Friday, January 21, 2011

Double-Dip Recession Loves Micro Caps

What Does Double-Dip Recession Mean? In general, when gross domestic product (GDP) growth slides back to negative after a quarter or two of positive growth. A double-dip recession refers to a recession followed by a short-lived recovery, followed by another recession.

So why is this good for micro caps. If you are a holder of securities, unless you are the guru of all gurus, you have seen your stock positions decline. Now if you hold these securities this decline is only on paper and not realized, but if you reorganize your positions, you find yourself in a dilemma: you have less money to invest then initially, or then you once would of had.

This situation leads to the logical outcome, buy cheaper stocks. This is the retail perspective. Wall Street and the institutions do not so much look at the stock price, but at the overall entity value. A large fund manager, holding assets of let's say 100 million dollars, may have seen his assets go down buy 20%- 50% depending on his holdings and buy in time. This same fund manager is looking for returns which may only be possible from a small entity.

It's rather simple, less money to invest, leads too smaller investments, i.e. micro caps. As well, smaller investments lead to higher returns (it's easier to double the size of a Jones Soda Company(JSDA), then Coca-Cola(KO). this is a natural shift during a recession and if we see another decline, which some analyst predict, this may be beneficial to micro cap companies who during a great growth period may be overlooked. Micro cap executives should scout investors leaving larger cap positions behind, and investors should seek micro caps with strong balance sheets, favorable P/E ratios, and solid management.

We are in no way trying to predict whether a double-dip will or will not happen, but what we are certain of is that a dip has already happen and many fundamentals which we have stated have already begun to take place. If another dip comes, one should expect the same outcome with the flow of investments.


by-Nicholas Gabriel

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