I earned a 24% return in 2014, investing solely in microcap stocks

In 2014, I achieved an internal rate of return of 24%. I use the XIRR function in Excel to gauge my return, because it places more weight on returns achieved on larger amounts of invested capital. In 2014, I added money as the year went on.

Am I happy with this 24% return? So-so. The annualized number was significantly higher in September/October, so the end of the year left a bad taste in my mouth. 2015 is off to a nice start.

The S&P 500 returned something like 13% or 14% including dividends in 2014. The iShares Russell Microcap Index ETF (IWC) returned maybe 4%, including dividends again.

My returns were achieved with 100% microcap stocks (sub-$300M market cap). Although I didn’t buy a single non-microcap in 2014, the only stock I have bought so far in 2015 is a small-cap: Atlas Energy LP (ATLS). I like this idea a lot, especially with oil being so beaten down. Denver Smith succinctly summarized the ATLS opportunity in Who Cares If $50 Oil Is Here To Stay? Atlas Is Being Acquired.

As 2014 went on, I got riskier, dabbling partly in penny stocks that I once viewed as a no-go zone. Fortunately or unfortunately, the strategy was not a total bust. I made 80%+ in Hannover House (HHSE) in about two weeks. I did pretty well “investing” in Big Screen Entertainment Group (BSEG). The second time I tried to play it, I got burned, but I still made money overall. And NightCulture (NGHT) was one of my worst moves of the year. I think I lost 35% or so in this one.

The path of investing

The path of investing

There is a lot to be said for owning stocks that allow you to sleep at night, and anything that I classify as a “penny stock” does not clear that hurdle. A penny stock to me is like what the general public envisions when they hear the term “penny stock”. A microcap stock would be mistaken by the public to be a penny stock, but in fact it is not, because it has a quality of integrity or legitimacy that the pennies do not.

Xpel Tech (XPLT) is a great example of a microcap stock that I did well in, in 2014. I bought it over the summer at $2.30 and sold late in the year around $3.50. Greystone Logistics (GLGI) is a microcap stock that became a thorn in my side towards the end of the year, when results declined markedly. I had way too big a position in Greystone, buying in the low $0.40s, riding it up to $0.60, and then riding it all the way back to below my purchase price. I only managed to sell a handful of shares for a profit, and just sold the last of my shares this morning in the low $0.30s.

A move that I made later in the year that put a big dent in my return was buying Petroamerica (PTAXF). I’m down 40% or 50% on this Canadian oil producer operating solely in Colombia. I have almost sold it several times, but I do not want to be that guy who sells at the bottom. More than that, I feel like oil is presenting an attractive opportunity now. Petroamerica has a safe balance sheet and should ride out any correction.

I played Innovative Food Holdings (IVFH) well and bought and sold it four separate times, always for a profit. For a while, anyway, it was trading really erratically but kind of predictably at the same time. Regularly it would trade some shares way below where most of its volume was, and I kind of picked up on that and was able to do well there. I do wonder if it is done playing around in the lower $1s for good now.

Over the year, I probably made 35 buys and 25 sells, something like that. My portfolio now is made up of about ten stocks, so that is a pretty frequent turnover rate. In 2015, I want to get my holdings down to eight or less stocks. I think there is a lot to be said for the adage that it is hard to keep track of many more stocks than that.

Good luck to everyone in 2015. Always do your own due diligence.

Nat Hunt

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