While the lockdown is slowly easing up in multiple states across the company, there is still no evidence that the economy is going to return to normal. Furthermore, many U.S. states like Texas, Florida, California and others are seeing a renewed coronavirus surge.
This means that microcap investors would have to practice prudence in investing in the upcoming weeks and months because normalcy may not return so quickly. Below are what we believe microcap investors should do to optimize their returns in these turbulent times.
Invest In Companies That Benefited During The Lockdown
Companies that benefited during the lockdown will likely continue to do so, especially because several large companies are giving the green light for employees to continue working from home despite the opening up of the economy. Facebook (NASDAQ: FB), Twitter (NYSE: TWTR), and several large tech companies have taken the lead to announce that they are permanently shifting to a more remote work-centric environment.
This shift might prompt other smaller companies to do so as well. Thus, there is a strong likelihood that the industries that have benefited from the lockdown, such as Twilio (NYSE: TWLO) and Amazon (NASDAQ: AMZN), would likely continue to do so. In the microcap world, stocks such as Qumu Corporation (NASDAQ: QUMU), which provides an enterprise video platform for live and on-demand video within the enterprise, could continue to benefit from this massive tailwind.
Avoid Companies That Are Not “Essential”
With the unemployment at historic highs in almost every state, it is unclear if consumers would start spending even if the lockdown eases completely. Thus, companies that provide goods and services that are non-essential would likely continue to feel the pinch over the near term. This is especially true for microcap companies as there is little possibility of a bailout. Everi Holdings Inc (NYSE: EVRI) is one such company. The company produces slot machines and provides financial equipment and services to casinos and has seen its stock fall by more than 56% so far this year. To add on to the problem, the company has a high debt to equity ratio of more than 20. Companies like this would likely find it hard to survive in a post-COVID-19 world.
Cash Is King
It may be wise to keep a small-to-medium percentage of your portfolio as cash. While quarter one results have been discouraging, there is a chance that quarter two, which extended over the full lockdown period, could be even worse. There is currently no historical period that matches the one that we are living in except for the Spanish flu in 1918. However, that period coincided with a period of war, so it is unclear how this pandemic would be different from then. Perhaps the best advice would be to keep some cash and wait till the dust settles rather than rushing in with the rest of the stock market only to realize that it was a mirage.
Article By: Dennis Chan