Sharing a lot of characteristics with the “Ultra Low Market Cap” red flag, looking for companies with a close of less than 2 gives you a number of companies whose market cap ranges from Micro to Small. These companies tend to have extremely poor fundamentals and also have a high probability of causing negative returns in your portfolio.
For this flag, we collect all companies who have a close of less than two at the time of screening. Now, a lot of marketers will try to sell you the idea that you can make your fortune on these low priced stocks. In some cases, that ends up being true. But in the majority of cases, you’re going to be stuck with a failing company without enough volume for you to exit the trade when you need to.
Now, all red flags in our system must follow a couple of simple rules. The first rule is simple, that the strategy must lose money over the defined period—in this case, from 2000 to today. In the case of “RawClose < 2” we have successfully lost money most years. Now, there was a small spike during the dot com bubble throughout the year 2000, but that was quickly corrected as the strategy went from +200% to -50% over the following two years.
The other major requirement for our red flags is that more than 50% of all positions taken on during that time frame must lose money. In the image above you can see that we have a loss rate of just over 60%. So if you wanted to make money over the past seventeen years, you would have needed to successfully pick the 1156 companies that made money in that timeline. This doesn’t seem too hard, but it becomes a much bigger challenge when you made just fewer than 3000 trades over those seventeen years. It’s probably also just smarter to stay away from these companies altogether.
In the above scatter plot, we have plotted the market cap of all companies taken on by this flag and compared them to the total returns made by that position during the duration of the trade. The majority of the companies returned had a market cap of under $500m which was to be expected. There were obviously some big winners – with some companies returning as much as 400%. However, the majority of the trades are located in the bottom left-hand corner of the chart. This densely populated area is full of companies that have lost money throughout the trade.
You could likely find parameters that found the best performing low priced companies, but when the majority of companies that have a price of less than $2 lose money, is it worth the risk?