The Little Book of Big Profits from Small Stocks Summary - Chapter 9

Chapter 9: Looking For the Right Stuff

1.      Choose companies that have a debt to capitalization ratio of 50% or less.

2.      Estimate the capital requirements of a company in the near future. If capital expenditure is required, it would cause lower profits on the horizon.

3.      Check the footnotes and fine print on financial statement. If auditors issued a qualified opinion that is a huge red flag that something may be wrong with the data we use to evaluate the company. 

4.      Check with the investor relation

5.      Look at the price chart (for some of these signals: stock moving higher on increased buying activity, stock breaking out to new highs, the stock has bounced off a level of support).

6.      I never make a decision because of the chart itself but if the stock has passed the research process, charts can provide valuable information about what other investors think of the company.

7.      Check who is buying or selling the shares.

a.       An insider selling the stock may not be a serious problem – as someone could be in need of cash for some personal reasons.

b.      However, many sellers over a period of time is a huge red flag.

c.       Insider buying is an indication that they like the potential of the company.

d.      Look at what other funds or large investors are buying. I like to see that at least a few other smart investors have expressed interest in the stock.

8.      Research what the analysts are saying. There are some great research resources available to you. For example: Value Line, Standard and Poor’s and Yahoo!’s Finance.

9.      Explore your own network of contacts (i.e., experts in the various fields to understand the new technologies, products and services)!

10.  The lesson here is to get talking, get researching and get to it!

Chapter 10: Well Bought Is Half Sold