Why I’m ‘All In’ on Small-Cap Stocks Now

Did you know there’s a deadline on economic expansions — and when it hits, we’ll automatically fall into recession?

Source: Shutterstock

Well, me neither, because it isn’t true.

But you’d never know that from watching the folks they put on TV these days.

Every year that passes, the calls just get louder that the end of the bull market is approaching.

Listen, I have to wonder … are these people seeing the same data I am?

For instance, just look at this nonfarm-payrolls chart from LPL Research.

Hiring Bounces Back

As you can see from comparing the yellow line to the black line, the average increase in payrolls over the past 12 months (+184,000 jobs) has been well above average for this economic cycle (+170,000 jobs).

As LPL’s senior market strategist Ryan Detrick put it: “Bottom line, this isn’t what you see in front of recessions.”

And, from a stock market perspective, what is the “engine” behind that? The small caps.

Small caps are the innovators. The job creators. We all dream of amazing profits from the next Netflix (NASDAQ:NFLX) or Amazon (NASDAQ:AMZN) … well — this is where you’ll find it.

Today, let’s talk about how to do that …

Finding the Cream of the Crop

At the small-cap end of the market, investing can involve greater risks — along with the potential of greater rewards.

That’s because many of them are newer up-and-comers … maybe even operating in an all-new industry. Some of them are great businesses, run by smart, hardworking people. Some are not. Obviously, you want to invest with the first group.

That’s why I believe in applying an analytical model to any small-cap stock I’m considering.

One of the factors I look at is the company’s path to profitability.

Now, don’t get me wrong. I don’t necessarily need to see huge profit margins right now.

Just look at Amazon and Netflix. In the early years, they were not generating profits. That’s because they continually invested in growing their businesses … which allowed them to increase their market share and hammer their competitors. So, investors bought them hand over fist … because they expected massive profits in the future. And AMZN and NFLX are up more than 1,000% since 2010.

The key is a clear path to future profitability. There must be a sustainable business model that can generate cash in the future. If not, then pass on it.

To find such a healthy, growing business, one of the hallmarks is rising revenue. Rising revenue allows a company to continually invest in its business. It’s a great story to attract the best talent in an industry. It also attracts the best partners.

I recommend looking for at least 10% annual revenue growth. In fact, I’d prefer to see 20% or 30% annual revenue growth.

On the flip side, if the company does not make a breakthrough in its early days, it won’t bring in enough revenue to fund expansion. It will be in danger of burning out.

In these cases, the companies must either sell new stock and dilute the value of existing shares or issue debt.

Neither of these options is attractive to us as early investors. That’s why I carefully analyze a company’s cash position before considering it for investment.

A company must have enough cash on hand to fund its growth plans. Not all new share issues or debt issues are bad, but I prefer to own companies with enough existing cash on hand to fuel growth.

The Best of the Best Small Caps

Besides that sort of balance-sheet analysis, there’s also some chartwork involved when I assess a stock. I like to get to know the business firsthand, too — I’ll even take a research trip overseas, if it’s called for.

In working with my InvestorPlace colleague Louis Navellier on our new Power Portfolio 2020 venture, I combine my “boots-on-the-ground” approach with his quantitative system. (Louis has his own specific set of business fundamentals he looks at, as well as a proprietary algorithm to measure money flow into (or out of) the stock. He’s not called “the King of the Quants” for nothing.)

Between the two of us, we came up with several dozen stocks set to move higher in the coming year. After lots of discussion and detailed analysis putting these stocks through the paces of both of our systems, we whittled them down to the best of the best for 2020.

These are relatively small, very innovative companies — with revenues and share prices set to soar over the next 12 to 18 months. And I’d bet you haven’t heard of most of them before today.

The bulk of our nine best hypergrowth stocks for 2020 are small caps. At less than 1% the size of a giant like Facebook (NASDAQ:FB) or Google’s parent Alphabet (NASDAQ:GOOGL), there’s MUCH more room to run compared to the large caps everyone knows.

I’m extremely confident in saying that our Power Portfolio has STUNNING upside potential. So confident, in fact, that we were willing to guarantee it.

Click here for the replay of our Early Warning Summit, in which we lay out our 2020 forecast and our extra powerful combined approach to finding the best profits.

Matthew McCall left Wall Street to actually help investors — by getting them into the world’s biggest, most revolutionary trends BEFORE anyone else. The power of being “first” gave Matt’s readers the chance to bank +2,438% in Stamps.com (STMP), +1,523% in Ulta Beauty (ULTA) and +1,044% in Tesla (TSLA), just to name a few. Click here to see what Matt has up his sleeve now. Matt does not directly own the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/moneywire/2019/12/why-im-all-in-on-small-cap-stocks-now/.

©2020 InvestorPlace Media, LLC