Often times in the small-cap market you’ll see companies rapidly spike on the back of a rumour and get issued a speeding ticket.
Sometimes it’s a case of investors buying the rumour ahead of the news. But not always.
But there is a benefit to this share price surge – liquidity.
The more liquid a stock is the better the chance you have of being able to buy shares in it at the price you want – and the less volatile the price will be as other investors buy and sell around you.
In our view, this sort of price movement can be the beginning of the share price being “de-risked”. That term is unique to commodity projects. When a resource is converted into a reserve (proved up by reliable drilling results) the project becomes more certain.
The increased certainty usually results in the share price going up.
This is all part of what happens when a share price is “de-risked”. And it’s not just resources companies.
It can happen to any small company when it starts to hit its straps. It’s what’s known as the small-cap effect. The diagram below will help you see what I mean:
What you see is like the chart DNA of a successful small-cap company. Granted, not every winner goes through this predictable pattern. But many do. When you see the pattern forming, it can help you time your entry into a share at the ideal time for maximum profits.
Please note, it’s not essential that you buy a stock the moment it hits the bottom of a range – although if you want to take that kind of punt you can.
Most of the time, what you’re looking for – and what we try to do in Australian Small-Cap Investigator each month – is buy into a stock at the beginning of an uptrend… when it’s in the “buying zone”. Any buying zone will do, although some moves are bigger than others.
But the small-cap effect isn’t a once-off event for a stock. It can happen in waves to the same stock many times over. For instance a stock will usually rally on the back of an upbeat announcement – such as a resource discovery.
Next the share price may fall back as the initial excitement wanes. But because the discovery has taken the stock to a new level, it’s not often the stock price will fall all the way back.
From this point the stock can tread water as investors wait for the next exciting news. This period can last days, weeks, months or even years.
But once the next news breaks, the stock can take off again… and quick.
For the most part you want to get in early, before the real price movement occurs.
Kris Sayce
Editor, Australian Small Cap Investigator
From the Archives…
Disruptive Technology Stocks For Smart Small-Cap Investors
2012-04-06 – Kris Sayce
ASX 200: This Market is Toast
2012-04-05 – Murray Dawes
Why Every Bank Will Soon Be a Tax Collector for Every Government Everywhere
2012-04-04 – Merryn Somerset Webb
Not Even Saudi Arabia Can Save Us From High Oil Prices
2012-04-03 – Jason Simpkins
Good News For Oil and Resource Investors
2012-04-02 – Dr. Alex Cowie