Years ago, a friend of mine asked me for a stock recommendation or two. “I need to make some money,” he said.
I told him I really liked Texas Instruments (Nasdaq: TXN). “The calculator company?!” he exclaimed. “Yes, the calculator company,” I replied, rolling my eyes.
I explained that while there are still calculators out there with Texas Instruments’ name on them, the company is one of the world’s leading semiconductor makers. And it pays a nice dividend.
He snored loudly, pretending to be asleep.
I then told him about Raytheon Technologies (NYSE: RTX). The government never gets tired of spending money on new toys for the military.
“C’mon, Marc… give me something exciting,” he demanded.
“Okay, how about Digital Realty Trust (NYSE: DLR)?”
I explained that this company is a real estate investment trust that rents out shelf space to household-name companies to place their servers. It generates a ton of cash and also pays a solid dividend.
“Booorrrring!!!” he cried.
Had he invested in those companies, he wouldn’t have thought they were boring at all. Texas Instruments became the second-biggest winner in the history of my monthly newsletter, The Oxford Income Letter, gaining over 450% in 10 years. I sold Digital Realty Trust in 2022 for a more than 220% gain in eight years. Raytheon, now called RTX, is still in the Oxford Income Letter portfolio and is up 792% since 2013.
But my friend wanted something tiny that could really move.
There’s a misperception in the market that low-priced stocks can move faster than high-priced stocks.
Tell that to anyone who bought Nvidia (Nasdaq: NVDA) at $400 or Goldman Sachs (NYSE: GS) for $300 two years ago. They’ll laugh in your face. Goldman Sachs has more than doubled to $760 since then, and Nvidia has more than quadrupled (it underwent a 10-for-1 stock split in 2024).
Still, there is something exciting about owning a lot of shares of a low-priced, very small company. And when tiny companies move, they can move fast.
Look at RedCloud Holdings (Nasdaq: RCT). It was trading between $1.40 and $1.70 in June of this year. But by July 1, it had tripled to $4.29.
PepGen (Nasdaq: PEPG) recently doubled – from below $2 to over $4 – in just a month.
And Dominari Holdings (Nasdaq: DOMH) skyrocketed nearly 13X, rising from $1 to $13, from mid-January to mid-February.
That’s the kind of action most people who get involved in microcap stocks are looking for.
And there’s nothing wrong with that as long as you know the risks and position size accordingly.
Many investors don’t know this, but you can also find microcaps that pay dividends.
For example, Kimbell Royalty Partners (NYSE: KRP) has a market cap of just $1.4 billion and yields almost 12%.
And $30 million market cap Crown Crafts (Nasdaq: CRWS) sports an 11% yield.
That brings me to another point: Microcaps don’t have to be startups that have recently gone public or are involved in Bitcoin or some other speculative technology.
Crown Crafts makes baby furniture and has been around for almost 70 years.
I tell investors that when creating a portfolio, they should diversify into various sectors, geographies, and market caps. There are times when large cap companies outperform and other times when small cap or microcap companies are better.
No doubt, my buddy was looking for one of those microcaps that are about to take off. Everybody is. And it’s okay to invest in these types of companies.
In fact, I recommend that investors include microcaps in their portfolios so they have exposure to these small companies that can double or triple in a short period of time in some cases and fly under the radar in others.
Just be sure you know why you’re buying a stock, and have an exit plan (like a stop) set up ahead of time. This ensures that you will sell if things change or grab profits when it’s time.