Efficiency Market Theory (EMT) dictates that all publicly available information should be priced into a company’s share price. However, EMT has flaws in my small-cap and micro-cap hunting ground, otherwise I would not be able to regularly flag up market mispricing investment opportunities.
For instance, there can be a lag between a company making an announcement which has positive implications on its earnings and the market reacting. One explanation is that small-caps are under researched, so investors are reliant on a paucity of broker coverage. Furthermore, sometimes analysts hold back upgrading their numbers until a company releases financial results, so although we are guaranteed upgrades then only investors closely following its progress are aware of this fact. Exploiting information voids is a strategy I adopt because it de-risks the investment, and can deliver attractive risk:adjusted returns in a short time frame, too.
A good example is Venture Life (VLG:92p), a developer, maker and distributor of products for the self-care market, that is set to release a pre-close trading update in the coming weeks that will undoubtedly lead to earnings upgrades as I highlighted (‘Exploiting an earnings upgrade opportunity’, 10 August 2021). It’s not an isolated example either.