I am always on the lookout for up and coming small and mid-cap stocks, because I know from my own trading statistics that the majority of my profits are generated from this space. Whether it is an individual company with its own set of unique fundamentals or a broader market thematic that creates a boom, I am constantly monitoring hundreds of stocks waiting for the right opportunity.
Before I start discussing my latest favourite stock, it is important that I emphasize my number golden rule I have when trading small caps and mid-caps. Here it is: it is almost always the case that small caps and mid-caps never make the transition to large caps. In fact quite often, small caps struggle to maintain even mid-cap status. I have this rule because of two main reasons; firstly, I was once burned on riding a stock from small cap to large cap and then all the way back down to a small cap again because I fell in love with the fundamentals and management’s lies. The second one is from almost 25 years of trading experience in global markets around the world, having seen how many “hyped” companies fail to deliver long-term.
Since I adopted this rule in my trading two decades ago the volatility, drawdowns and overall risk in my returns dropped sharply and the consistency of profits (and keeping them) skyrocketed. So it is important that readers know irrespective of what the stock is below the intention will always be to buy, ride the trend, enjoy the gain and take the profits!
Zoono Group (ZNO) is a small cap company that has developed an antimicrobial molecule that bonds to any surface and creates a layer of protection that kills bacteria, viruses, mould etc that comes in contact with it. The coated surface stays protected for an extended period of time depending on its application but it can be from anywhere from 24 hours to several months. The agent can be added to sprays, paints, sanitizers, dips and is non-toxic and environmentally friendly. Actually its toxicity is the equivalent of Vitamin C and independent laboratory tests across the world have supported the company’s claims.
ZNO has a variety of products with one of the more interesting ones being its hand sanitizer, branded Stayzon that has recently been added to Woolworths’ shelves. The sanitizer continues to kill germs after a single use, for 24 hrs. Sounds like the perfect sanitizer for my children before I send them off to school in the morning! This single product is being distributed through Amazon, CVS Healthcare outlets and Walmart in the US and shortly into China.
The company using the same molecule has other attractive products that can be added to hard surfaces to give protection from bacteria and germs for up to 3 months. Ideal applications would be anywhere with high human or animal traffic, so think hospitals, daycare centres, restaurants, schools, airplanes, toilets etc. ZNO products have been proven to be highly effective against a wide variety of pathogens including E.Coli, swine flu, Listeria, TB, H1N1 flu virus and MRSA (staph infection).
How does it work? Well according to the company it uses physics rather than chemistry to destroy bacteria. The molecules when bonded together on a surface create a series of “spikes” like road spikes that instantly destroy bacteria or pathogen like a pin popping a balloon – see below.
So we have a company with a great product with many applications and is FDA and EPA approved. Its distribution paths are expanding and along with sales in the US, it recently has signed a distribution deal in China. Remember this is the country that is crazy for Australian/NZ products and has sent the shares prices of Bellamy’s, A2 Milk and Bubs soaring. A fraction of this type of demand out of China would have a serious impact on ZNO.
The company currently has a market cap of just $24 million, with the free float significantly below this. Taking into account 2019 escrowed stock the fully diluted market cap is $64 million.
Now having traded nearly every small and mid-cap stock on the ASX, this situation reminded not only of the potential in the likes of Bellamy’s at $1.60 but also another company called Yowie (YOW) back in early 2014. YOW at the time listed on the ASX with the goal of bringing back old character based chocolates and selling them in the USA. As the company began to obtain distribution deals with the likes of Walmart the share price skyrocketed from 20c to 90c in a matter of weeks as shown below. I did trade the stock during this time and I recall its market cap was initially sub $40 million and near its 90c peak reached circa $160 million. And that was without a dollar of revenue being earned. A great example of where a company producing a consumer based product enjoyed the market pricing in all its earnings potential immediately.
Now, ZNO with a similar market cap but arguably a product with much wider scope and longevity, should, with some early good news easily repeat Yowie’s 2014 performance. That would equate on a fully diluted basis the share price reaching $1.00. A few solid announcements of China success coupled with a tiny free float could see prices well beyond that attained. But let’s not get ahead of ourselves.
The performance of the ZNO share price has been positive with a surge to new highs following its distribution deal in China. I try to almost always only buy into stocks when the bullish momentum is present and we have that here. Even though there has been a move from 30c to 40c in the past few weeks, technical indicators are not near overbought conditions, so there still leaves plenty of room for gains before the stock even looks ‘overheated’.
So while I have concerns over banks, retailers and property prices in Australia there are still many opportunities available within global industry thematics and specific companies. Examples like Lynas Corp (LYC) that I highlighted in August is an example of a global opportunity that has rallied strongly. ZNO here is a company specific example that has the potential to deliver solid profits irrespective of how the broader market performs.