Small investors have an advantage over big hedge funds and other professional investors: They don't have as much money.
Why is not having much money an advantage? It allows us to invest in stocks that large investors simply cannot touch because of lack of liquidity. If a stock only trades $50,000 worth of shares a day, a even a relatively small $50 million dollar hedge fund would have to buy all of the shares traded for two weeks just to allocate 1% to the stock, and would have to do the same if it were to sell. As you can easily imagine, that would send the stock price rocketing (or plummeting when the fund sold), and remove much potential for profit.
If the big funds can’t buy a stock, they’re not going to spend any time researching it. Likewise, analysts, who make their money selling their research to large investors, are not going to research it either. With professionals out of the picture, it’s relatively easy for a small investor to gain an informational advantage: We just have to dig a little deeper than others. The fewer investors who are paying attention, the easier that is.
That’s not to say that all (or even most) illiquid stocks are a good buy. You still have to do some digging. Yet unlike with more widely followed companies, the stock price can occasionally be much less than the value of the company, especially if that value is not yet shown on the company’s books.
A Very Illiquid Stock
Which brings me to Power REIT (NYSE:PW.) The stock’s average daily volume is about 1300 shares, or only $10,000. With a market cap of $13 million, if a $100 million dollar hedge fund tried to allocate just 1% to PW, it would send the price skyrocketing as it attempted to purchase as much stock as normally trades in five months. The fund would also end up owning over 5% of the company, becoming subject to extra restrictions on trading and disclosure.
With a stock this illiquid, even small orders of a few hundred shares can move the price five to ten percent, so it’s best to use limit orders to make sure you’re not paying a lot more than you expected. Even limit orders will move the price over time, however. That said, the current stock price of $8.10 is more than justified by the current 4.9% annual yield alone. Which means the large upside potential I’ll discuss below is essentially free.
What Most Investors See
I mentioned Power REIT in my recent article on the possibility of Solar REITs, as well as profiling the company earlier this year. I think the comments I’ve received are indicative of what most small investors see when they look at PW:
Personally, I consider a 5% yield attractive in the current interest rate environment, but it’s the litigation with Norfolk Southern Corp. (NYSE:NSC) that provides the opportunity to dig deeper than most other investors have.
According to Power REIT’s recent quarterly report and court documents, the substance of the litigation is this:
Payment of Legal Fees