Big Gains from Small-Cap Juniors

As you know, there are big potential gains in small-cap stocks. But small-cap investing is hard work. And in my world, the resource world, there are thousands of small startup resource companies out there, which can make it hard to filter through the best investment. Let me tell you about what you can do to filter through these small-cap companies…

Many of the small-cap companies I recommend to my Energy & Scarcity Investor readers are the so-called Canadian junior companies. These are companies whose shares trade, usually, on the Toronto Venture Exchange (TSX-V), a small-cap version of the highly regarded Toronto Stock Exchange (TSX). Or sometimes, the small guys’ shares trade on the London Exchange, or Australian Exchange or the Over-the-Counter (OTC) board in the U.S.

Often as not, the Canadian junior companies are resource developers that are burning cash. They’re definitely risky… but wow, some of them can deliver the returns!

When you deal with the small-cap resource investment space, it helps to be a geologist. It helps to understand how this business works. It helps to understand exploration, geophysics, drilling, mineralogy and much else. That’s because the vast majority of mineralized zones are NOT commercial ore and will never become a mine. The vast majority of acreage is NOT hydrocarbon-prospective and will never make an oil field. Remember this! Know it, learn it, live it!

Vast multitudes of investors buy shares in small-cap companies that never go up, and likely go down. You can lose your shirt a lot faster than you can make a five- or 10-bagger, that’s for sure!

There are dozens of small Canadian (and Australian and British) junior out there. Sometimes I travel from New York to Toronto to London to Hong Kong — and Brazil, South Africa, Serbia, Hungary, Turkey and more — to find potential investment ideas. You can eliminate almost all of the companies you review from contention before you decide on a small-cap play.

After you make an investment, it requires constant attention. You need to continue to monitor the management, the financials, the developments. The small guys don’t have nearly the information machines that the big guys have, so you may have to dig harder for real information.

So this is what I have to do even to begin to make it all work. I have yet to figure out how to make it work without that level of attention to detail. Point is, these small-cap guys are hard to find, hard to track and risky. Small-cap investing is hard, if it was easy, everyone would be doing it.  When tracking these small-caps on your own, make sure you continually keep an eye on these companies. Keep an eye on their financials and other business developments. If you put in the time and research they can produce outstanding gains for your portfolio.

Until we meet again,
Byron King
Penny Sleuth

April 18, 2011

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