Enormous wealth has its downsides. Small investors like you and I can build game-changing wealth in stocks no billionaire would ever touch.
We asked three Foolish investors to share some of the best names that Warren Buffett and George Soros wouldn't or simply couldn't trade. Read on to see how CorEnergy Infrastructure Trust (CORR -0.93%), Magic Software Enterprises (MGIC -3.59%), and Geron (GERN -0.88%) fit that bill.
The little software-building company that could
Anders Bylund (Magic Software Enterprises): You won't find a whole lot of interest in Magic Software Enterprises from deep-pocketed investors or the largest mutual fund managers. The company is simply too small and too thinly traded to move the needle for an investor with huge assets.
To wit, the provider of software development and marketing solutions sports an average trading volume of less than 48,000 shares per day. Trading at roughly $8 per share, that works out to a daily dollar volume of roughly $385,000. That's small enough that individual investors can wield enough capital assets to account for more than 10% of the daily volume in a single trade. It's also small enough that a million-dollar buy or sale would soak up several days' worth of current orders, with market-moving results.
Add in Magic Software's relatively small market cap of $360 million, and you'll have a complete set of big-money handcuffs. This is a thinly traded small cap, best left to smaller mutual funds or individual investors for the time being.
Only 5% of Magic Software's shares are held by insiders and very large shareholders today. The largest mutual fund holding is a 0.7% stake held by the Westcore International Small Cap Fund, for a grand total of $2.1 million. The largest owner overall is a hedge fund called Denver Investment Advisors, whose entire asset base adds up to just $2.2 billion.
Of course, none of this matters unless Magic Software qualifies as a stock worth investing in. In my view, it's at least worth a closer look by growth investors. The Israel-based company's shares are trading at a very reasonable 13 times forward earnings. Those earnings are expected to increase by 17% next year and an average of 14% over the next five years. Don't back up the truck to invest your life savings here, but Magic Software could be a quiet little winner over the next few years.
This small-cap clinical-stage drug developer appears ripe for the picking
Sean Williams (Geron): Clinical-stage biotech company Geron could be an intriguing stock for investors to consider, and it's certainly one that'll stay off the radars of billionaires.
To begin with, it's a small-cap company with a $457 million market cap. Most billionaires prefer to buy larger companies and often view small caps as risky, volatile, and unproven. Second, Geron's share price is less than $3, which is a level often associated with risk and volatility. And finally, Geron is a wholly clinical-stage drug company, which means there's potential for wild share-price swings, and the need for investors to stay on top of clinical data. Most billionaires, including Buffett, simply don't have that kind of time to devote to keeping up with clinical trials.
However, billionaires' loss can be your gain. Geron has but one compound in clinical development, imetelstat, as a treatment for myelofibrosis (MF) and myelodysplastic syndrome. But this one compound demonstrated jaw-dropping results in early stage clinical trials for myelofibrosis a few years back.
Previous therapies targeted at MF have focused on the symptoms caused by the orphan disease, such as enlarged spleen and anemia, and done absolutely nothing to slow or halt disease progression. Imetelstat, however, demonstrated both partial and complete responses in MF patients, suggesting that it could become the standard of care in treating MF. The lone Food and Drug Administration-approved therapy on the market specifically for MF is Incyte's Jakafi, and it's on track to generate around $1.05 billion in sales this year at the midpoint. That $1.05 billion could almost entirely be imtelstat's if it excels in ongoing studies.
Geron also isn't navigating the development of imetelstat alone. It's partnered with Johnson & Johnson's (JNJ -0.37%) subsidiary Janssen Pharmaceuticals. Geron and J&J worked out a deal worth as much as $935 million in 2014, which netted Geron $35 million upfront and gave it the opportunity to earn $900 million in various development and regulatory milestones. It's also entitled to a handsome royalty on net sales of imetelstat, if approved. Considering how versed J&J is in bringing new drugs to market, Geron may be able to sit on its laurels if imetelstat is approved, push its costs down substantially, and bank significant profits based on royalty revenue. It is also possible that J&J could just choose to acquire Geron if imetelstat is a success.
Billionaires won't be going anywhere near Geron, but it could be ripe for the picking for biotech-savvy, patient investors.
An income growth stock you won't want to miss
Matt DiLallo (CorEnergy Infrastructure Trust): Billionaire investors tend to avoid smaller stocks because they'd need to buy an outsized stake in the company for it to make a meaningful difference in their portfolio, which alone could move the stock. Because of that, most uber-wealthy investors would likely avoid buying CorEnergy Infrastructure Trust, as its current market cap is less than $400 million.
However, just because most billionaires wouldn't bother with CorEnergy Infrastructure Trust doesn't mean you should avoid this high-yielding energy-focused REIT. That's because the company offers investors an eye-popping yield of nearly 9%, with plenty of upside potential as it buys additional assets.
Supporting that payout is a growing portfolio of mission-critical infrastructure properties that it leases to customers under long-term agreements, which provide the company with stable cash flow. While the company endured a period of uncertainty during the oil market downturn after two large customers went through bankruptcy proceedings, CorEnergy's leases survived untouched.
Adding further stability to its payout is the company's conservative payout ratio, which has averaged around 75% of its adjusted funds from operations over the past year. Finally, CorEnergy has an excellent balance sheet, evidence by a low debt-to-capitalization ratio of 24%, which is below its 25% to 50% target range.
Because of its healthy dividend coverage and ample financial flexibility, CorEnergy Infrastructure Trust has the capacity to make a couple of acquisitions per year going forward, targeting deals in the $50 million to $250 million range. Given its small size, these deals could be needle-moving, potentially providing the company with the ability to grow its already generous payout at a brisk pace. That combination of income with upside makes CorEnergy a compelling stock to consider, even if it's too small for most billionaires.