Why Volume is fundamental in Microcap Investing?
By nature, both of us are pure fundamental long-term investors and do not look at technicals at all but when one is a microcap investor, volume unfortunately becomes a fundamental factor. We share 2 interesting cases where volume has been a superhero or supervillain for us in the short term. Two of these examples are from stocks shared in our blog earlier.
The takeaway from this is one has to befriend volume to really be in the microcap game.
Example 1 - Our undervalued Steel company
Yesterday the company hit a 52-week high and has been hitting multiple consecutive upper circuits.
Has something fundamentally changed? No, but from our assumption one buyer who simply discovered the story and sees what we see wants to acquire shares worth essentially a crore odd rupees has run up the price. The quantum traded in that period of consecutive upper circuits over 6 odd sessions would be just 30-40 lakh rupees! The same company had poor results last quarter and got stuck in ESM and there were only sellers and no buyers and this was just a couple of months back. We did take advantage and acquired volume then. In microcap investing, if one has to buy especially in companies in the sub 200 crore range market-cap one has to buy against the tide because removing promoter and other holding more often than not the free float is very low, and if the story is discovered you won’t get a chance. We don’t worry about volume during selling because we hope that when the time to sell comes our thesis plays out and the company is larger and hence volumes to sell support.
Example 2 - Our Infrastructure business as a Listed Startup
In just 3 months the company has doubled and hit its 52-week high yesterday and we still believe it's a long-term hold. Here also volume is a big reason for the up move. 75% of the company is owned by promoters, 7%+ by a single domestic investor. Even though the company is now at 500+ crore of market cap the free float post the promoters and the big investors would essentially be in a single digit of total shareholding. Our eyes still glitter when we find a potential microcap with 70+ % promoter holding for this reason that if and when the story plays out the initial up move is exponential due to the low volume available.
Key Takeaways:
In microcap investing one has to buy before the story is fully discovered or with semi-complete information as more often than not once fully discovered it’s almost impossible to get good volume.
Volume can be your best friend or enemy and is super important to track if microcap investing.
If your thesis plays out by sheer volume shortage you may see a 2x in a short term but if it plays out negatively you can see a 50% haircut also the same way!
We want to emphasize that this communication should not be misconstrued as a recommendation, as we are not SEBI RIAs. It is crucial for readers to conduct their own due diligence and exercise caution.
Therefore, we urge all readers to approach this opportunity with prudence and carefully consider the potential risks involved. While the prospects appear promising, it is essential to maintain a cautious approach and stay informed of the inherent dynamics of the industry.
Happy to chat and discuss this in detail
About Us -
Govind Shorewala - Entrepreneur (Mining, Textiles) & Investor (Private & Public Markets) → Reachout at: govind.shorewala@gmail.com
Aaroah Mittal - Early Stage VC → Reach out at: aaroah.m@people-group.com