Microcap Stocks: Why You Should Diversify Your Portfolio

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 is up more than 570% since I recommended it. Raytheon is up 480%. And I recently sold Digital Realty Trust for a more than 180% gain.

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 Tesla (Nasdaq: TSLA) for $100 in 2020 or anyone who bought MercadoLibre (Nasdaq: MELI) for $500. They’ll laugh in your face. Tesla quadrupled just two years later, and MercadoLibre traded as high as $2,020 less than a year later.

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 Rigel Pharmaceuticals (Nasdaq: RIGL). It was trading at $0.64 on June 13, 2022. Nine days later, the stock had doubled.

Tiny Blue Dolphin Energy (OTC: BDCO) was trading at $0.39 on May 10, 2022. Less than a month later, it hit $2.38.

And Trevi Therapeutics (Nasdaq: TRVI) was at $0.46 in February 2022. Less than two months later, it tagged a high of $3.73.

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 billion and yields more than 12%.

And $58 million market cap Crown Crafts (Nasdaq: CRWS) sports a 5.6% yield.

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 66 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 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 to 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. Ensure that you will sell if things change or grab profits when it’s time.

These small stocks can be volatile, and you don’t want to be wondering what to do as the stock is bouncing all around.