[This piece was adapted from the Grow or Die growth investing Substack, which you can learn more about here.]
The famous Bible tale of David battling Goliath is often misinterpreted, which is unfortunate because grasping the real meaning and applying it to investing can give you a huge edge over most market participants.
Allow me to clarify. . .
Goliath possessed superior size, strength, and equipment. Clad in gleaming armor, he intended to slay David with his enormous blade. David, a mere shepherd boy, eschewed armor and relied primarily on a simple sling as his weapon.
Thus, it stunned all onlookers when David launched a stone from his sling that struck Goliath's brow, felling the giant instantly. It's the quintessential triumph of the underestimated challenger. However. . .
The common perception is mistaken. David wasn't truly the underdog; he was the odds-on favorite! While Goliath may have had physical prowess on his side, he was undone by two critical weaknesses: sluggishness and hubris.
David, in contrast, was agile, clever, and versatile. He leveraged these qualities to vanquish Goliath before the behemoth could even close the distance between them.
Amazingly, this scenario plays out repeatedly in the equities market.
At any moment, scores of overlooked small-cap stocks are poised to outmaneuver their bulkier, less nimble industry rivals and skyrocket in value, much like David's improbable victory. The key is identifying these "David" stocks.
While most investors dismiss these small companies as too diminutive or feeble to topple the Goliaths of their sectors, they possess the same advantageous traits that enabled David's triumph. They're swifter, more agile, and more innovative, often upending the status quo with cutting-edge technology.
Consider Netflix Inc. (NFLX:NASDAQ) as a prime example. Back in 2003, few foresaw that Netflix would decimate the traditional video rental business epitomized by Blockbuster, the Goliath that generated $1.4 billion in operating cash flow from its 8,700 stores.
But Netflix's web-based model rendered physical locations obsolete. Patrons simply streamed films online for a low subscription cost. Unencumbered by thousands of property leases and a massive workforce, Netflix's small size enabled rapid innovation, such as its groundbreaking streaming service launched in 2007.
Combined with sophisticated predictive AI that kept users hooked, Blockbuster couldn't withstand Netflix's onslaught and declared bankruptcy in 2010. Meanwhile, Netflix flourished, delivering massive returns to early investors. A mere $10,000 invested in 2008 would exceed $1 million today.
That's the power of identifying small companies with immense, underappreciated advantages early on. Netflix is hardly an isolated case. Take eXp World Holdings Inc. (EXPI:NASDAQ), a "David" stock I recommended in June 2019 when I ran a microcap newsletter.
EXPI is essentially the Netflix of real estate, operating similarly to industry giants like Keller Williams and Century 21. But instead of physical offices, EXPI supports its agents via a virtual world accessible from anywhere with a computer and internet.
This digital approach eliminates major overhead expenses, enabling EXPI to compensate agents far more lucratively than rivals. The higher earnings potential attracts hordes of new agents, fueling the company's explosive growth and profitability.
When I initially recommended EXPI, its market cap was a paltry $600 million. But its tech-driven agility relative to competitors led my readers to a 376% gain in a mere 16 months. This illustrates the power of identifying genuine growth engines while they're still small and easily overlooked.
Most investors fixate myopically on a company's present form rather than its transformative potential. That's a huge mistake. The most prodigious winners don't start out fully developed; they evolve into dominant players over time, often beginning as microcaps.
By learning to spot authentic growth early on, you begin to see opportunities everywhere.
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- Chris Wood: I, or members of my immediate household or family, own securities of: None. My company has a financial relationship with: None. My company has purchased stocks mentioned in this article for my management clients: None. I determined which companies would be included in this article based on my research and understanding of the sector.
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