Small-cap stocks, by definition, are publicly traded companies with market capitalizations between $300 million and $2 billion (Investopedia). While a majority of these small companies chose to go public in an effort to raise additional capital to fund their growth, a small percentage of the listed companies turn out to be fraudulent; this in turn has created negative associations for all small cap stocks. In fact, when I first began research small cap investments, I couldn't help but recall scenes from "The Boiler Room" of financial advisors swindling ill-informed investors. However, as I began digging deeper into numerous small cap companies, my opinion changed and I began to see an exciting risk/reward proposition for investors who do their due diligence. Investors must realize that many of today's large cap stocks did not start off as billion dollar companies but instead appreciated in value over time.
There are many reasons why most individual investors largely overlook small cap stocks. It's been said that 80% of institutional research analyst dedicate their time to just 20% of all publicly traded stocks (FirstWilshire). The reason for the lack of institutional coverage is not a reflection of the quality of the companies but rather a resource issue. Institutions profit when transactions occur and are incentivized to publish reports on stocks with the most trading volume as opposed to companies that may be the most promising for investors. This in turn creates mispricing and opportunities to earn substantial returns for the patient and intelligent investor. Additionally, many small cap stocks are restricted from being purchased by mutual funds because they do not meet certain investment criteria such as minimum trading volume, dividend yields, and minimum share price; this is significant because mutual funds represent a substantial portion of stock purchases.
InvenSense (INVN) One of the small cap stocks that I have been following for some time now is InvenSense. InvenSense is a fabless semiconductor that specializes in Micro-electro-mechanical gyroscopes, accelerometers, compasses, and pressure sensors. To put it simply, the company provides proprietary tiny computer sensors in consumer electronic products such as smartphones, tablets, game controllers, smart TVs, and wearable sensors to provide precise motion tracking. An example of this would be the Nintendo Wii's (InvenSense breakthrough) revolutionary remote that allowed users to use hand gestures to control game characters. Through its industry-leading technology, InvenSense has grown into a billion dollar company and has cornered the smartphone market with only Apple as the only smartphone maker not being supplied by InvenSense. Although it is not currently in Apple products, it is not farfetched to see Apple switch from its current supplier, STMicroelectronics, to InvenSense.
Tags: press release code 85230509036 BA, bradley associates news, revisiting small cap investing with invenSense