{"id":29024,"date":"2012-04-13T01:37:45","date_gmt":"2012-04-13T05:37:45","guid":{"rendered":"http:\/\/countingpips.com\/forex-news\/2012\/04\/two-down-and-dirty-ways-to-track-down-undervalued-small-cap-stocks\/"},"modified":"2012-04-13T01:37:45","modified_gmt":"2012-04-13T05:37:45","slug":"two-down-and-dirty-ways-to-track-down-undervalued-small-cap-stocks","status":"publish","type":"post","link":"https:\/\/www.investmacro.com\/forex-news\/2012\/04\/13\/two-down-and-dirty-ways-to-track-down-undervalued-small-cap-stocks\/","title":{"rendered":"Two Down and Dirty Ways to Track Down Undervalued Small-Cap Stocks"},"content":{"rendered":"

By MoneyMorning.com.au<\/a><\/strong><\/p>\n

US author Michael Lewis’s most famous book is Liar’s Poker<\/em>.<\/p>\n

In it he tells the story of working for U.S. broking firm, Salomon Brothers during the late 1980s. (It’s a must-read book if want to understand the early years of the subprime mortgage market.)<\/p>\n

Lewis’s second most famous book – in America anyway – is Moneyball<\/em>. Written in 2003, Lewis tells the story of cash-strapped baseball team, the Oakland Athletics (the A’s) and their general manager, Billy Beane.<\/p>\n

<\/span><\/p>\n

(Unless you’ve got a basic understanding of baseball, we don’t<\/u><\/em> suggest you read it.)<\/p>\n

In short, baseball is a game where rich teams usually end up with the best players.<\/p>\n

That’s a problem for the poorer teams as it makes it harder for them to compete.<\/p>\n

Billy Beane’s task was to find a way to combat this problem. How? Well, even though he couldn’t outspend the big teams… he sure could out-think them…<\/p>\n

Looking for Value and Growth in Small Cap Stocks<\/h3>\n

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In any line of business many take conventional thinking as fact. In baseball, the scouts who watched college and high school players were sure they knew what made a first-rate player. If the player fit their conventional thinking they said he had the right “tools”.<\/p>\n

Trouble is, not every hot young ball player with the right “tools” becomes a match winner. And the ones that do – and prove themselves on the pitch – don’t come cheap.<\/p>\n

This is where Billy Beane had to out-think others. He had to ignore the traditional player evaluation process. And instead use an approach that would help him buy players other teams would overlook – because they didn’t have the right “tools” – but could score enough runs to win him games.<\/p>\n

His trick was to use statistical analysis of a potential player’s past performance… something many other talent scouts hadn’t and still don’t think is important.<\/p>\n

The result of this analysis was that Beane could find players the market had undervalued. So that even though the A’s wages bill was only one-third that of the big-spending New York Yankees, the team could still compete on almost equal terms.<\/p>\n

Now, that’s all well and good for baseball and other sports. But how can it be applied to investing? Simply this: looking for value (and growth) is the core of small-cap investing<\/a>.<\/p>\n

You look for small cap stocks<\/strong> that are undervalued by other investors and where there’s the opportunity for explosive growth. You could call them small-cap Moneyball<\/em> stocks.<\/p>\n

And here are two of the best ways we know you could look for them…<\/p>\n

Value the Small Cap Business, Not the Small Cap Share…<\/h3>\n

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The simplest way to protect your wealth is to pay LESS for a share than it is actually worth… That is, try and buy shares worth $1 for 60 cents. And you’ll never go far wrong. <\/p>\n

I’m not talking about haggling with your broker, or some kind of discount trading. It’s about knowing the difference between share PRICE and VALUE.<\/p>\n

And with the sovereign debt crisis growing<\/a>, in Europe and the US, it’s as important as ever.<\/p>\n

Why?<\/p>\n

Because when something “dramatic” happens in the world negative sentiment floods the market. This sentiment drags the price of good small-cap stocks<\/a> (and bad small-cap stocks) down. And gives you the opportunity to buy good small-caps trading cheaply<\/a>. <\/p>\n

If you know how to find and buy a small-cap trading below its true value, you can use that knowledge to identify hidden profit potential. In any market<\/u>.<\/p>\n

So how do you work out whether you’re getting a fair price? <\/p>\n

First, you need to stop thinking about buying small-cap “shares”… and start thinking about buying small-cap “businesses”<\/a>. <\/p>\n

When in Doubt, Follow the Dividend Trail<\/h3>\n

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When you invest in a quality company trading below its intrinsic value, there’s a strong likelihood of it paying off in the long term. <\/p>\n

Another rule of thumb when it comes to sniffing out quality companies is to follow the “dividend trail” back to its source. <\/p>\n

Many investors write off dividend-paying stocks<\/a> as “boring”. And unlikely to make you “real” money. But a company with a long track record of making dividend payments is probably less of a risk than a company with NO track record of paying dividends to its shareholders. <\/p>\n

The reason being that it (generally) proves the company generates more cash than it needs… <\/p>\n

That healthy cash buffer might be what separates a business that’s able to shake off the US debt virus from the ones that can’t. <\/p>\n

If you buy a good dividend-paying stock<\/a> at a fair price, over the long term you should receive a healthy mix of income and growth. And your wealth will be better protected against vicious collapses in the share market.<\/p>\n

Play ball!<\/em><\/p>\n

Kris Sayce
\nEditor, Australian Small-Cap Investigator<\/strong><\/p>\n

\n<\/img><\/a> <\/img><\/a> <\/img><\/a>\n<\/div>\n


\nTwo Down and Dirty Ways to Track Down Undervalued Small-Cap Stocks <\/a><\/p>\n","protected":false},"excerpt":{"rendered":"

By MoneyMorning.com.au US author Michael Lewis’s most famous book is Liar’s Poker. In it he tells the story of working for U.S. broking firm, Salomon Brothers during the late 1980s. (It’s a must-read book if want to understand the early years of the subprime mortgage market.) Lewis’s second most famous book – in America anyway … <\/p>\n

Continue reading “Two Down and Dirty Ways to Track Down Undervalued Small-Cap Stocks”<\/span><\/a><\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[],"tags":[],"class_list":["post-29024","post","type-post","status-publish","format-standard","hentry"],"_links":{"self":[{"href":"https:\/\/www.investmacro.com\/forex-news\/wp-json\/wp\/v2\/posts\/29024","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.investmacro.com\/forex-news\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.investmacro.com\/forex-news\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.investmacro.com\/forex-news\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.investmacro.com\/forex-news\/wp-json\/wp\/v2\/comments?post=29024"}],"version-history":[{"count":0,"href":"https:\/\/www.investmacro.com\/forex-news\/wp-json\/wp\/v2\/posts\/29024\/revisions"}],"wp:attachment":[{"href":"https:\/\/www.investmacro.com\/forex-news\/wp-json\/wp\/v2\/media?parent=29024"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.investmacro.com\/forex-news\/wp-json\/wp\/v2\/categories?post=29024"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.investmacro.com\/forex-news\/wp-json\/wp\/v2\/tags?post=29024"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}