Small-Cap Stocks
Investing in small-cap stocks is a good way to earn huge returns. The smaller companies often have the most potential for growth. They also carry plenty of risk for investors.
Anytime you buy shares of a small, little-known company, there are a bevy of unknowns. Some small-cap stocks are clinical-stage biotechs whose drugs have yet to be approved for commercial use. Others are chipmakers or cloud-computing companies that have plenty of promise but have simply been misunderstood by the market.
It’s impossible to take the risk completely out of small-cap investing. But there are ways to minimize those risks without sacrificing potential profits. For starters, set up a clearly established set of rules ahead of time, and stick to them.
Our small-cap expert, Tyler Laundon, has a very specific set of rules for identifying the right stocks. Those are:
- Search for paradigm shifts in any field of business that requires a unique, new solution that will be provided by a stand-alone company. Then seek a niche supplier that will become an equal benefactor to that pioneering company.
- Invest only when the market opportunity is huge—and quantifiable. Only invest in small companies that serve large, burgeoning markets because you can realize tremendous growth with even small shares of the market.
- Get into a small cap stock before institutional investors become aware of it. Sometimes it takes a while for the big hedge funds or mutual funds to discover small yet promising companies. Once they do, it quickly drives up the price.
- Invest in small caps that offer both growth and value. Look for relatively young companies with growing sales that are undervalued based on the company’s market potential versus its total market capitalization. A balance sheet with little to no debt is also a big plus.
- Invest at the right time in the product cycle. There is a direct correlation between the time of investment and the degree of risk and rate of return you can expect. The time period after venture capital investors come aboard is generally the most promising.
- Lastly, concentrate on the very best ideas. Look for industries that have hit a roadblock and need new technologies to keep growing. The small companies that provide those breakthrough technologies make for the best small cap stocks.
These rules won’t help you pick all winners. But they should give you a leg up in selecting the right small caps.
Tyler applies his winning philosophies as editor of our Cabot Small-Cap Confidential advisory. Searching for small cap stocks can seem a bit overwhelming. In the Cabot Small-Cap Confidential advisory, Tyler does all the heavy lifting for you, identifying those hard-to-find small caps that can earn you the kind of triple-digit returns that can transform your portfolio.
Small-Cap Stocks Post Archives
Trend analysis is critical when researching small-cap stocks. And these three small caps are benefiting from some of today’s biggest trends.
This small-cap stock has the potential to be the next Edwards Lifesciences (EW), a revolutionary healthcare company that has delivered a 3,000% return since its IPO.
The market has bounced back in 2016, and small-cap stocks have led the way. With more earnings growth on the horizon, the rally in small caps may just be getting started.
While small-cap dividend stocks don’t always make for juicy storylines, the fact is that many of the best performers in the stock market today are these little income producers. And if you have the willpower to stick with them, you may easily find their performance rivals that of the best performing growth stocks. Here are three stocks for your review.
One of the things I love about being chief analyst of Cabot Small-Cap Confidential is the quest for the next great undiscovered small cap growth stock. It’s like a never-ending treasure hunt, with occasional massive discoveries. And I have the freedom to search anywhere in the world! That means I’m often looking at business sectors that most investment analysts skip right over. A perfect example is the vending machine market, also known as the unassisted point-of-sale (POS) market.
Small cap gold stocks have been on fire in 2016. Many are up 50%, 100% or more. It hasn’t mattered much if the company is a profitable gold producer or a pre-revenue gold explorer. If it has anything to do with gold, it’s probably gone up. I monitor a watch list of small-cap gold stocks. And these five are up over 100% so far this year.
Small caps will outperform large caps in 2016. Given that small caps outperform over the long-term, yet have underperformed large caps for two consecutive years (2014 and 2015), and have fallen so much year-to-date, I see solid potential for small-cap outperformance over the next 12 months.
I have no idea if the biotech sector is near a bottom, but based on history, it would seem that we’re within 10% or so of that mark. The greatest risk seems to be that the binary outcome possibilities for developmental-stage biotech stocks (either fail or succeed) don’t mesh with investors’ risk appetite right now.
I have a lot of stock market advice written down. And it turns out that over the years I’ve been fairly consistent in the small cap advice that I’ve given during challenging markets. Most of the advice is the same each time the you-know-what hits the fan, as it’s been doing lately. For example, in the spring of 2010, small caps were in correction mode, and ultimately fell 15% before finding bottom.
A couple of weeks ago, I published my Small-Cap Outlook for 2016. In it, I briefly described what I expect to be one of the most exciting trends in 2016—virtual reality (VR) and augmented reality (AR). For the record, I’m far from the only person with this view. And I think that’s a good thing—it means the profit potential is that much greater since interest is so widespread!
When the market turns back up, having the shopping list ready will save a lot of research time, and money can be quickly directed into those names that have convincing uptrends. Here are five mid- and small-cap software stocks that are on my radar as potential buys for investors. With forecasts suggesting cloud software will drive 50% of all software investment through 2019 (equal to average annual growth of 18.3%), these stocks deserve a spot on any growth investor’s wish list.
At the end of the year, I like to look back at what worked in small-cap stocks. The exercise is useful for reminding investors what to look out for. I’m also always curious to see what stocks made investors really rich, and which ones caused the tears to flow. Here’s my list of 10 best and worst small caps of 2015.
Investing in Small-Cap Stocks is one of the best ways to make huge returns-- if you can handle the risk.
The past year will go down in the history books as a dud in terms of stock market returns. You’re among the lucky few if you were able to generate positive returns given that the broad market is down 2% year-to-date. But I have two pieces of good news. First, that lackluster performance is in the rearview mirror. Good riddance. And second, the future looks a heck of a lot brighter—at least for one particular group of stocks. I think there is 15% upside potential in small-cap stocks over the next year.