Small Cap stocks are where outsized opportunities reside. This will be especially true if the vaunted “Fed Put” is broken as we expect it will be. Small Cap land is where you will find quality companies led by quality management teams that are under-followed by the sellside community.
First, run a screen for companies with Market Caps below $2 billion, Total Revenue growth consistently above 5% and positive cash flow growth. If you can’t generate positive cash flow much less cash flow growth as a public company you lack operational discipline.
Now for the hard work:
- Identify companies that have built the best product and services portfolio in a particular market segment. Those companies should be the fastest growers and have the best customer retention rates.
- The best Technology companies invest heavily in their product and services portfolios, as well as their people.
- The best Technology companies are not spending as much on stock buybacks as they are on Product Development. A good rule of thumb is be wary of companies that buy back stock at ever higher prices. Those that do so are using stock buybacks to put a floor under the stock / goose executive options packages rather than buying back stock opportunistically when it is historically cheap.
- Identify companies that have had minimal executive turnover.
- Identify companies that have made intelligent acquisitions. Smart acquisitions strengthen the acquiring company and are executed for a reasonable purchase price.