Finding Hidden Gems in Small-Cap Stocks

Investing in small-cap stock is like trying to get to a treasure chest in a sunken ship. Swimming in the old ruins of a sunken ship is dangerous; there could be a shark in the murky waters, or you could disrupt something and accidentally bury the treasure chest forever. But if you navigate the sunken ship carefully, you could find yourself at the treasure chest reaping the rewards. Knowing how to research small-cap stocks is like knowing how to safely make it to the treasure chest.

Why Small-Caps?

Granted, large-cap stocks might provide more stability—but their performance cannot compare to that of small-cap stocks. As a matter of fact, small-cap stocks have outperformed large-cap stocks by 20 times over the course of 37 years, between 1979 and 2015. They could give higher returns than large-cap stocks do and be more profitable. A promising feature of investing in small-cap stocks is that you are investing in a company before it makes it big and its stock skyrockets. Because you are investing in a company that is in its expansion phase, there is more room to make a profit compared to investing in an already well-established company that has pretty much maxed out its growth.

Investing in small-caps also helps diversify your portfolio.  Which is a good thing. Diversification is important because it acts as a sort of insulation against market volatility. If you spread out your assets throughout different types of stocks, it could minimize the risk of losing too much. Diversification is one of the most important components of reaching your long-term financial goals while lessening risk.

Small-cap stocks are more finicky when it comes to investing; there is a lot to think about and look into. And not all small-cap stocks are built the same, nor does every single small-cap carry the assurance that it will one day blow up into a large-cap company. Small-caps tend to depend on local economies and have a hard time making it through financial hardships. But if you know what to look for, the small-cap you decide to invest in can rake in a nice profit. Find the hidden gems in small-cap stocks by considering the following factors.

Recognize the Risk

When you decide to dip your toe into the small-cap pool, many things can happen. You can either reap high rewards or go through major losses due to small-cap volatility. They are more volatile than other stocks due to their size, and prices tend to fluctuate 5% or more in a single trading day, which can be off-putting to some investors.

There are some things you can do to help you best minimize risk. Considering the type of market you are in can help you to know when to invest in small-cap stocks. Typically, small-cap stocks tend to perform better in young bull markets or when the economy is on a rebound. Past earnings and performance is usually a good indicator of how a stock will perform in the future. If revenue growth is over 20%, then it is typically a promising stock. These are not foolproof ways to stay safe when investing in small-caps, but they will help you significantly in investing in the right ones.

Read the Resources

There are many resources available to conduct small-cap research. Some online screening tools are free of charge and contain a high amount of data readily available. Some examples of effective searches to procure the right results are “market cap under $500” or “coverage by two or fewer analysts.” Additionally, many small-cap companies publish their earnings on platforms. Go through these platforms and investigate smaller companies’ earning presentations, press releases, characteristics, and growth projections. When you delve into the available resources, you could glean knowledge that will help you invest in small-cap stocks with huge growth potential.

Analyze the Attention

Gauging how much attention a small-cap company really has can be beneficial. If it has a low online presence in comparison to other small companies, it could work in your favor. Because fewer people know about it, there could be a bigger reward if you invest and the company does well. Another side of this coin is to look into the small-caps that major organizations feature in their portfolio. This could help you take a step in the right direction; if big companies favor certain small-caps, it could be promising for the smaller company’s future growth.

Think Small

Think locally or regionally; maybe there is an up-and-coming company in your neighborhood that could expand greatly.  After all, you know your community better than others. You could have insight into promising new developments in your area before it makes nationwide news. Proceed with caution, though—when considering investing locally, there is potential for confirmation and familiarity bias. Sometimes, local businesses cater to their communities’ specific needs. This means that while you might think company XYZ is providing ground-breaking solutions, maybe their solutions are only necessary in your area. There is not much growth for a company that will only meet the needs of a specific population.

And Finally, Don’t Cut Corners

Take your time, read the charts, look at the numbers, and consider all the factors, from growth revenue to how the economy is doing. Do not cut corners when it comes to researching which small-cap company to invest in. The last thing you want to do is play Russian roulette with small-cap stocks; make sure the one you invest in is the one with the most promising outcome. Extensive research and consideration is the best way to ensure that you will find those hidden small-cap gems.  Even if you use popular stock investing sites, like Dear Retail, it is important you utilize the information provided as a starting point.  Not just the only point.  Not cutting corners does not mean you cannot be efficient with your research and investment.  Always perform your own due diligence, trust your instincts and eventually you will know a hidden small-cap gem opportunity when it presents itself.