Tuesday, August 31, 2010

Small cap stocks suffer

Small cap stocks in general have had a miserable summer. While a low volume of trading hits all sectors, small caps become the most vulnerable. In this fragile market, investors are on hold in large caps and on strike in small caps.

From a market dynamic perspective, retail investors, often a mainstay of small cap companies, are retreating from the market. They're scared. Every tick down in a favorite regional or local stock finds some that press the panic button. If one thinks that institutional investors will step in and rationally price a beaten down small cap, they're wrong. With such low volumes in already thinly traded names, limited liquidity stops big investors from making a move. Any purchase of consequence will send the small cap stock flying and ruin the price opportunity.

So publicly traded small companies are paying up for their credit lines, uncertain about their banks' long term commitments, concerned about a new regulatory and tax environment that is far from clear, and watching their equity opportunities diminish by the day.

Is this a big opportunity that only small investors can buy into? Or is this a repricing of companies that have little power over bigger economic forces?


Anonymous Peter said...

Some small company stocks are enormous opportunities that will give back doubles and triples in two years, no doubt about it. Problem is, some will also go bust or be sold at a distressed price that only awards the buyer. Research and luck is required.

11:49 AM  

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