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 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 been simply misunderstood by the market.
It’s impossible to take the risk completely out of small-cap stocks. 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 Thomas Garrity has his own set of rules in searching for small-cap stocks. Those are:
- Make certain the company you're considering has enough capital to run its operations for many years and its balance sheet is (for the most part) debt free.
- Time your investment with a company-specific event—a new product unveiling, clinical trial results being released, an earnings release, etc.
- 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.
- To the best of your ability, ensure that your investment has the highest probability for success. The proof will come from doing research and assessing data. Any company can fail, big or small, you just want to try to avoid being a shareholder when that happens.
- Only put capital to work in a stock that correlates with your investment risk tolerance and timeline. If you’re content to hit singles with lower-risk that can accrue over time, then it doesn’t make sense to swing for the fences with high-risk, high-reward small-cap stocks.
- Lastly, become committed to your investment, which means being comfortable with market volatility, and also having the patience to let it succeed.
These rules won’t help you pick all winners. But they should give you a leg up in selecting the right small-cap stocks.
They have certainly worked for Thomas Garrity throughout his decades as a stockbroker, stock analyst, venture capitalist and portfolio manager. Above all, Tom invests only when the odds of winning significantly outweigh the risks.
Tom applies those 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, Tom does all the heavy lifting for you, identifying those hard-to-find small caps that can earn you triple-digit returns. Over the years, Tom’s under-the-radar picks have helped Cabot Small-Cap Confidential become one of the leading technology advisories in the industry.
Each write-up features commentary on the picks from one or more of our expert stock market analysts, as well as company details and a stock chart.