My grandfather always had a sharp eye on my career.
In my newspaper days, he would always ask about a story I was investigating or a sports team I was covering at the time. We would talk for hours.
When I switched to finance and the markets, he was always curious about how things worked — what made stocks move and what we look at when talking about companies or the economy.
He read all of our essays. One day, before he died, he asked me about how the size of a company affects its daily stock market moves.
I was thinking about that last week while writing about some of the biggest post-crash stock recoveries of the last 20 years.
I wanted to know what recent stocks soared after a crash.
So that’s what I’m doing today…
I found a “cheap” stock — meaning one that’s priced under $5 for this example — that rocketed higher after the 2022 bear market.
The TALK of the Town
After running some screens, I found a stock priced under $5, which has moved significantly higher over a short period.
Talkspace Inc.’s (Nasdaq: TALK) technology platform connects patients with licensed mental health professionals.
It offers therapy options for individuals, couples and teens. It can even connect patients to psychiatrists to prescribe medication when needed. And this can all be done through its innovative online portal instead of driving to another appointment.
TALK investors have been incredibly bullish on the stock since last March…
In March 2023, the stock was priced at $0.62 per share. TALK moved up to its recent high of $2.61 last week — a 320% jump in just 10 months!
I mention TALK not because I think you should run out and load up on the stock — although it does carry a “Bullish” 61 overall rating on Adam’s proprietary Green Zone Power Ratings system — but to show you just how fast these sub-$5 stocks can move.
Here’s What I Told My Grandfather
When my grandfather asked me why size mattered in the stock market, I echoed something Adam told me years ago…
First, there is nothing wrong with having mega-cap stocks in your portfolio. Apple Inc. (Nasdaq: AAPL) and Amazon.com Inc. (Nasdaq: AMZN) are good companies with strong track records.
But these massive companies have a harder time beating the market over the long term.
That’s because buyers and sellers determine stock prices. Prices go up when there are more buyers than sellers, and they fall when the opposite occurs.
When you have a market cap measured in trillions, there has to be a lot … and I mean a lot … of buyers willing to pile in cash to move the price by a significant factor.
But when you have a smaller market cap … say, almost $370 million like TALK … it doesn’t take nearly as many buyers to move the needle.
That’s not to say that AAPL or AMZN can’t post strong gains, but it will take a lot longer than 10 months to hit that 320% mark. In the last 12 months, AMZN has gained just over 62% while AAPL is up 36%.
Bottom line: Adam had another piece of insight about size … the bigger a company gets, the more natural it is for its growth to slow.
In addition to his research, academic literature supports the idea that smaller companies outperform large companies, in aggregate, over the long run.
That doesn’t mean you should load up your portfolio with small-cap stocks. Turning your back on large stocks would be silly.
But it’s this kind of research that prompted Adam to develop a trading strategy based on small-cap stocks (especially the $5 variety).
This is a unique opportunity to get in on a strategy that Wall Street isn’t paying any attention to.
Until next time…
Matt Clark, CMSA®
Research Analyst, Money & Markets