This entry will focus on how I tend to play micro cap stocks. I consider myself to be an opportunistic investor and I laugh at the Efficient-Market Hypothesis. My view of the market is completely incompatible with such a premise because it does not provide for the fact that Wall Street engages in gross manipulations of price, information, and even regulatory structure when they are seeking profits. If I believe one single thing about the stock market, I believe that Wall Street cheats, that Wall Street cheats often and Wall Street cheats big. As an investor, I have developed a style to match that belief.
Over time I have developed the patience to watch a larger number of stocks for long periods of time, and then to play them selectively. CPTC, CVM, CKSW, CTIC, ITI, VG, RTK . . .those are all stocks that I watch and play over long periods of time. I try to find stocks with solid or improving fundamentals and a good story. Then I use my software to track their development, and most importantly, I wait to find great entries. When I am building a position, I try to make multiple purchases, and I usually attempt to scale into the position, buying larger amounts at lower prices (often at the price point where earlier longs, trapped in a losing position are selling).
The decision point for many of my trades deprecates questions of company value and starts with the question, “What is the street going to do to this stock now?” In my view of the market, value is still important but it becomes secondary to price movement. It is difficult for market makers to make money on a stock that sits still, so they have a tendency to “catalyze” some price movement. On a lot of the stocks I watch, market makers will often reward diligent investors that have been accumulating shares on the basis of value with a sharp drop in the price. I refer to these events as a manipudips or manipuplunges. Those are events that I am looking for . . . a senseless and suspicious drop, often without any news, in a company with solid and even improving fundamentals. So my goal is not to buy companies that I like, but to buy companies I like after they have been toyed with and the path of least resistance for their price movement is clear.
Recent price action at NNVC illustrates the approach nicely. When I first discovered this stock in September, it was trading in the high .80s or low .90s. I added it to my software and started to research the company. It didn’t take me long to decide two things; 1) I liked the company and 2) I was unwilling to pay .8x for the stock – not because I didn’t feel the company was worth that much, but because I had a high degree of confidence that if the market makers were unable to move the price above 1.00 that they would elect to take it down hard and reset it. I set a price alarm to alert me to a buying opportunity if the stock went under .50. That was an easy price target, because the market makers were well aware that crossing that threshold would likely snap even long term holders of the stock, tripping a bunch of stop limit orders and releasing a lot of shares – so many that market makers could not only cover short positions they had opened at much higher prices, but enough for them to reverse the trade and get long entries as well.
Over the next few weeks the play began to unfold. Again, my premise was that the street would not make any money if the stock sat still, so they would move it. Without any material information entering the market place, they dipped the stock 50%.
Manipudip at NNVC
Unfortunately, I missed the play at NNVC. When the stock broke .50 and I looked at the chart, I was pretty sure I would be able to get .40, maybe even better. So I bid shares at .40 and a lot more at .36. Unfortunately, the stock stopped at .41 and I missed a fill by a penny. Three sessions later, the stock had more than doubled from a low of .41 to high of .88. But it is okay that I missed this particular play, there will be more just like it. I simply wanted to share my most common strategy for buying small and micro cap stocks.
One of the keys to succeeding with a strategy like this is the ability to follow the development of a large number of stocks. I wrote a piece of software to help me do just that, a free version of that software is now available.
[...] the NNVC plunge with seemed to have no reason to occur, GNBT had “bad news” on October 20th when it [...]
I BOT NNVC ON THAT DROP. I GOT FILLED AT 46 CENTS. ACCORDING TO YOUR STRATEGY WHEN DO I SELL? AND DO I SELL THE WHOLE POSITION OR HALF? ANY THOUGHTS WOULD BE APPRECIATED
Nice catch. As stated in the disclaimer for this site, I am not dispensing investment advice. This is more like .50 cents and a cup of coffee stuff. That being said, there is an old saying, “Nobody ever went broke taking profits.”
I am almost always inclined to take some shares off the table on a quick double. When creating a position in something like NNVC, my goal is usually to have “core shares” and “trading shares.” So when I am making an initial purchase, I am buying “extra” with the idea that I will be selling some in order to book a profit. I want the core to become my longer term position. Now, with a company like NNVC which I really like a lot, I am generally not as quick to take profits. I would probably put 25% of my position for sale close to $1.00, and 25% around .74 . . . and I would adjust accordingly. But I would have a bias to keep at least 1/2 of the position. If you are lucky, that dip was simply manufactured for the inside players to load up and stay long for awhile, if NNVC breaks a news story that clues people in to their potential you could be a happy fellow because it may never dip down there again. On the other hand, they just showed you what they are about . . . I don’t think any of them lost sleep over that little slaughter/robbery they just pulled off. So your job is to be prepared for both outcomes and have a plan, know what you will do if they start to pull it back and know what to do if it runs up too far too fast. Again, congrats on the entry, well played.