The Little Book of Big Profits from Small Stocks Summary - Chapter 4

Chapter 4: Growing Out Of Sight

1.      Growth stocks are Wall Street’s favorites. They have lots of current market momentum, and tend to be heavily traded. They also tend to have cutting-edge technologies or products that everyone is excited about. But they are not the type of undiscovered growth stocks that we are looking for.

2.      We do not necessarily want to own the most popular exciting stocks. If everyone likes them and already owns them, they are probably pretty high in price and much of the gains are already discounted in the price.

3.      It is hard to outperform if you do what everyone else is doing.

4.      We are more interested on:

a.       Stocks that are good, rather than being looked good

b.      Stocks in boring niche business

c.       The business is dull

d.      The companies that make products that people simply do not want to live without regardless of what is going on in the economy or the world (i.e., they are some hobbies or products that become lifestyles, such as golf, hunting, fishing, boating or so on) – but are out of favor due to economic slowdowns

5.      We need to look for companies that can experience earnings growth without necessarily being exciting.

6.      The mantra of most growth stock investors is bigger, better, faster. They are looking for the newest fads and the most exciting products. The truth is that the best growth stories are often found in our cupboards and refrigerators. These seemingly boring products we use every day can create growth stories and when those companies see their stock price fall into single digits, they become tremendous profit opportunities.

7.      Use stock screener to look for undiscovered growth stocks as follow:

a.       Stocks that have been growing steadily for at least past five years (i.e., earnings and revenue growth by at least 15%)

b.      Maximum debt to equity ratio of 0.3 or 0.5

c.       Maximum stock price at $10

d.      Companies with products that have exposure to huge potential markets like alternative energy, smartphones, social networking, or any other product or service that can see continued steady growth for years to come.

e.       Some institutional ownership (i.e., while we want them undiscovered we do not necessarily want them to be unknown).

f.       Decent levels of insider ownership (i.e., more than 10%)

g.      Explosive growers that have seen a surge of earnings and revenues in the past year and are poised to break out and gain the attention of Wall Street

Chapter 5: Shopping the Bargain Bin