“This washout is handing us an amazing opportunity to pick up disruptive microcaps at bargain-basement prices.
We’re seeing valuations and opportunities we haven’t seen since the darkest days of COVID-19.”
Microcap expert Chris Wood just sent those words to his Project 5X subscribers.
The last time he sent this type of note was in March 2020 when the “corona crash” happened.
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My friends, I’ve never been more excited in my 15-year investing career… That may seem like an unusual thing to say considering what’s going on in the world right now. I feel for folks whose lives are being disrupted by the coronavirus, and I hope you and your family are getting by okay. But when I perform my market scans... I can hardly believe the moneymaking opportunity I’m seeing in disruptive small-cap stocks. When I launched Project 5X a little over a year ago, I honestly wasn’t sure if we’d ever get a chance like this again. But it’s here. In short, there’s never been a better time to get into the tiny disruptive stocks we follow in Project 5X. |
Back then, while everything was getting hit hard… microcaps were getting hit the hardest.
In fact, the shakeout pushed one of Chris’s picks—virtual and augmented reality stock Kopin (KOPN)—down 85% at one point. My publisher and I asked Chris when he was going to cut his losses and sell it. Keep in mind, a stock that’s declined 80% needs to rise 400% just to get back to even.
Chris held firm, telling subscribers their patience would be rewarded—and soon.
It takes serious courage and conviction to make a call like that. But Chris was right.
From its bottom, Kopin soared 921% in just four months:
His readers ended up booking a 399% gain on Kopin... along with several other 100%+ winners that looked down for the count in March 2020.
In fact, since the “corona crash,” Chris has closed a total of 10 Project 5X positions for an average gain of over 200%.
I’m telling you all this because I understand how tough it is to be a microcap investor right now. I’m invested in a couple that are down 70%+…
They’re small stakes, so I’m not losing sleep.
But many investors might be thinking of getting out.
Today, I’m bringing in Chris to show why that could be a costly mistake…
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Chris Reilly: Chris, as you know, microcaps have gotten slammed. IShares Micro-Cap ETF (IWC), although not a perfect indicator, holds a basket of microcap names. It’s down 21% since mid-November compared to a decline of less than 7% for the S&P 500 over the same period. And many individual names in the fund are down 50%+.
But you’re not worried…
In fact, you say this is a buying opportunity?
Chris Wood: Yes, this sell-off has handed us an amazing opportunity to scoop up small disruptive stocks on the cheap.
Look, we all know the investing mantra “buy low, sell high.”
But most folks don’t have the stomach to employ that philosophy. And they end up doing exactly the opposite.
That’s why we must follow the data, not our emotions.
And the data shows small stocks have gotten cheap.
In fact, my analysis shows that relative to large caps, smaller stocks have only been this cheap two other times in the past 20+ years. Once at the peak of the corona crash. And once at the peak of the dot-com bust.
And that’s a “surface level” comparison of all small stocks vs. all large stocks. It understates how attractively priced quality microcaps are today. I can confirm that with 100% certainty, because I research hundreds of microcaps a year.
That’s why I’m buying. In fact, Project 5X stocks now make up over 90% of my actively traded portfolio.
To be clear, I do not recommend anyone else go “all in” on microcaps. I’m telling you this to show my conviction that we’re at a great moment of opportunity.
Reilly: Are there indicators you follow that suggest a turning point is approaching?
Wood: Well, it’s really about historical context.
When you see these big, prolonged sell-offs in microcaps, they typically max out at about a year.
We’re almost at a year now. The peak for these stocks was early February 2021.
Now I’m not saying microcap weakness can’t continue for a few more months. But I do think we’re nearing the bottom.
And it’s important to remember that once we hit that bottom, the bounce-backs tend to happen fast.
The Russell 2000 small-cap index bottomed on March 18, 2020. It then soared 135% in less than 11 months.
Our Project 5X microcaps bottomed around then too… and many of them went on to soar much higher. Kopin, for example, soared 5,600% over the same period.
Reilly: Are you concerned at all about “catching a falling knife?” You buy more here—and these names continue to fall?
Wood: No. Because if I like a stock at a certain price and it falls below that price, as long as nothing fundamental has changed I just like it that much more.
I’m not talking about throwing darts and buying random microcaps. Obviously, that would be a recipe for failure.
In my Project 5X microcap advisory, I identify microcaps that check these boxes:
When you find a microcap that checks those four boxes... you may have a big winner on your hands.
But keep in mind, in Project 5X, we’re not trading these stocks. We’re investing in them. We’re not looking for a small, quick gain. We’re looking for at least a 5X gain over a three- to five-year holding period.
Because the reality is it takes time for these early-stage companies to execute on their visions.
So patience and conviction are key.
We were down 56% on Magnite (MGNI) in early April 2020. Less than a year later we realized a 422% gain.
With Kopin we had to wait about two years for it to really pop... and endure being down 85% at one point. But sticking to our guns was well worth it in the end. We realized a 399% gain.
That's the key to successful microcap investing. Sticking to your guns when you’re right and being able to hold paper losses. Most folks lose because they sell at exactly the wrong time.
Reilly: I understand. But even in 2020, when you were screaming from the rooftops for readers to buy, it probably wasn’t easy for the average person to pull the trigger...
Wood: You’re right, it’s not easy. It’s hard.
That’s why most folks fail to buy low and sell high.
It’s human nature to be scared to buy when everyone else is selling.
But that’s exactly when you should be buying.
And there are ways you can make it easier for yourself.
For starters, never invest more than you can afford to lose.
You don’t need to invest mountains of cash in these stocks to make transformational gains. Because of their highly asymmetric risk profile, you only need to risk a little to make a lot.
Reilly: Any other tips?
Wood: Never over allocate to one stock.
It’s hard not to fall in love with some of these microcaps. What they’re doing is often cool and innovative. But you never want all your eggs in one basket.
And microcaps should only make up at most 20% of your overall investment portfolio.
Finally, take some profits when they’re available.
In Project 5X, we take free rides (meaning we sell our initial stake) after our stocks have risen 100% to 200%. Having your initial investment or more returned makes it easier to stomach volatility.
Investing in microcaps is a roller coaster ride, and it’s not for everyone…
But if you can stomach the volatility, have patience and conviction, then you can realize some truly massive gains over the long run.
Chris Reilly
Executive Editor, RiskHedge