sense to invest in small companies – any investment returns from these will not materially affect the fund’s performance because the position is too small.


One of the best books ever written on investing, Peter Lynch’s One Up On Wall Street, explains this phenomena well. Lynch earned stellar returns running Fidelity’s Magellan fund by buying hundreds upon hundreds of small positions in promising small cap stocks and holding them until the market realized their value.


Small cap stocks are valued inefficiently because of the lack of research on them, leading to misunderstanding of a company’s business or prospects. Add to this the general investment community’s unwillingness to invest in small caps, and you have a perfectly inefficient market for them, leading to bargains.

If we want the best returns for our portfolios, we have to take advantage of inefficiencies in the system.


3) Small Caps Can Become Big Caps


This one is obvious – you’re not going to find the next Microsoft or Wal-Mart by investing in Microsoft and Wal-Mart. When Microsoft started trading on the NASDAQ in 1986, it’s market capitalization was about 700 million. Today, it’s worth 260 billion – giving you back your initial investment 370 times over (and that’s not including dividends!).


Relating to point #2, once small cap stocks grow to a certain size, institutions and mutual funds can safely invest in them without worrying about statutory regulations or problems of scale. This leads to an influx of institutional money, sending stock prices up even farther. As market cap grows, these stocks get added to various indexes, which leads to investment by index funds that track them.


Small caps by their very nature have more and larger avenues of growth than large capitalization stocks. This, plus the intricacies of the financial markets, give them several advantageous characteristics for share price appreciation.


If we want the best returns for our portfolios, we need to own the best opportunities for revenue and earnings growth.


4) Small Caps Are Attractive Buyout Bait


Large companies are always struggling to deliver growth to their shareholders. Adding meaningful growth to a company with billions of dollars in revenues and earnings is not easily done. These large companies are often bureaucratic nightmares, slow to adapt with new trends and not nimble enough to stay ahead of changing markets.


Instead of taking the time, patience, and effort to develop new businesses, these cash rich mega-corporations often turn to acquisition as a quick fix for growth. Also, private equity groups will often buy these companies to restructure and then take them public again, reaping a big windfall. Buying small companies, even at a significant premium to market price, is often a drop in the bucket that delivers new opportunities in an instant.


5) Warren Buffett Says So


No less an authority than Warren Buffett himself has guaranteed that he could earn 50% annual returns investing sums of around 1 million. How would he do this?


“…look for small securities in your area of competence where you can understand the business”


If we want the best returns for our portfolios, we’d be wise to listen to the world’s greatest investor!


If you need any help then consult with the experts at Paradigm Capital Management – a trusted small cap investing company. We at Paradigm Capital are focused on a single minded purpose: To ensure that our clients have the best information on which to base intelligent financial decisions in pursuit of superior investment performance.

For more details, visit here:


Why Do the Best Penny Stocks Initiate Buy Back Programs?

The most direct act that a company can do to increase the price of its stock is to buy up its own shares in the open market. The best penny stock companies often launch buyback programs when they seek to diminish the number of shares outstanding (the number of shares available in the market). The share bought in the open market can be retired. Retired shares are no longer counted as outstanding. Investors will value the remaining shares at a higher price.


As an example: ABC Company has a $5 million market cap that has 10 million shares outstanding. This would give ABC a price per share of.50. With a corporate buy back of shares the outstanding number of shares would be reduced. Supposing ABC retired 2 million shares… that would leave 7 million shares outstanding. If the market cap remains at $5 million, it has no reason to go down since investors still have the same valuation for the company. Then each share would now be worth.71, which is.21 more than they were worth prior to the buy back.


There are a few reasons for instituting a buy back. The first reason is if the company wants to shore up confidence in the company. Company management wants to show investors that they have confidence in their business plan and stock… and continue to believe it is a solid long-term investment. It one thing for company insiders to announce news such as expected new earnings… and it is another thing for them to put their money where their mouth is.


The second reason a company may institute a buy back is to push up the price of a stock. The company knows that investors will translate the buying of a stock as a positive sign on the value of the stock. However, this can be done at investor’s expense. A company stock with no trading volume might start buying up the stock to push the price of its own stock up. However, this kind of activity is monitored by regulators, but investors still need to be careful.


In conclusion, make sure you conduct complete due diligence when you see a company initiate a buy back of its own stock. However, this can be a very good sign for a small company on the move.


Paradigm Capital Management is a small cap company. With a long history of small cap investing and micro cap funds, Paradigm Capital Management employs a disciplined, bottom-up approach with an emphasis on fundamental analysis and extensive management contact.

Our three decades of experience provide an exceptional level of insight that is reflected in our high-conviction portfolios.

Call us at 212.364.1830

Purchasing Penny Stocks through An Online Broker

Penny stocks are one of the hottest securities around and for good reasons, too. These are very affordable stocks that can be bought for under $5 per share with many going as low as a fraction of a dollar. The profit potential is also good if and when the trade has been done with careful research, analysis and evaluation from the buying to the selling steps, which is also true for the blue-chip stocks anyway.


Add in the fact that microcap shares can also be traded through an online brokerage site and traders have the opportunity to earn a good income from the comforts of their own home. But small cap shares also being one of the riskiest commodities in the market, we must emphasize the need to be very careful in making decisions lest your capital makes a beeline for the netherworld.


The Right Information


The first step in a wealth accumulation activity like stock trading is to gather relevant, reliable and timely information about the micro cap stocks under consideration. Unlike in previous years, it is now easier to secure information about penny stocks in the Pink Sheets and the OTC Bulletin Board because of the stricter reporting requirements and classification system in place. But if you want more reliable information than these two over-the-counter trade venues can provide, we suggest heading to the Nasdaq and AMEX small cap markets.


Gathering of information also involves careful research into the profit possibilities of the penny shares. Just like in blue-chip stocks, fundamental and technical analysis as well as qualitative and quantitative evaluation is essential in weeding out the losers from the winners with the company management, economic direction and even technological innovations as part of the criteria. Of course, the financial statements must also be scrutinized for analysis.


Open An Online Brokerage Account


While you are performing analysis of the penny shares, you can also enroll in an online brokerage site. Depending on the terms and conditions of the site, you may start a trading account with an amount from $500 to $5,000 as well as maintain certain amounts in the account. The commission rates and types of services also vary with many online sites now offering discounts for stock transactions.


Then, you will purchase the penny shares that you have deemed the most promising in terms of profit potential. The online broker will execute the trade for you based on pre-agreed terms including the ticker symbol of the penny stocks, the number of shares at a certain price, and the hold period, to name a few criteria. These tips will help in successful purchase with the view of making a profit later on:


  • Invest risk money into the account. Never gamble with your retirement, pension, educational and living expenses funds since you can ill afford to lose even a single cent of it to high-risk investments like penny stocks.
  • Invest small amounts at first just to get your feet wet. It is also important to diversify your penny stock investment as well as to ensure that microcap shares form only a small part, say, just 10% of the total investment portfolio.
  • Stick to a limit order of penny stocks. This lessens the risk in times of big price changes.


Consult with our experts at Paradigm Capital Management if you want to learn more. We at Paradigm Capital Management are focused on a single minded purpose: To ensure that our clients have the best information on which to base intelligent financial decisions in pursuit of superior investment performance.

For more details, visit here:

Importance of Penny Stocks in a Portfolio

Many people have diversified their portfolios in ways that ordinary people can’t even imagine. But the one thing that many people don’t do is combine the right percentage of penny stocks into their portfolios. Penny stocks should compile no more than 2.5% or your portfolio.


The reasons why penny stocks are important in your portfolio are because they give you the right balance between high risk stocks and low risk. All stocks are risky in some way, but many people dislike penny stocks because they are usually companies that are in turmoil or are newer to the market. But the most important thing about penny stocks is that they give you a great balance between fast income and growth. You never know when you might hit that diamond in the ruff and find a company like Google, Yahoo, or Microsoft. Just imagine if you were to pick out 1 winner in ever 5. If that 1 was like Microsoft then you just won. But the facts are that if you do your research rights the likelihood of you picking out a good stock are 1 in 2. Those are great odds.


What have you invested in lately? Are any of the shares that you bought ready to sell yet? And if so are they going to sell for a profit? Look at this example; if you bought 100 shares of TTT for $10 and then you bought another 100 shares of HHH for $3. You just spent $1300 on stocks, but what has the better chance of getting your money back fast? The truth is they both could get your money back and profit just the same, but the penny stock has a lot less points to increase in order to reach that goal.


For more information you can consult with our experts at Paradigm Capital Management. Paradigm Capital Management employs a disciplined, bottom-up approach when it comes to small cap investing and micro cap funds, with an emphasis on fundamental analysis and extensive management contact.


We have the expertise when it comes to small cap investment to achieve your financial goal, contact us at (518) 431-3500

OR visit us here:

Paradigm Capital Management Tips on Watching Hot Penny Stocks

This is very often for you to receive information via email alerts or newsletter from websites that offer financial tips or news about hot penny stocks making huge profits on investment. This can be taken as true with some grains of salt as making profits with hot penny stock investments depend on many things and very subjective in nature.


Before making any decision about penny stock trade you must be very careful. It requires diligent research about the companies and shares in spite of following the tips blindly. In most of the cases these tips are so lucrative that investors cannot resist about investing. It is not that every newsletter or alert is wrong, but investing on the basis of these tips only can be troublesome. There are certain points that must be checked through before you go for any decision about penny stock trade. First of all you must cross check the information with the chart. If the stocks are already moved up within last two weeks then chances are there that it will go down. This is very general advice. When you will go in depth about hot penny stocks you will realize that it is not always the case that such stocks can bring you huge profits. Instead you can lose significantly if you invest in stocks that have already reached their peak level and are about to go down.


You must learn the basics of chart reading in order to obtain information on penny stocks that is most critical to make decisions about retaining or selling the stocks. There are no complexities on chart reading all you need to understand is to learn about getting the position of stocks. This helps you to invest into the hot penny stocks at safe point neither early nor too late. It is extremely useful to check on the details regarding penny stock tips to prevent you from any losses. Penny stocks are offered mainly by the companies that comply with least listing requirements and follow few standard procedures. You must go thoroughly about the nature of the penny stocks as they are highly fluctuating and illiquid to trade with you can get profit from these only by having constant watch.


In case you are new investor then you must pay some extra attention to the details about researching out the information on your own without making any hasty moves. Penny stocks are highly unstable and can lend you nowhere if you invest by just going through tips or newsletters with information about hot penny stocks. There are possibilities that hot stocks that you are looking for is done with the moves to confer profits and now it’s time to move out of it. These tips and alerts about hot penny stocks are correct in majority of the cases about movement of the shares but cannot offer information precisely for each and every stock; your discretion is crucial factor.


If you need any help then consult with the experts at Paradigm Capital Management – a trusted small cap investing company. We at Paradigm Capital are focused on a single minded purpose: To ensure that our clients have the best information on which to base intelligent financial decisions in pursuit of superior investment performance.

Read also: How Do Successful Day Traders Pick Top Penny Stocks?

High Volatility Investments

Penny stocks and options are high volatility investments that attract both the trader and the long term investor because of the small amount of capital required to make substantial gains as compared with less volatile higher priced stocks. The long term investor buys a stock believing that a company’s value will increase over time and the stock price along with it. When he buys an option it is usually to reduce the risk in owning the underlying stock. The short term trader looks at things a little differently. Typically a trader looks for large percentage price movement over a short period of time. Large percentage, short term price movements can be found both in options and certain penny stocks.


Penny Stocks are often defined as stocks priced below $5. It is often implied, but not necessarily the case, that penny stocks are also micro caps with capitalizations of less than about $250 million. Penny stocks can be found across the full range of capitalizations from micro caps to large cap stocks. For example, Sun Microsystems (NASDAQ: SUNW) met the definition of a penny stock for much of 2004, trading between $4 and $5. In late 2004, trading between $5 and $6 per share, its capitalization was over $18 billion. The price of a large cap $18 billion stock would rarely be expected to move by a large amount over a short period of time. The largest percentage daily price gainers, of say 50% or more are typically stocks that started from $5 or less. But they are typically micro caps.


As a group, micro cap penny stocks are avoided by large funds because prices are too easily affected by sizeable buy and sell orders and capitalizations are too small to affect a large fund’s bottom line. Buying more than 10% of a publicly held company carries with it certain insider responsibilities. Large funds must wait until stock prices rise typically above about $20 before they can become seriously involved without moving the price and still have price movement impact their financial results. The small investor has a distinct advantage over large fund managers when he takes an early position in a good micro cap penny stock.


Short term options are best suited when the underlying stock has a higher price, say above $50. While it is more likely that a micro cap penny stock will gain 50% in a single day than it is for a higher priced stock, the typical 5 or 10 to one leverage that options provide makes it only necessary for a higher priced stock to move 5% to see a 50% gain in the corresponding option price. There are several additional considerations involved in choosing an option. Not the least of these is the market environment. When chosen properly, options for higher priced stocks provide the same large daily price movements of penny stocks. Lower priced stocks need to move by a larger percentage in order to see a similar percentage move in the corresponding option. They are only likely to do so if they are micro cap penny stocks.


If you need any help then consult with the experts at Paradigm Capital Management – a trusted small cap investing company. We at Paradigm Capital are focused on a single minded purpose: To ensure that our clients have the best information on which to base intelligent financial decisions in pursuit of superior investment performance.

For more details, visit here: