The Nano-Cap Gold Mine

Nano-cap stocks have much more potential than their larger-cap counterparts. This is because there are lucrative niche opportunities available to the nano-caps that the larger-cap stocks simply can't get involved in. These smaller niches are not profitable enough for them. As a result, a nano-cap can triple and quadruple its market size in the same time period that a larger-cap stock takes to grow 20%.

CAREFUL ANALYSIS REQUIRED

You may have heard people conclude that it's better to invest in lower-priced stocks than in higher-priced stocks. Of course, the argument follows that a one dollar increase in a company whose stock you bought at $2.00 (SmallCo) is a 50% return, yet a one dollar increase in a company whose stock price was $50.00 (BigCo) is only a 2% return. So, it stands to reason, the lower the stock price, the greater the potential gain, right? Well, it's not that simple. To limit your decision-making to price only would be very irresponsible and dangerous. Without a careful analysis of the stocks you plan to buy, any investment may turn out to be a major disappointment.

You may be surprised to know that many investors — or if you prefer, day-traders — do not know anything about the companies they put money into. They speculate on rumors and trends and then buy and sell the stock on troughs and peaks. They may do this many times during the same day. This is not investing. Investing is making an informed decision based on the facts, not hype, then buying and holding the stock until it reaches your target price.

RISK VS. REWARD

Investing solely on the basis of stock price is dangerous because it does not take into consideration any measure of risk. It may be the case that BigCo is much more stable and far less risky than SmallCo. However, the opposite could also be true. You must consider the risk vs. reward tradeoff. This decision will be a personal one, since every person's measure of risk tolerance is different. Different financial situations and levels of individual wealth make a person more or less indifferent to various levels of risk.

Minimizing risk comes from looking at a number of factors such as the management team, the company's business plan, the company's products, and industry-specific factors such as market size and projected growth. Knowing and understanding what the company does and how it does it is vital. Beyond that, you must understand what the chances are for the company's success in its target market environment and how much growth is available for the company and industry.

LARGE E-LEARNING COMPANIES

Looking at the e-learning industry, we find many companies have solid management teams, business plans and products. The biggest companies tend to target big-ticket consumers seeking online degrees. Large companies can't even look at market opportunities available to smaller ones because there is simply not enough money in it. Big players have to focus more of their resources on larger markets to get the best return on their investment. Unfortunately for them, as we pointed out in the article entitled "The E-Learning Growth Fallacy", the government projects that the market for higher education will grow at snails pace of 2% during the next eight years. If this proves true, these companies will grow far below their projected growth targets, and the stocks will suffer as a result. For this reason, investing in larger e-learning companies may not be a wise idea.

E-LEARNING NANO-CAPS

The smallest players in the industry tend to focus on underserved niche segments of the e-learning market. E-learning nano-caps, companies with market capitalizations under $50 million, have their eye on small and highly profitable industry segments such as continuing education, skill-building and job retraining. They have a lot more room to grow in their market niches. With the clever use of niche marketing and specialized targeting, nano-caps can triple or quadruple their market values in the same time it takes a larger-cap to grow 20%. This is possible by virtue of the nano-cap's smaller relative size.

Nano-caps generally fly under the radar and are not noticed by the industry while they are becoming established and rapidly growing. In contrast, larger-cap stocks face greater competition, since they are bigger targets. Don't just buy nano-caps because they're cheap. Don't shy away from them either. You have to know something about what business they're in. Take the time to investigate nano-caps and look at the potential each has in its industry. There are plenty of bargains out there for the savvy investor.