Many investors are sitting on the sidelines, waiting for the next breakthrough in the market because they don’t have a clue where to go or what to do next. They’re going to once again find themselves behind the trends unless they take action now.

The next big breakthrough is just mere weeks away in the form of the third-quarter earnings season. And after the difficult times the market experienced during the third quarter, it is more than ready to be lifted by positive earnings reports.

If you are looking for a way to best take advantage of the pops expected of earning season market behavior, then you need to begin turning your attention to small-cap stocks.

Earnings season is the time for stocks to really shine, and none more than the small-caps. Emerging companies relish earnings season because the stakes are high and the buying interest enticed by a positive report can easily send stocks with a small market cap through the roof.

Why are small-cap stocks going to be an excellent source of profit for the upcoming earnings season, and which companies should you be paying attention to? Let’s discuss:

Seasonality of Small-Cap Stocks

Many investors out there are hesitant to deal with small-cap stocks. The risks involved with investing in smaller companies and all the uncertainty of where they are heading seems to outweigh any potential gains.

I’m here to tell you that that’s not the case.

As with any stock, be it small-, mid- or large-cap, there are risks and rewards to investing. All you need to know is the proper trading strategy to get the most out of your investment.

In terms of small-cap stocks, it is important to understand their seasonality. Since they do have smaller market capitalizations, small-cap stocks tend to be more reactive to market swings and volatility. Big news is likely to have a greater effect on small-cap stocks than their large-cap counterparts.

That’s why earnings season is such a pivotal time for small-cap stocks, and it is why you see more significant increases or decreases in stock value based on a company’s earnings report in small-cap stocks.

I’ve talked before about how large-cap, blue-chip stocks tend to build in anticipation of earnings. For a few weeks ahead of earnings announcements you will see large-cap stocks pick up as investors rush to get in on positions before reports are released. Small-cap stocks behave differently.

Instead of jumping on anticipation, small-cap stocks are more likely to jump on actual news. That’s why there is so much activity going on in the market during earnings season. Investors wait to trade small-cap stocks until they see how the companies actually have performed for the quarter. That’s why it’s not unlikely for a small-cap company to jump 20% to 30% during the week after a strong earnings report.

Acting on news also is why small-cap stocks are often the first to be affected by market activity. You are more likely to see small-caps drop first when bouts of market volatility or depression settle in. Similarly, these stocks also are among the first to rebound and signal market recovery.

Just to give you a clear idea of the type of activity, and potential profits, you can expect from small-cap stocks in the coming weeks, I am going to give you a lesson on the recent performance history of a few stocks during earnings season.

Three Small-Caps to Stick with this Earnings Season

The three companies I’m going to highlight below show just how much potential you can expect with smart investments in small-cap stocks — especially during the earnings seasons.

1. Majesco Entertainment (NASDAQ:COOL) develops games for Sony‘s (NYSE:SNE) PlayStation, Microsoft‘s (NASDAQ:MSFT) Xbox and Nintendo’s Wii game systems, as well as games for personal computers. The company is originally known for action titles such as BloodRayne, Black & Bruised

and Blowout, but more recently made headlines with the very popular Zumba Fitness video game for Wii. Majesco Entertainment has made a critical shift in 2011, and investors can’t get enough of the stock. Majesco moved its development efforts to lower-priced value offerings. This strategy gave the company its first profitable quarter in 12 months.

When the company announced its latest second-quarter earnings figures a few months ago, they annihilated analysts’ estimates. The company posted a 250% earnings surprise and 170% earnings growth for the quarter! These were absolutely tremendous results. The stock is expected to continue its quick growth, with analysts expecting 250% growth for the current quarter.

2. 3D Systems (NYSE:DDD) makes products that are used by businesses to conceptualize and design products. Such well-known companies as Bose, Ford (NYSE:F), Hasbro (NASDAQ:HAS), Northrop Grumman (NYSE:NOC) and Porsche use 3D Systems’ devices.

In the second quarter, sales totaled $55.1 million, a sizable 57% boost from last year’s $35.1 million. And it gets even better: Both net income and earnings per share exploded over 300%! This quarter’s net income weighed in at $13.4 million, compared with just $2.7 million in Q2 2010. Similarly, adjusted EPS was $0.26 per share this quarter versus six cents per share last year. Earnings per share thrashed the consensus estimate of 15 cents, yielding a whopping 73% earnings surprise!

3. Jazz Pharmaceuticals (NASDAQ:JAZZ) is an innovator in the specialty-pharmaceutical space, with two commercially successful products on the market with rising sales.

Last quarter, Jazz’s earnings were boosted by the sale of its drug, Xyrem. Earnings grew from $10.5 million, or 28 cents per share, to $38.4 million, or 82 cents per share. This represents a phenomenal 266% jump in net income and a 193% spike in earnings per share! Analysts were expecting 77 cents per share, so JAZZ posted a 7% earnings surprise.

Investors were elated with this news, and drove the price of JAZZ up by over 13% on announcement day!

This is just a small sample of the amazing activity you can expect from small-cap stocks during the next earnings season.