How to Find Best Buys in Small-Cap Stocks
Small caps are those companies with market capitalizations of $100 million or less. They can represent real bargains but unfortunately, your broker will never tell you about the best buys in small caps. Individual investors are likely to hear only about stocks that Wall Street must recommend - the big household names, for example - or that a brokerage firm feels chummy with. That leaves a lot of respectable stocks out in the cold.
So investors generally have to track down these stocks alone. The few research firms that specialize in digging up Wall Street's buried treasures usually report their findings to institutional investors, such as money managers or fund chiefs. They get paid for their work by executing these institutions' trades.
Investors who want to go solo in small cap stocks should begin by identifying trends with staying power. Then, figure out the best ways to play those trends.
Once you've identified an appealing industry, narrow the field. There are several characteristics to look for before you can feel comfortable investing in a small cap company. These include:
Large ownership by management. Top management should own at least one quarter of the company themselves. That way, their motivations are the same as yours. Check the proxy statement.
Little or no debt and little need for fresh capital. Debt-to-equity ratios shouldn't exceed 15 percent, or else the company's growth could be sidetracked by the need to service borrowings. Calculate debt-to-equity by dividing the company's total liabilities by its shareholder equity.
A management that can verbalize its plan for the future. The company must be able to articulate a credible business plan for at least the next two years. Small-company managements are usually more available to discuss plans with investors; if they're unwilling, look elsewhere.
A product or system that's difficult to replicate or as close to being unique as possible. You don't want to invest in a me-too company; you want a specialist.
Little or no institutional ownership. Your goal: To own a stock before institutions spot it. Therefore, less than 10 percent of a stock should be held by institutions now. (A company spokesman can tell you this figure.) As the company increases its market value into the mid-cap range - to $100 million or more - it will begin to hit institutions' radars. When the bigs start buying, think about selling.
By following these suggestions, there is a very good chance that you can find stocks of smaller companies that will turn out to be very profitable investments!
* * * * *
So investors generally have to track down these stocks alone. The few research firms that specialize in digging up Wall Street's buried treasures usually report their findings to institutional investors, such as money managers or fund chiefs. They get paid for their work by executing these institutions' trades.
Investors who want to go solo in small cap stocks should begin by identifying trends with staying power. Then, figure out the best ways to play those trends.
Once you've identified an appealing industry, narrow the field. There are several characteristics to look for before you can feel comfortable investing in a small cap company. These include:
Large ownership by management. Top management should own at least one quarter of the company themselves. That way, their motivations are the same as yours. Check the proxy statement.
Little or no debt and little need for fresh capital. Debt-to-equity ratios shouldn't exceed 15 percent, or else the company's growth could be sidetracked by the need to service borrowings. Calculate debt-to-equity by dividing the company's total liabilities by its shareholder equity.
A management that can verbalize its plan for the future. The company must be able to articulate a credible business plan for at least the next two years. Small-company managements are usually more available to discuss plans with investors; if they're unwilling, look elsewhere.
A product or system that's difficult to replicate or as close to being unique as possible. You don't want to invest in a me-too company; you want a specialist.
Little or no institutional ownership. Your goal: To own a stock before institutions spot it. Therefore, less than 10 percent of a stock should be held by institutions now. (A company spokesman can tell you this figure.) As the company increases its market value into the mid-cap range - to $100 million or more - it will begin to hit institutions' radars. When the bigs start buying, think about selling.
By following these suggestions, there is a very good chance that you can find stocks of smaller companies that will turn out to be very profitable investments!
* * * * *
posted by Bob Moser at
9:47 PM
0 Comments:
Post a Comment
<< Home