Once again the media hype machine for growth stocks causes
financial pain for small cap retail investors.
Is it a ground hog year again? Oh yes.
Every year it repeats: A herd of small cap
investors who purchase shares of small cap growth stocks flying high in
momentum from the hype by investment bankers, analyst calls, stock newsletters
and portfolio managersí picks in the media.
This year we highlight Reliq Health
Technologies. Small cap investors who purchased shares in this company earlier
in the year are feeling a lot of financial pain today. The share price is
currently down significantly in value from its high and, hence, this small cap
stock favourite is no longer in favour. The Investorfile blog is not about to
analyze the operational issues of the aforementioned company but, rather, hype
from the small cap investment community that propelled this stock to
unsustainable valuation levels.
Good information and analysis is critical for
small cap investments. But, acting on the information from a consensus view
from others can be precarious for investing in small cap stocks. We feel that
buy recommendations by small cap fund managers in the media and newsletter
writers often induce others to follow and cause stock prices to jump. This is
when a share price will deviate far from the small cap stockís true fundamental
To compound the issue, we are also of the
opinion that most fund managers do not have any better insight into determining
the long-term success of small and microcap stocks. But some small cap fund
managers use the media for their own agenda to communicate their stock picking
thoughts and thatís where the problem begins.
The emphasis for most small cap top picks by
fund managers in the media is on liquidity, not value. They pick small cap
stocks which are more liquid (higher daily trading volumes) and have many
millions of shares outstanding and therefore trade at a higher market
capitalization. The current market valuations and trading multiples of these
top pick stocks are usually unjustified when they are recommended but it
creates trading momentum which unfortunately attracts retail investors to buy.
understand that fund managers can often 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 a big discounts to
the market price. They appear on TV as having a have long-term view on their
top picks stocks but they rarely hold on to a small cap stock for the long-term
if a trading opportunity exists. They maybe selling their position when retail
investors are buying.
As for Reliq Health Technologies, when the hype
for this stock cooled, its trading multiples fell and, compounded with the
millions of shares issued, the stock price came crashing down.
We say why pay for this hype? Buy small cap
growth stock when its valuation is still reasonable, which allows the Company
to generate positive surprises and exceed on lower expectations to outperform
and avoid making buying decisions solely based on a recommendation in the
Unfortunately this lesson is never learned and
we will be able share another example next time. It will be a ground hog
year again for some small cap investors.
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