Club Mailbag email InvestingClubMailbag@cnbc.com is as follows: So we’ll send your questions directly to Jim Cramer and his team of analysts. We cannot provide personal investment advice. We only consider more general questions about investment processes or stocks in the portfolio or related industry. Question of the Week: How can you find small businesses that could grow into winners? What is the standard for small caps with little or no revenue or sales? Again, I appreciate all the insights. – Kevin investment should not feel like a gamble, especially when managing long-term investments. If you are looking for a potential fledgling company, you need to understand the risks. It is very difficult to discover the next nvidia. Nvidia was released in January 1999 and had a market capitalization of around $300 million. Chipmaker is currently the second most valuable US company with a market capitalization of $3 trillion. Investing in small businesses can sound attractive as many people are still in the early stages of growth and theoretically offers more growth opportunities than a mature, large cap. However, putting money into small businesses with little or no revenue or for sale involves sophisticated speculation. These unestablished companies have a higher risk of failure. However, if they succeed, they can bring significant growth and high rewards to investors. CNBC Investing Club is not engaged in speculative investments. This is a dangerous game that doesn’t match how Jim Kramer’s charity trusts are managed. Trust is a portfolio of 31 stocks used for your club. Although it was advertising Nvidia for a long time, when Jim first added to his trust in 2017, the company and stock were much more established. All three make it difficult to withstand a recession. Their stocks also tend to trade less volume, which can make them more volatile and difficult to trade. The small cap had some spotlight moments in 2024, but it didn’t last long. Their biggest gathering took place during the market rotation in July and November, when investors temporarily shifted their focus from the tech giant to small and medium-sized businesses. After the June Consumer Price Index report showed that inflation had cooled, the July surge began on July 9th, providing cushions to cut interest rates. Investors rushed to a small cap that was sensitive to interest rates, increasing the group’s benchmark Russell 2000 by 12.8% that month, according to a CNBC report. A similar rally took place in the first week of November after the presidential election, with interest rate cuts closing the week with the Russell 2000 surged by 8.57%, and interest rates reignited. A week later, Larry turned around and in the end the investor enthusiasm faded into the group. Jim believes there is a place for small cap speculation, especially for younger investors. However, there is not much safety net when dealing with early stage companies that are still unprofitable. Unlike established companies such as Club Name Costco, which has proven business models, strong returns and consistent growth that investors can rely on, speculative investment requires a different approach. Here are some simple statistics about the small cap, according to a note from Morgan Stanley in October. The small cap index has a very high turnover rate. In Russell 2000, there are only 56% of the same members as in 2019. This is compared to 81% of the S&P 500. Of today’s active members, 25% have been IPOs (initial public offerings) or SPACs (special purpose acquisition companies) results over the past five years. Small caps also tend to track performance in a broader market. As of February 27th, the Russell 2000 had 8.6% in the last 12 months. If you assume such risks, you must be prepared for the possibility of complete loss. Therefore, qualitative analysis is important because numbers often don’t look very large in the early stages of evaluating companies. Qualitative analysis focuses on non-numerical factors that can affect a company’s success, especially when financials are limited. Understanding the business model, leadership team, and the company’s industry positions and competitive strategies can help you measure your company’s potential. This is especially important for speculative investments where finances may not reflect the true value of the company. Here are four questions to answer before investing in a speculative little cap. 1. How good is management? When it comes to investing in small caps, the leadership team is everything. In young and growing companies, strong executives can turn their potential into profits. But likewise, weak leadership can sink the business before it starts. I want to see a management team with a clear vision, solid track record and the ability to navigate challenges. Start by looking at their background and researching company leaders to measure industry experience, past success, and experience in similar roles. Another important factor is that they manage their money well and need balance sheet needs. Can they allocate resources wisely, or are they burning cash without a clear plan? Should a company continue to sell its stocks to raise cash? Corporate governance also plays an important role. This refers to rules and practices that maintain accountability and transparency to the company. Well-run companies with disciplined governance tend to go well with investors and achieve strong returns. 2. Are there market opportunities for growth? Small businesses tend to focus on niche markets where there is plenty of room for growth. So understanding market opportunities can help investors determine whether the company may gradually expand. These companies could be innovators who could shake up the entire industry. A thorough investigation will allow investors to find underrated companies with potential for growth. Important Questions to Ask: What are the business growth potential for their niche? What are their total addressable markets? Does this company have a clear path to profitability and long-term success? Promising market opportunities increase the chance that small caps will expand and maintain their growth and become a much larger player in the industry. 3. Does the company have a moat? Corporate moats are like their secret weapons. It prevents competitors from bringing their customers to profit. For small businesses, strong moats can either determine whether they have long-term success or be hit by bigger players. A sturdy, competitive small cap is likely to grow and gain market share, and will ultimately turn into a much larger company over time. Some will be major acquisition targets for large companies. A way to find a powerful moat is to look at the company’s market location. Dominate your niche or offer something unique that is difficult to copy? Is their products or services owned? Companies with well-defined market positions are likely to create lasting value and continue to grow for years to come. 4. Are there a lot of analyst reports? In many cases, fewer stocks will be less interested in institutional investors and analysts, making it more difficult for everyday investors to do the right due diligence. Analysts tend to gain deep insight into the company and can provide useful analysis of the health of their business. Some of the information they deserve can be difficult for ordinary investors to find. You may also have your own tools to analyze stock outlooks. But Wall Street often works with a herd mindset. Many analysts tend to have similar valuations on stocks, so when one company buys or sells, others tend to follow. Conversely, if you don’t have much coverage for analysts, you probably won’t be affected by volatility because you don’t pay much attention to the stock. The same idea applies to ownership of institutions, including mutual funds, hedge funds, or pension funds. If institutional activity increases, it could create a large price fluctuation in stock prices, given that these institutions often have large stock trading. 5. What are the company’s funding needs? Before investing in small caps, look for the cash location. Most people don’t have the same access to funds as big companies. This means that you may have a hard time keeping new growth funding and operationalising smoothly, or getting through the tough economic situation. If they provide safe funding, lenders view small caps as more risky, which can cost more. The higher the cost of capital, the more you eat up profits and slow growth. And if a company takes on too many debts, it can put its financial stability at risk. To measure whether the small cap is on a solid financial footing, you should ask a few questions: the cash required by the company and what is it used for? Will funds lead to actual revenue and profit growth? If your company isn’t making a profit yet, when do you expect it to break? (For a full list of Jim Kramer’s Charitable Trust stocks, see here.) As a member of the CNBC Investment Club with Jim Kramer, you will receive a trade warning before Jim can trade. Jim waits 45 minutes after sending a trade alert before purchasing or selling stocks in the Charitable Trust portfolio. If Jim talks about stocks on CNBC TV, he will wait 72 hours after issuing a trade alert before running the trade. The above investment club information is subject to our Terms of Use and Privacy Policy, along with the disclaimer. Due to receiving information provided in connection with the Investment Club, there is no obligation or obligation of the fiduciary. No specific outcomes or benefits are guaranteed.
The trader works on the floor of the New York Stock Exchange on February 13, 2025.
Daniel Devries | CNBC
Club Mailbag email InvestingClubMailbag@cnbc.com is as follows: So we’ll send your questions directly to Jim Cramer and his team of analysts. We cannot provide personal investment advice. We only consider more general questions about investment processes or stocks in the portfolio or related industry.
Question of the Week: How can you find small businesses that could grow into winners? What is the standard for small caps with little or no revenue or sales? Again, I appreciate all the insights. – Kevin
