Checking Price versus Market Cap
I often see on chat rooms and bullboards investors discussing small caps with phrases like “but it used to be a 6 $ stock – I’ll buy it and wait for it to get back there”
Should they be looking at Price or Market Cap?
Side note: Here is an overview of Price vs Market cap from Khan Academy:
In some sectors, notably junior mining companies, you need to look at Market Cap (Stock Price * Number of Shares outstanding) instead of share price as a potential upside if conditions return. Every time one of these junior companies does a reverse split it affects the market cap but may not be reflected in the price over time given their nature to fall off dramatically in tough times.
As a note, any company that goes through a reverse split falls for this math so if you think of buying a company because it “used to be a 6$ stock” please look to see if any reverse splits have occurred.
Here is a example of a small Canadian junior gold company that I ran using the www.stockcalc.com website – It hit a high of 12 Million market cap in 2008 and the adjusted stock price at that time was in the 1.20$ range (I say adjusted because as each reverse split occurs in order to have apples and apples the charts need to be adjusted to reflect the splits)
The company is currently trading at 13 cents with a market cap of less than 3.5 million.
Let look at 3 points in time here with the share consolidations accounted for:
Jan 1 2010: Market Cap 5.5 Million, Price 57 cents
Jan 1 2014: Market Cap 1.0 Million, Price 10 cents
Jan 1 2015: Market Cap 3.4 Million, Price 13 cents
From these we can calculate the (adjusted) # of shares as 10 Million each of 2010, 2014 and 26 Million in 2015. The company did a reverse split mid 2014 followed by a number of private placements.
Price – This chart shows the adjusted close prices for the company from 2008 to mid 2015.
Here is a zoomed in version of the price chart
So if we wanted to speculate thinking conditions were going to turn around for this junior mining company, how high could the share price go based on historical values?
If we look at the price chart we see the company would have been in the 50 to 60 cent range during 2010-2011 and may speculate it could return there if gold prices reverse higher. This would be a 4-5 times return compared to the 13 cents currently.
Conversely if we look at Market Cap: after the split Market Cap was 3.4 million. To return to the 5.5 million range we see a 60% return.
i.e if the company returned to full value as expressed by 2010-11 market cap it would only rise to 21 cents, not the 50 to 60 cent range it had seen previously.
Yes it is intuitive, just something to keep on your radar when looking at these smaller stocks.
If you want to explore the Stockcalc software simply create an account at www.stockcalc.com and have a look around. Use the walk-throughs (click the walking man icon), videos (video icon on each page) or the help menu to help understand and navigate the site.