Over the past few weeks, I've been chatting with my colleague Bob Bogda
about the potential for home run stocks. These are the kinds that can
deliver gains in one year that many other stocks take a decade to
achieve.
No area is as ripe for such upside as micro-cap stocks, which
typically have market caps between $50 million and $200 million.
Micro-caps tend to toil in anonymity -- right up until the time they
deliver great news. Caught off guard, investors can push such stocks up
by 50% or even 100%.
Of course, with such potential reward comes risk. Micro-caps can also
shed value at a rapid pace, especially if the market loses steam. Case
in point: I suggested back in September that Merge Healthcare (Nasdaq: MRGE) could
double in value, but MRGE has fallen 27% since then. I still think
Merge is an intriguing health care opportunity, but clearly my
enthusiasm was premature.
That's why you need to take a basket approach to micro-caps. Placing
too many funds in just one micro-cap stock is too risky. The other two
stocks in that September article bear out that premise: Novavax (Nasdaq: NVAX) is up 77% since my profile, and Lionbridge Technologies (Nasdaq: LIOX) is up 86%. If you invested $3,000 in each of those three stocks at that time, you'd be sitting on a tidy 45% gain. (more)
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