Beat The Street With Small Cap Stocks
How do you beat the Street?
It's an old question to be sure, and one that every fund manager, stock picker, and independent investor out there wants to find an answer to.
Sure, you can pick up Peter Lynch's 1993 best selling book 'Beating the Street' - the main message in that book is to "buy what you know". It's a great read, and I recommend every independent investor take Lynch's message to heart and invest in companies with business models that they understand.
These don't have to be complicated. In fact another investing icon, Warren Buffet once quipped, "I try to buy stock in businesses that are so wonderful that an idiot can run them. Because sooner or later, one will." I appreciate Buffet's candid and balanced approach, and the fact that at a certain level he tries to keep it simple.
We all hear stories about derivative masters, dark pool investing, and algorithm based trading strategies. But if you work a normal job, like most people, these complex investing strategies are unduly complicated - not too mention time consuming. Invest in what you know, and keep it simple, and you're likely to have much more success.
I conducted an informal poll at the office this morning. My employees "bought what they knew" and are invested in well known large-caps like Apple (Nasdaq: AAPL) with a current P/E of 24, IBM (NYSE: IBM), with a current P/E of 13 and McDonalds (NYSE: MCD) with a current P/E of 17.
And that's good work -- all these companies have made investors money over the last two years. But these aren't exactly unknown companies and Wall Street is all over them - so if you purchase shares in these companies you would be buying what the Street already owns.
To really beat the Street, you need to get in on small-caps before they become the darlings of Wall Street and owned by everybody - including your annoying neighbor who brags about his investment winnings.
Another informal poll of my employees showed good small cap ownership – and I must admit I love to see team members putting money to work in this sector. It shows they have skin in the game, so to speak. Office member ownership in small caps includes solid names like Del Monte Foods (NYSE: DEL) with a forward PE of 66 and IMAX Corporation (NASDAQ: IMAX) with a forward PE of 21, along with a number of lesser know companies that have yet to reach the upper end of the small-cap spectrum like the above companies.
Ownership of small-cap stocks like those held by member of my team reminds me of another Buffett quote, "Someone's sitting in the shade today because someone planted a tree a long time ago." Small cap stocks are just like that tree seedling - invest in quality ones now, and you'll be rewarded later.
But finding the most fertile seeds is not easy to do, especially if you work full time and want to dedicate free time to spend with your friends and family. How can you beat the Street by buying what you know, if you don't know about the stocks you should be buying? That circular logic reminds me of my chocolate lab, Pinot - she loves to chase her own tail.
But there is a way...
Here's what I do for Small Cap Investor PRO subscribers - I seek out overlooked companies we can still buy at reasonable valuations. And for fast growing companies that are on the verge of gaining widespread coverage by Wall Street.
I start by scanning the universe of stocks that fit my particular criteria, and then dig further into the most compelling stocks in the group. I look at quarterly and annual reports, review cash flow models, and determine the likely catalysts that will fuel a company's future growth.
After deciding which stocks look good, I decide what I'm willing to pay. Then I buy up shares when the window of opportunity is open. The next step is to sit back and let Wall Street (and your neighbor) 'discover' these unknown stocks, and allow their buying to propel the share prices higher.
Small Cap InvestorPRO subscribers have made 77% on stocks like China Green Agriculture (NYSE: CGA), a natural fertilizer company, and 53% on a provider of secure payment terminals, and 56% on a fast growing natural gas company. I'd love to tell you the names of these second two companies, but you'll have to sign up for a trial membership to find out.
To beat the street, you need to get in on opportunities before the Street does. Right now, there are several companies in my portfolio that are worth your attention, and I'm constantly on the lookout for more great companies to add.
*****If you already have a list of stocks that you're considering purchasing, trading strategist Jason Cimpl is ready to give you his opinion in a personalized video chart review of your favorite stock.
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