17-Apr-2020: 1:01pm: A lot of fund managers have to stay away from smaller companies because of the lack of liquidity - not enough buyers and sellers, not enough volume, and particularly when there are gaps between the bids and offers. Some refer to them as "Lobster Pot Stocks" because they're easy enough to get into, particularly if you're patient (or hungry), but hard to get out of when you're in a hurry. The gaps are not just between the highest bid and the lowest offer (the spread) but are also often between the individual bids and the individual offers. This can cause some massive price spikes - and drops - on no news at all. Case in point - 8CO is up +34% as I type this straw - on no news. Why?
Well, there are some mitigating reasons:
- Sentiment has improved today because the DOW futures are maxed out on the upside (up 800+ points) due to a promising coronavirus drug treatment from Gilead. It has been reported that a group of coronavirus patients participating in a drug trial were seeing "rapid recoveries" in coronavirus fever and respiratory symptoms, which sent shares in American biotech company Gilead Sciences up 10% and the futures surging, shortly after the US market closed. That has translated into a very positive day on our market as well.
- While 8CO is up +34%, that is actually only +1.7 cps (less than 2 cents) from 5 cps to 6.7 cps.
- 8CO was trading at between 16 and 18 cps in May last year, and at over 10 cps in January this year, so they're just regaining some of their recent losses, some of which are clearly COVID-19 losses - which saw them smashed down to as low as 4.5 cps - and they're just climbing off those lows now, whereas some companies have already rebounded quite a lot. 8CO has just taken longer for the recovery to get started.
- Today's move has been made with just 5 trades that together are worth a total of less than $5,000 ($5K), so the move has been on low volume.
- The current highest bid is at 5.9c and the current lowest offer is at 6.5c, whereas the last traded price was 6.7c. If somebody placed a trade now to SELL only $600 worth of shares "at market" (i.e. not a limit trade), the share price would drop -17.9% just on that trade - from 6.7c down to 5.5c. The second highest bid is at 5.5c and the higher bid at 5.9c is for only 8,500 shares - worth only $501.50. This demonstrates just how much a very small trade can move a share price in percentage terms when a company has this sort of liquidity (or lack of).
What can we learn from this? Well, for one thing, that there are often great opportunities to buy shares in these sort of companies at very low prices when sentiment is very bad. However, the flip-side of that is that it can be very expensive if you need to get out of one of these companies in a hurry. In summary, there's often money to be made in low liquidity companies, but they are really only suitable for private retail investors who tend to take smaller positions (than fundies) and they are also really only suitable for money (investable capital) that won't need to be called on rapidly - so money that can be parked in the stock for a considerable period of time.
As an example, don't invest your kids' university education fund money into stocks like 8CO when they're in high school. Although, it might be OK if they're pre-school age.
The other issue is there's often a higher risk of permanent loss of capital with such companies, because they tend to be at the higher end of the risk spectrum anyway, so you might be better off putting the education fund money into something a lot more solid (perhaps a high quality LIC or ETF) and using your own play money for companies like 8CO. The biggest gains - the multi-baggers - usually come from this end of the market (the very small end), but so do most of the 100% losses. Invest in them by all means, but know what you're getting into - it might be a lobster pot.
Disclosure: I don't currently hold 8CO, but I do hold a number of companies that have very similar liquidity profiles (i.e. very low liquidity).
8CO is on my Strawman.com scorecard.
