Top picks from the media stock gurus provide
little value for small cap investors.
This is not the first time the Investorfile blog has made comments
about stock pickers in the media and their small cap favourites which turn out
to be flops (See: I ask, where are these hot stocks now?) Unfortunately, it
will not be last time we will write about this topic too.
We are still of the opinion that most analysts and fund managers do
not have any better insight into determining the long-term success of small and
microcap stocks than the average retail investor. But some use the media to
share their thoughts and that’s where the problem begins.
A look back at small cap top picks made in 2015 by some of the
financial stock gurus appearing on the Business Television Network (BNN)
program called Market Call proves our point.
Here is a sampling of small cap "top pick” recommendations in 2015
and how they preformed. (To be fair, we excluded top pick stocks related to the
oil industry which were impacted by the unforeseen collapse in world oil
prices).
- Guestlogix: Trading halted. Filed for bankruptcy protection
- Sensio
Technologies: Trading halted. Filed for
bankruptcy protection
- Loyalist
Group: Down 97% from 2015, KGIC (TSXV: LRN - $0.02)
- Imperus
Technologies – Down 84% from 2015 (TSXV:
LAB - $0.09)
- Patient
Home Monitoring – Down 80% from 2015
(TSXV: PHM - $0.40)
- Snipp
Interactive – Down 64% from 2015 (TSXV:
SPN - $0.32)
So the question is: Why has the performance for small cap top picks
been so dismal? We provide several reasons here:
- The majority
of the small cap top picks where companies with little or no historical
profits and operating in an industry that has just become trendy among
investors. When the honeymoon period is over and the profits have yet to
emerge, the stock price for these companies gets crushed from the herd of
investors selling.
- The emphasis
for most top picks is on liquidity, not value. Small caps stocks which are
more liquid (higher daily trading volumes) have many millions of shares
outstanding. With so many shares issued, the current market valuations and
trading multiples of these top pick stocks are usually unjustified when
they are first recommended. When the hype for these stocks cools, the
trading multiples fall and, compounded with the millions of shares issued,
the stock trades down to much lower levels.
- Fund
managers can leverage their small cap buy recommendations in the media to
create liquidity for stocks they do own to lock in a gain on their
investment(s). Most small cap stock positions acquired by money managers are
through a financing or block trade and at big discount to the market
price. They appear on TV as having a long-term view on their top
picks stocks but they rarely hold on to a small cap stock over the long-term
if a trading opportunity exists.
To conclude, our advice to retail investors is to be wary of small
cap stocks that receive all the accolades as Top Picks from investment
newsletter writers and money managers appearing in the media. In many cases
their opinions should be discounted like performance of their small cap stock
picks. Otherwise you risk owning these stocks and when they flop, having to sell them at a
"discount” to what you paid.
Final words for retail small cap investors: Buyer beware.
Read Disclaimer:
This article is for informational purposes only. This article is based on the
author's independent analysis and judgment and does not guarantee the
information's accuracy or completeness. The information contained in this
article is subject to change without notice, and the author assumes no
responsibility to update the information contained in this article. The
information contained within this article should not be construed as offering
of investment advice. Those seeking direct investment advice, should consult a
qualified, registered, investment professional. This is not a direct or implied
solicitation to buy or sell securities. Readers are advised to conduct their
own due diligence prior to considering buying or selling any stock. |
