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 been simply 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 small-cap 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 stocks that offer both growth and value. Look for relatively young companies with growing sales, yet is 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 stocks.

They have certainly worked for Tyler in his years as a small-cap analyst. Between 2012 and September 2015 his small-cap recommendations generated cumulative returns of more than 2,300%, including both winners and losers, and outperformed the Russell 2000 Index by an average of 28% per year.

Tyler 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, 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.


Featured Stock Picks

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.

This Silver ETF Is Why It Pays to Invest in Sector Funds

There's a silver ETF that's up 270% year to date, sparked by the recent rise in silver prices. And it is Exhibit A as to why investing in sector funds can be immensely profitable if you time it right.»

How to Find Small-Cap Stocks in Five Steps

If you know how to find small-cap stocks, you can consistently unlock better-than-average market returns. These five steps will help you find the right small caps. »

Hillary Clinton Just Did Biotech Stocks a Favor

Biotech stocks have been in a downward spiral this week after comments from Hillary Clinton. She also created a buying opportunity. »

How New Treatments are Fueling the Boom in Biotech Stocks

Biotech stocks have been red-hot this year, and a major reason for it is the glut of promising treatments being developed for diseases that have long been woefully undertreated. »

Stock Picks


This stock could rise 50% before becoming fairly valued.

This hot technology company is growing like a weed, thanks to products that speed up cloud communications.

This stock is somewhat well known, but far from well loved.

Cabot Wealth Advisory

Nine Characteristics of Great Growth Stocks

By Timothy Lutts on October 24, 2016

Recommending great growth stocks is our specialty at Cabot. But so is education--we want you to be able to find growth stocks on your own too. Here are nine characteristics of what to look for.Read More >

How to Find Great Growth Stocks in a Scary Market

By Paul Goodwin on October 21, 2016

Even in today’s scary market, there are great growth stocks out there. Here’s how to find them—and how to avoid the kind of losses that can haunt your portfolio.Read More >

Buy This Small-Cap Tech Stock as the Nasdaq Thrives

By Tyler Laundon on October 20, 2016

Technology stocks are thriving, as the Nasdaq has been outpacing the S&P 500 and the Dow for months. And one small-cap tech stock in particular is outperforming the industry’s big boys. Read More >