Getting Real With Tiny Stocks

Let’s get real. Put the emotions aside. Let the data talk for a while. I think emotions belong in personal finance, because otherwise persons won’t care about finance. I also know that math belongs in finance because finance is driven by arithmetic and math. Our emotions, however, don’t like to be usurped. Here’s an exercise I conduct that introduces each to the other when I analyze stocks.

Microsoft, Apple, and most of the S&P 500  companies grab headlines anytime they choose. They gain that power by what the companies do, but also by the consequences for their stocks: MSFT, AAPL, INX. Their stocks rise, the market rises. The number that typifies their power in the investing community is their market capitalization. Market cap can be as simple as the price of the stock multiplied by the number of shares of the stock. That’s arithmetic, not even fancy mathematics.

Investors draw lines in the investment environment declaring stocks to be small, medium, and large based on their market caps. Depending on who you are talking to, those borders change. Depending on how picky they are, they may even add micro and mega.

Let’s put market cap in perspective. According to Google, over 6,500 corporations have market caps of over one billion dollars; that’s $1,000,000,000. Currently there are about 7.125 billion people. Currently there are about 2,217 corporations with market caps over $7.125 billion. That many rich companies mean most investors, especially the professionals, only look at large companies. That also means many of them look down on small companies. I’m glad they do.

As an individual investor in a competitive marketplace inhabited by very powerful and ruthless competitors, I’m glad to find a niche that they avoid and dismiss. Thank you for laughing at small companies. Thank you for ignoring that the largest companies started out as the smallest companies. Even a multi-billion dollar corporation probably has a historian who can track it all back to one or two people who came up with an idea.

That rise from almost nothing to unimaginable wealth is an element of our society. It exists without judgment until we act upon it. I’ll leave that debate aside for this post.

Individual investors with high risk tolerances can’t readily invest in the “almost nothing” unless they start the business themselves or know the people involved. There are rules about angel investing and venture capital that encourage people to be “accredited investors“, which generally means someone with over a million dollars in liquid assets. The idea is that such a distinction is proof that you’re a prudent investor. Pardon me as I pause and reflect on how that definition totally ignores the role of luck in our lives.

For the individual investors with high risk tolerances but poorer finances, one option is to invest in small companies before they are popular, profitable, or proven. Warning bells ring whenever such investments are considered, and the label of “speculation” is appropriately applied. Some elements of the financial system aim to protect such investors from themselves. Many individual investors take that as a challenge.

A good characteristic of any investor is the willingness to analyze the investments they are considering. Small companies have less data, which is another reason for large investors to concentrate on large companies. While many investors have many opinions about their investments, I am most impressed with those who conduct an analysis, and even more impressed with those that publicly share them as part of an open discussion.

When dealing with small companies that have little data, it is necessary to extrapolate. Extrapolation, as most people familiar with math know, is easily misleading. Whenever extrapolation and estimates drive an analysis, I find myself checking the results against outside limits and benchmarks.

After MicroVision’s Annual Shareholder meeting I did a quick analysis of the share price possibilities based on comments made by the Chairman of the Board. I liked the answers, but I knew they had to be given some perspective. Based on the components that go into digital cameras, it is possible that MicroVision could see similar growth. Given that growth in the company, I calculated the growth in the stock.
2015            $33
2017           $178
2020         $667
2023      $3,333
It should be obvious that if I can hold the stock until 2023 that I’d be a multi-millionaire just from my MVIS shares. Have no fear, I’d diversify and have a bit of fun long before then. But how big is a company with a price of $3,333? Would it be bigger than the biggest company that exists now?

Currently, according to Google there are 30,059 companies to invest in. I suspect that includes mutual funds and such, but I work with the data I can get. 20,532 are worth more than a million; but there are a lot of houses worth that much. Even at one hundred million, there are 12,309 investment opportunities to pick from. At ten billion we’re down to 1,666; a number small enough that many people would recognize many of the companies. Only 96 are larger than one hundred billion; not all of which are recognizable, but most are. That top rarefied niche is the home of the drivers of the market indices, the holders of immense wealth, and also probably partly owned by most pension plans. None have made it to a trillion, yet.
Market cap    # of companies
1.00E+06        20,532    32% percentile
1.00E+07         17,272    43%
1.00E+08        12,309    59%
1.00E+09          6,578    78%
1.00E+10           1,666    94%
1.00E+11                96    100%

max cap 100814 market cap

So, where does my estimate place MVIS? Assuming about 45,000,000 shares for MVIS
2015               $33         $1,485,000,000
2017              $178        $8,010,000,000
2020            $667      $30,015,000,000
2023          $3333    $149,985,000,000

max cap 100814 MVIS

MVIS market cap and share price

That last number is definitely high, but at least it isn’t higher than what’s proven possible in 2014. It suggests that MVIS would be a major player in the S&P 500, even as the index climbs. That’s where conventional wisdom wags a finger and says it won’t be so. Maybe so. I don’t need it to get that high. I need sooner rather than 2023. But, that company with the largest market cap, the one that most people laughed at for decades was started by two guys who had an novel and simple idea. Thank you Steve and Steve, Jobs and Wozniak.

If big price numbers create an emotional positive or negative response, remember, they’re just numbers. BRK, with a market cap lower than AAPL’s, closed today at over $200,000 per share, directly because there are less than two million shares available. MVIS has less than fifty million shares.

About Tom Trimbath

real estate broker / consultant / entrepreneur / writer / photographer / speaker / aerospace engineer / semi-semi-retired More info at: and at my amazon author page:
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