The Small-Cap Investor: Secrets to Winning Big with Small-Cap Stocks

Acknowledgments xi

INTRODUCTION The Story of a Small-Cap Investor 1

CHAPTER 1 Start Small, Finish Big—Discover Big Profits in Small-Cap Stocks 9

Small-Cap Investor: Eight-Step Process for Big Profits from Small Stocks 10

Small Caps as Generators of Growth 11

An Example of Small-Cap Success 15

Small-Cap Value Stocks Outperform Large-Cap Growth Stocks 19

Profitable Small Caps Don’t Always Make Gains on Day One 19

The Inefficient Market Theory: The Small-Cap Advantage 24

The Market as an Emotional Being 25

CHAPTER 2 Big Ideas for Big Profits 29

Spotting the Next Big Idea 30

Expanding Your Search 36

The Competitive Edge 37

Spotting Institutional Activity 38

CHAPTER 3 Finding Great Small-Cap Stocks 43

Growth + Value = Profits 43

Success Stories from the Past 50

IPOs Are the Genesis of Small Caps 53

Spotting Growth Sector Trends 55

News You Can Use 59

You’ve Found an Interesting Trend or Company—Now What? 60

CHAPTER 4 Understanding and Evaluating Financial Statements 65

Generally Accepted Accounting Principles and the Basics of Accrual Accounting 67

Financial Statements Made Simple 69

Ten Key Metrics to Review in Every Financial Statement 72

What Exactly Are Earnings? 76

A Quality Test: Cash Flow Instead of Earnings 83

Ten Accounting Red Flags 86

CHAPTER 5 Financial Projections and Valuations 91

Understanding Financial Guidance 92

A Reality Check 93

Guidance Caveats 96

Interpreting Analyst Estimates 97

Companies Play the Earnings Game 98

Financial Trends for Spotting Promising Small Caps 99

CHAPTER 6 Taking the Mystery Out of Technical Analysis and Trading for Quick Profits 103

Some Technical Basics 105

Accumulation and Distribution 118

The Relative Price of a Stock 120

CHAPTER 7 Trading Strategies for Successfully Buying and Selling Small-Cap Stocks 123

Liquidity Considerations with Small-Cap Investing 124

Risk Tolerance 127

Risk Awareness, an Essential Attribute 130

Timing Decisions 133

Trading Techniques 136

CHAPTER 8 Portfolio Diversification and Allocation 139

Equity Diversification Methods 140

Diversification Mistakes 141

Overdiversification 142

Using Mutual Funds and ETFs to Diversify 143

Risk Tolerance as a Means for Diversifying Your Portfolio 147

Asset Allocation Basics 148

CHAPTER 9 Buy Small Caps to Grow Your Portfolio 151

A Track Record of Small-Cap Success 152

The Key Drivers to Growth 153

Early Bird Gets the Worm 154

Appendix 159

Notes 163

About the Author 165

Index 167