Yep, it’s not fun to watch to watch my account fall. I had grown the account up to just a bit over $100,000 (by dollar-cost-averaging $240/week) over the last three and a half years. I started out with ZERO. You can read more about my process here.

This article about what has happened with the NASDAQ provides a nice summary. We have seen rising interest rates (especially the highly watched 10 year treasury reaching 1.75%) hurting smaller companies, with the rational that they need to borrow money more than larger companies and this will hurt their performance.

Also, there has been a rotation out of the high growth tech stocks and more into the cyclical stocks and financial stocks.

Take a look at how my core stock holdings have performed against the Nasdaq index

This chart shows the relative performance of my core holdings against the NASDAQ, from it’s peak back in February 2021 up until March 26th, 2021.

The Nasdaq is down 6.08% (the green line)

• OIIM is down 17.95%
• BHAT is down 13.5%
• GNSS is down 1.75%
• SMSI is down 25.16%

Why am I continuing to hold through this dip?

First of all, I’m in these stocks for the longer term. Sure I watch them every day and it sucks to see this decline.

The fundamentals are strong

The main reason I continue to hold is because of the fundamentals.

• These companies are profitable. They actually have earning… income left over after all of their expenses. How many super small, micro-cap companies can say that? Amazingly, this is relatively rare for a micro-cap stock.
• Their sales growth rate is booming, or starting to boom. A year from now, two years from now, the current level of sales is going to be small compared to the future.
• All of these companies have solid balance sheets….tons of cash in the bank, and hardly any debt. They have no problems weathering a sales slowdown (and as I mentioned, that’s not happening).
• I entered positions in each because there is a unique story behind each holding, with a common thread…they have a catalyst a story that is so compelling that the company is practically unstoppable.

If I entered these stocks simply because of the technicals, I would have sold. If I was a trader, who simply looked at the chart and didn’t know anything about the company beyond the ticker symbol, sure, I would have been shaken out of my holdings!

I would have sold – no doubt.

I can guarantee you that I would have done this…because I have.

I’m not a trader anymore

See, when I was actively swing trading, I sold companies that violated a key technical area…where no matter what, if a stock reached a certain price point, I would get “stopped out”. I was out of the stock…looking for the next setup. The next trade.

Often, in the future… perhaps months down the road, the same ticker would come up on my stock screens and it was WAY higher. I would look at the fundamentals, read the news and find out that “Wow, this company would have made a great investment!”. That was frustrating, but again…I wasn’t focused on that at the time…after all, I consistently told myself, “I am a trader”.

No joke, I literally would tell myself, particularly after rough patch of consecutive losses in a row:

“I am a trader”

Trading can be mentally tough. Every day, even every hour, the “should I buy”, “should I sell” conversations in your head is mentally draining…at least it was for me.

I would tell myself that I was a trader to force myself to keep at it after a rough patch, especially after I had been shaken out of a position at a loss.

When you don’t know the story behind a company’s fundamentals, it’s business, it’s catalysts…and it declines, you sell. You get scared out of your position.

FOR EXAMPLE:

At one point (early 2017) I specifically remember selling SHOP and APPS when I was trading (holding them for just a few days) …not for long term holds. Just look those stocks now – PAINFUL.

I should have held…right?

But when you know that longer term, the company will likely be higher because it is doing so well, it makes it easier to hold on through the dips.

That is where I think I am now. I know that these companies are solid. I know their business is doing extremely well. I know they have tons of money in the bank and owe very little debt (if any). So when they dip as they have, I hold, knowing that nothing has changed, except the price.

Actually, there is something that is changing:

• Their sales numbers are increasing
• The earnings (net profits) are increasing

Which brings me to another subject…multiple expansion/compression

Multiple expansion and compression

Multiple compression is when a key ratio, such as Price to Earnings (P/E) declines. Another ratio could be Price to Sales (P/S) ratio.

The ratio(s) can decline if the price or the sales (the numerator on top) goes down and the earnings or sales (the bottom number: denominator) stays the same or increases.

So if a stock declines in price from (in a day, a week, month) and the earnings per share stay the same (the bottom number will stay the same until the next quarter’s earnings are released), the multiple has compressed. Or, let’s say earnings came out and the next day the stock price didn’t really move significantly at all…that’s also multiple compression – the ratio declined.

Let’s take a look at one of my holdings: OIIM.

• They had diluted earnings per share of $.21 cents. Going back to 3/14/21, the closing price was $8.45. The P/E ratio on this day was 40.23 (8.45 divided by .21)
• Their stock price closed yesterday (3/30/21) at $7.34. The P/E ratio is 34.95 (7.54 divided by .21).

That is earnings multiple compression. It shrank.

I like to also look at sales. Sales numbers are less volatile (up and down) and harder to manipulate. As a company, you either sold a product or you didn’t. As you work your way down the income statement, there are tons of expenses coming out, accruals, assumptions, reserves, taxes, etc. The numbers quarter to quarter, even year to year can take sharp swings, sometimes a temporary hit.

Take a look at this table and look at the P/E ratio and Price/Sales over time:

You can see how wildly the P/E changes when compared to sales.

Notice that the Price/Sales ratio has steadily increased (and it has for several years), with a recent dip. The P/E ratio has also taken a dip on this table. On a side note…notice the multiple expansion overall though…as price continues to climb as others are starting to recognize the growth story behind the stock.

In any case, the multiples have compressed because the price has declined.

But how much lower can the price go?

OIIM is rapidly growing. It’s sales are bursting through the roof and is profitable, so earnings and sales are rapidly increasing. If the price stays the same or declines, the ratios will continue lower. At some point there has to be a floor as the denominator on the bottom (earnings and/or sales) increases to the point where the multiple (the ratio) gets to such a low that it becomes a huge value. It won’t be a low value for long. The price will have to recover and/or stay the same.

Price today reflects not just the current state of the company but expectations for the company’s prospects. The prospects are quite good. I believe OIIM and my other core holdings have declined because they are being dragged down by the overall market.

The stocks that I own are growing in sales and earnings faster than the overall NASDAQ market. If there is overall ratio compression with the market – fine. My stocks will decline for a bit or just languish, unchanged.

But as we continue forward, and if the NASDAQ (or tech/small cap stocks) experience multiple compression, my holdings at some point are going to find a floor and can’t stay too low for too long, otherwise they will become ridiculously cheap. I don’t think they will get that cheap…we’ve likely seen the floor (I hope).

That’s why I’m not selling right now.

Glenn