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How to Find Small Cap Stocks

by Carmelo J. Montalbano

Overview

Finding small capitalization stocks is a matter of being methodical and comfortable with the kind of investing techniques necessary to find undervalued stocks. Small cap stocks are often attractive to individual investors because large institutions cannot buy enough of any one company to affect results materially.

Buy Strength and Sell Weakness

Step 1

Keep a spreadsheet log of possible names to consider investing in. In the log add important criteria like market capitalization, price-to-earnings ratio, cash on hand, the ratio of debt to capital and other important benchmarks. Eliminate companies in industries you do not understand or do not want to invest in.

Buy Strength and Sell Weakness
Step 2

Use the Value Line Investment Survey Small Cap subscription to get information about most small cap companies. Review balance sheet information and copy telephone numbers of each company you are interested in. Research recent activities and general corporate news through the Bloomberg website.
Step 3

Review Securities and Exchange Commission (SEC) filings using the EDGAR system. The EDGAR system is an active database of all regulatory filings required by the SEC. Balance sheet data and a management discussion of material events affecting the company are included with every filing.
Step 4

Contact the company directly and ask to speak to an officer of the company in the accounting office. This is a common practice of stock analysts. Often you will be able to talk to a corporate officer, unlike large companies, and discuss recent activities. This is important because small cap companies do not announce all corporate activities. Ask them the name of their greatest competition and companies in competing technologies. Add these names to your log.
Step 5

Review holdings of mutual funds and pension funds that invest in small cap stocks. You may find names of companies that have yet to fully realize their earnings potential. Often pension funds will support local companies in a new issue stock offering if they are in an industry deemed important to the contributors of the pension fund.
Step 6

Review, through the Yahoo finance pages, lists of companies by industry code, sector, size and performance. This search method is free and extensive. Make certain your criteria is limited or you will receive many spurious results.

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spreadsheet program to create a small capitalization log of companies
spreadsheet program to create a small capitalization log of companies
Small cap investing is difficult. There are a few small cap funds. Consider these if your accounting and fundamental analysis skills are weak. Research individual business websites that you read about for leads to other possible companies. Small cap companies are often engaged in new technologies. Company names can also be found when researching promising technologies.
Small cap investing is difficult. There are a few small cap funds. Consider these if your accounting and fundamental analysis skills are weak.
Research individual business websites that you read about for leads to other possible companies. Small cap companies are often engaged in new technologies. Company names can also be found when researching promising technologies.
Always 'paper' or practice trade before investing real money. Use protective stops to prevent small losses from becoming large losses.
Always 'paper' or practice trade before investing real money.
Use protective stops to prevent small losses from becoming large losses.