Small Cap Stocks

Small cap stocks have been described as the 'bestThere was a time, in past history, when the
profit opportunity of our lifetime',far out performingcompany that has evolved into the Exxon Mobilof
any other asset class by a huge margin.today did grow at a much faster rate but those
But there is also a huge caveat here (Isn't theredays are long gone.
always?). All small caps are not alike.As Rupert Murdoch says, "The world is changing very
While it is true that small cap stocks havefast. Big will not beat small anymore.
outperformed their larger cap brethren tothe upsideIt will be the fast beating the slow."
(occasionally, even during bear markets) they haveTo increase the odds for success in the investor's
also outperformed to thedownside. Even to the pointfavor, limiting selection of small capstocks to the
of extinction!value category only, the investor is assured of not
Is there a way to increase the odds of success inover paying inprice.
taking advantage of the huge profitpotential presentTo further increase the odds for success, the
in the small cap stocks arena? I believe that there is.investor can introduce a 'timing' elementinto the
But first, let's define our terms:strategy, through 'technical analysis', by the utilization
Small cap stocks are defined as the smallest 30% ofof 'moving averages'.
market capitalization stocks tradedon the NYSE,For example, if a stock is trading above its 40 day
AMEX and NASDAQ exchanges.moving average (40ma), and the 40ma isabove its
Small cap value stocks are defined as the top 30%80 day moving average (80ma), the stock is in a
of stocks with the highest bookto price ratios (withinrising trend which, clearly, isalways the best time to
the small cap grouping) traded on the NYSE, AMEXbe buying stocks, is it not?
and NASDAQexchanges.Finally, one must not ignore the risk vs. reward factor
Why are small companies able to grow faster thanthrough proper trade management.
larger companies?Determine in advance, before entry, under what
Witness the Law of Diminishing Returns at work! It isconditions the trade will be 'kicked out'.
possible for an enterpriseto reach a point that furtherThrough the judicious use of stop-loss orders, say
capital investment yields less and less return on15% or 20% below entry, and/or if the
thatinvestment.40ma crosses below the 80ma, whichever occurs
Can you visualize a company the size of an Exxonfirst, would be a good rule to follow.
Mobil (XOM), for instance, with itshuge ($369Risk can also, initially, be 'fixed' in place through the
billion???) market capitalization growing its earnings atpurchase of a put option, forprotective purposes, in
a 50% or higher rateof growth per year?combination with the purchase of stock.
A company like an Exxon would be doing well toRather than purchasing the stock itself, purchasing a
achieve and maintain a 10% rate of growth,yet manycall option as a substitute for thestock, introduces
smaller companies can grow their earnings at a 50%'leverage' into the strategy along with the limitation of
or higher annual rate. Picturea WWII PT boat runningrisk.
circles around a battleship!