by Marin Katusa, Katusa Research:
As I’ve covered in previous essays, the resource market’s extreme cyclicality means the sector regularly produces 200%…500%…and 1,000%+ winners.
But buying your stake in these potential winners isn’t like buying a stake in a giant company like Microsoft or ExxonMobil.
There’s a right way to do it and a wrong way to do it.
This essay will show you the right way.
The resource market’s biggest winners come from companies with small market caps. I’m talking about companies with market caps of less than $1 billion.
To get an idea of how a small cap compares to the giants of the stock market, just realize that in mid-2016, ExxonMobil’s market cap was $370 billion.
A small cap company with a market value of $200 million is less than one-tenth of one percent the size of ExxonMobil.
Small caps have much, much larger upside than large caps. After all, it’s much easier for a $200 million company to grow 10 times larger than it is for a $200 billion company to grow 10 times larger.
That’s why I typically keep my investments in companies with market caps of less than $1 billion. I even occasionally invest in companies with market caps of less than $10 million (which is a rounding error on ExxonMobil’s balance sheet).
Because these companies are so small, they typically have limited trading liquidity.
A company like ExxonMobil trades millions of shares on a typical trading day. Some small caps trade less than a thousand shares on a typical trading day. A large amount of buying or selling in a small cap can make the shares swing wildly in value.
That’s why we have to “stalk” small cap resource opportunities.
We have to wait for exactly the right time to buy.
You have to remain patient…like a lion that waits and waits for just the right moment to strike.
The ability to “stalk” assets and wait for GREAT prices is essential to your success in small cap resource stocks.
This is a volatile sector. One-day moves of 10%…15%…and 20% are common in small resource stocks.
One day, the share price of a good company will be $1.50. The next day, it will be down 20% to $1.20.
That’s why when I find a stock with huge potential, I don’t jump into the market and buy at any price.
Instead, I stay patient and wait for great prices. I “stalk” the asset. I wait for the market to “mark down” the merchandise I want to buy.
And if it takes me weeks to accumulate the amount of shares I want at the price I want, so be it. That’s just how the resource market works.
If you can’t accept this reality and practice patience, small cap resource stocks just aren’t for you.
Buying at great prices has a huge effect on your overall returns.
For example, let’s say a stock is trading for $1 per share.
If you buy the stock at that price and it climbs to $3 per share, you’ll make 200%.
But if you “stalk” the shares and wait for a sell-off to mark shares down 25% to the bargain price of $0.75 per share, you’ll make 300% on a move to $3 per share.
By simply waiting for the right price, your returns are hugely amplified. Over the course of a year, it means a lot of extra money in your pocket.
If an investor puts a “market” order in for a thinly-traded stock which tells the market he’ll buy at any price–he’ll get fleeced by market pros. He’ll end up paying anywhere from 10% – 100% too much for his stake.
But by entering a “limit” order–which tells the market he’ll only buy shares up to a certain price–the skilled investor gets the price he wants. And he’s fine with waiting weeks or even months to acquire the amount of shares he wants at the price he wants.
By now, you can see why “stalking” is so important to your success.
It can literally mean the difference between making 50% in a year and losing 50% in a year.
To succeed in resource stocks, you must be willing to stalk assets and wait for exactly the right time to buy.
That’s why my research works a little differently than the conventional stuff out there.
When I find a great opportunity and determine a great price to pay for it, I publish my research.
Since the resource market is volatile, the price of one of my “chosen few” stocks could be $1.25 per share one day…then fall to $1 per share the next day.
When that type of move happens, you need to be ready to buy shares.
This approach is in contrast with many of the research services you’ve probably encountered before.
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