Smaller is more Rewarding
Since 1926, the average small-cap value stock has significantly outperformed the average large-cap growth stocks.
All great companies start small. They are built by entrepreneurs who invest their time and money, raise capital privately, and turn their dreams into reality. Many of the world’s greatest innovations come from small, entrepreneurial companies and very few come from the behemoths. Even Microsoft, Wal-Mart, and were all once small caps and if you can buy these stocks early, before the broader financial arena, and when they are profitable and trade at low prices with great growth prospects, your returns can be explosive – long-term.
Again, many of the biggest and most successful companies in the stock market started small – so unless you’re invested in this group of stocks, you’re missing out on the best potential gains. The problem is that most investors look at small-cap stocks the wrong way. Not all small caps provide value or a good risk-to-reward profile. Inexperienced investors either chase stocks that are overpriced, hold losers far too long hoping for a turnaround, or they just never even hear about long-term potential winners because these stocks are not yet household names.
Fortunately, KeyStone is here to help you navigate this market – and introduce you to some of the best, most profitable small-cap value and growth stocks on the market.
But first off, what are small-cap stocks? Essentially, they are stocks with a relatively “small market capitalization.” The definition of small cap can vary, but in our U.S. Coverage Universe, we classify our market capitalizations as follows:
US Micro-Cap Stocks Covered: Market Cap of less than $250 million.
US Small-Cap Stocks Covered: Market Cap of between $250 million and $2 billion.
U.S Mid-Cap Stocks Covered (High Percentage of Coverage): Market Cap of between $2 billion, typically to a limit of $10-15 billion.
Do Not Confuse Quality Small-Cap Stocks with Penny Stocks
The quality small-cap growth and value stocks that we cover should by no means be compared to the world of “penny stock” investing. The companies we cover are typically earnings-positive, with strong revenue growth, strong balance sheets, and low fundamental valuations. While they can trade below $1.00 (many trade from $1.00 – $100.00 – the market valuation is based on market-cap, not share price), the stocks we cover are not fly-by-night organizations with an “idea or concept,” a patch of desert in Nevada that “promises” to be the next great gold mine, or any money losing enterprise. We specifically avoid these types of “penny stocks” in favour of profitable, strong, high-growth businesses that have the potential to provide shareholders with tremendous long-term returns.
The Advantages of Investing in High-Quality Small-Cap Stocks
- Small-Cap Stocks Historically Outperform Large-Cap Stocks
Between 1926 and 2004, large-cap stocks had an average annual return of about 9.26%. Accordingly, $10,000 invested in large-cap stocks in 1926 would have grown to about $10 million by 2004. That’s not too shabby. However, it pales in comparison to the astonishing 15.9% annual return of small-cap stocks over the same time. $10,000 invested in small-cap stocks in 1926 would have grown to about $1 billion by 2004! There is also a famous Ibbotson study, which examined the U.S. markets over 70 years and found that small-cap stocks outperformed large-cap stocks 79% of the time over a 15-year period and 95% of the time over a 20-year period.
- Buy Before Big Institutions Can Buy
You have an advantage in buying at the small-cap level. It is one of the biggest advantages of investing in small-cap stocks and allows you to beat institutional investors. Because mutual funds and other investment vehicles have restrictions that limit them from buying large portions of any one issuer’s outstanding shares, many funds will not be able to give the small cap a meaningful position in the fund. As small-cap investors, we can buy in early and benefit from institutional buying down the road as the company grows and larger investors can buy in – often providing better liquidity and pushing the valuations higher.
- Lack of Coverage Creates Potential Small-Cap Bargains
In many cases, when Keystone discovers a small-cap stock, we are initially the only or one of the only official research coverage on the stock and often the only independent analysts covering the stock. Compare this to many large-cap stocks which have hundreds of analysts analyzing and following their every move. You can immediately see why the potential to find an undervalued and undiscovered gem is far more likely in the small-cap segment of the market.
- Small-Cap Have Higher Growth Prospects
Due to their size alone, small caps can often sustain higher growth rates than larger companies – it is easier to double earnings of $1 million to $2 million than to double earnings of $1 billion to $2 billion. Higher growth, bought at reasonable prices equals a better chance for long-term share price appreciation – something all investors are looking for!
New: U.S. Small-Cap Research Service
We apply the same earnings and growth-based methodology that produced the best performing capital compounding stocks over the past 2 decades from our Canadian Small-Cap Research to 8,000 U.S. micro to mid cap stocks to uncover 8-15 profitable, undervalued growth stocks annually. Get in on the ground floor as KeyStone builds out the U.S. Small-Cap portfolio over the next 24-months.
| Year |
Small-Cap Discovery Portfolio |
| 2024 | 31.9% |
*From Actual U.S. Growth Service Discovery Portfolio
