Do Good Stocks Come in Small Packages?

April 23, 2009 by admin
Filed under: Stocks

In the past decade or so, small cap stocks have been the best performing asset class out there. Plus, there are plenty of great small cap stocks and mutual funds to choose from.

One of the interesting aspects of small-cap stocks is that they are dynamic. In other words, the term “small-cap” is just an approximation that could change over time.

That’s a good thought to keep in mind when investing in micro cap stocks, the slightly more elegant cousin to the penny stock. Smaller companies can and do increase their size and their revenues, sometimes enough to create a higher market capitalization base that puts them in a higher small-cap sector class. Ideally, that’s what you want to see in a successful micro cap stock selection. In other words, get in early and enjoy the ride.

Historically, micro-cap stocks, as measured by the Russell Microcap Index, have fared very well, averaging an average annual return over the last five years of 14%.

Both micro-caps and penny stocks have been used to describe low-priced companies. But there is a decided difference between the two. A penny stocks is generally defined as a stock that trades below $5 per share. Microcap stocks describe a stock with a low market (or “micro”) capitalization of below $250 million. Such stocks tend to have low stock prices and trade small volumes.

You can find micro cap stocks in a variety of places. They trade over-the-counter (OTC) Bulletin Board and can also be found on the Pink Sheets, Wall Street’s ubiquitous term for the daily listings of price quotes for companies that trade in the over-the-counter market. There are some similarities between penny stocks and micro cap stocks in terms of public access to the critical information needed to evaluate such stocks. Larger public companies have to file regular financial reports with the Securities and Exchange Commission. Investors can simply log on to the SEC web site and check a company out. Not so with micro caps. Too often, the data just isn’t there to make a thorough judgment on a microcap company’s performance potential.

When focusing on microcap stocks, focus on finding out whether the microcap company has registered with the SEC or its state securities regulator. Then get to know its business, inside and out. Check out all the reports you can from securities regulators on the company in question and pay close attention to all financial statements. If you can’t find any reports, ask the company for its “Rule 15c2-11” file – that document will provide some hard material on the microcap company that should be well worth reading.

Also, look at the people running the company. Have they run similar companies before? Do they have a track record of profits and high ethical practices? Do they own a lot of the company? Has the company stocks ever been suspended from trading by the SEC? Are there any complaints against them? Again, your state securities regulator and/or the SEC should know.

Micro caps can give you a legitimate shot at high-growth profits. But you have to have the time and research skills necessary to make sure you’re dealing with a company that is above reproach and committed to solid business practices as well as its customers and shareholders.

They’re out there – you just have to know where to find them.

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