While well-known, blue-chip to mid-cap companies offer good value in businesses, small-cap companies (particularly, in the micro- or nano- cap environment) with nascent stage of operations and with stock prices below 20 cents, might offer an opportunity for investors to generate returns over a time frame. Kalkine’s ‘Stocks Under 20 cents’ report is aimed at covering such companies and stocks that are intended for investors with high-risk appetite and, in return, they may be rewarded with a much higher return because of the company’s growth potential. Any company that has been in business for a short while, with a small market share and a market capitalization as high as $300 million, can fall under this category.
The very basic approach towards this product is to identify stocks that might have value, with high growth prospects, and are expected to generate multi-fold returns for investors. Although any stock covered under the category carries high associated risk(s), the research on the stock would entail all the aspects with regards to the business model, financial health, risk scenario, future growth, etc. in the form of a SWOT analysis. Thus, Investors are required to consider such stocks for investment after sincere due diligence and understanding of below-given aspects:
Business Model: Some small companies tend to have a lucrative business model or assets that can contribute significant returns in the future. However, such businesses might collapse if a thorough analysis of the market is not carried out to identify the key competencies required. Hence, understanding the business model is the first and foremost step in the process of analysing a stock under this category.
Valuation: Some small stocks seem attractive as they appear to have lower valuations and thus, can mislead the investor fraternity. Investors are often misled by a lower price to earnings ratio or other valuations. While valuing such stocks, lack of financial information might pose a challenge in terms of bringing appropriate fundamental analysis and hence support from technical study or trends might play a role.
Financial Health and Fundamental analysis: As these companies are in the initial phase of growth, financials have the tendency to change rapidly. Such companies might not have the profitability on the books or bottom-line might not have consistent growth. The reasons behind no profits or less profits should have proper validations. Other parameters such as top shareholders, financial ratios, industry outlook, growth prospects, outlook, etc., are looked at with a cautious approach.
Changes in Business Dynamics: On the operational front, key performing indicators, strategic priorities, product portfolio and pipeline, new product launches, trials, management or ownership changes, etc. can be looked at. Changing dynamics of the business helps in evaluating the trajectory for the company.
Risk Analysis: Small businesses carry higher risk(s) as compared to well-established companies. These systematic or unsystematic risks need to be analysed in a thorough manner to minimize the uncertainty around the stock.
It is worth noting that companies under this category can offer ample investment opportunities from a medium to long term perspective; however, the risk is also on a higher side. Given this backdrop, it is essential to extensively analyse the business and potential growth opportunities that can act as key catalysts for future stock price movements. Development programs and business strategies set out by a company speak volumes about the long-term growth potential. Although the business may not seem appealing due to little or no revenue and lack of profitability, an investor can consider the above listed factors as the pillars holding the business together during the initial stages, which may transform into significant returns over the long term. Therefore, through Kalkine’s ‘Stocks Under 20 cents’ report, we are making an effort to identify stocks with decent potential with attribution to associated risks for interested investors.
