Special Report: The Secret to Big-Time Profits From Small-Cap Stocks

Where can you land double-digit gains in a single day, or triple-digit gains in a single week?

The answer, more often than not, is in the often-feared and misunderstood corner of the financial universe known as small- or micro-cap investing.

The "cap" refers to a company’s market capitalization, which is the product of the current share price multiplied by the number of shares out.

In plain language, the market cap is the company’s current overall value.

For companies like Apple (NASDAQ: AAPL) or Alphabet Inc., the parent company of Google (NASDAQ: GOOG), that figure is in the hundreds of billions of dollars.

But as big as those major players are, the chances of any new investor making more than a couple percentage-point gains on them is that much lower.

Their periods of meteoric growth are behind them, and the profits to be had from those times of rapid expansion have long since been cashed in by the early investors, who bought shares before they were even public.

Therein lies the difference between blue chip, or mainstream, stock investing and investing in small- and micro-cap companies.

Public companies whose shares trade for pennies or that have only a few million (as opposed to billions of) shares out in the market are the ones where the biggest potential is locked.

Young companies, often still in their pre-profit stages, both define and accentuate the concept of ground-floor investing.

With upside potential at its maximum, however, there are risk factors to consider.

Maximized upside translates to risk because, unlike established companies whose meteoric growth period is over, pre-profit, early-stage companies can often fail to achieve expectation.

Occasionally, they fail to progress at all, resulting in catastrophic decline of share value and inevitable losses to shareholders.

With careful planning and strategizing, however, the risk can be minimized while retaining all of the reward potential associated with early-stage companies.

This de-risking process can be boiled down to just a few crucial steps.

Over the course of my career, I’ve found that there are five steps necessary if you want to all but guarantee profits with penny stocks.

Here are those steps and the reasoning behind them:

  1. Avoid the Dividends: Early-stage companies need to be reinvesting their cash... not doling out profits.

  2. Cash Reserves: This implies a healthy, stabilized debt-to-equity ratio. This means a company has the money to research and develop products, market itself, hire new staff, and buy new equipment. If the company is a body, the cash is the blood.

  3. Strong Profit Margins: A good profit margin isn’t essential, but it’s indicative of stability and future growth.

  4. Gross Margins of 50% or Better: This implies that the business model works and will continue to keep the company profitable moving forward.

  5. Tight Share Structure: Fewer shares for a small company means two things: First, individual shares will be valued higher and thus carry an appearance of stability. Second, positive news will have a stronger effect on trading volume as a percentage of total market capitalization. In short, good news will drive gains faster.

On top of these five basic filters that you should apply to your small- and micro-cap stock searches, there are a handful of basic big-picture factors to look at to give that final bit of strength to your de-risking strategy.

  1. Current Popular Trends: Is the next iPhone coming out in a week? Has Tesla just announced a new product launch? Major players in the consumer goods sector drive trading for smaller companies on a magnified scale. A new iPhone means smaller sub-contractors, supplying things like screens and other components, will be getting orders with potential to change the company’s entire balance sheet. A new product from Tesla Motors, such as the Powerwall, will drive the lithium market at a similar pace.

  2. Seasonal/Cyclic Events: Investors tend to hibernate during the summer and become more active in the fall. The holidays are also quiet, followed by a major rejuvenation in January. Mining companies operating in Canada are similarly subject to seasonal limitations, just based on climatic factors. Buy during the cold months and await the warm ones, and you’ll maximize your potential right off the bat.

  3. Macroeconomic Factors: Did the Fed just announce an interest rate hike? Did the newly elected president just state an intent to raise taxes? Either of these events will drive trading in the precious metals sector. And don’t just watch the domestic economic news. Big changes can come from abroad, too. The Chinese yuan is gaining ground as a replacement for the dollar as the world’s reserve currency. The result? Gold will spike. Find a good, small gold miner with the right production costs, and profits are virtually guaranteed as investors run the prices back to record levels.

Put all of these together and what you get is a highly optimized, de-risked, and, most importantly, short list of potential companies to invest in.

No tricks, no anecdotal results... just statistically de-risked companies that offer maximized upside for minimized risk.

Invest in these on a consistent basis, and in the long run, you will see realized profits that no mainstream, blue chip investing strategy can compare with.

Of course, if you’re still a bit skittish about going it alone and applying these filters yourself, we can help there, too.

Stay tuned for more Wealth Daily news releases, and get the full benefit of our proprietary de-risking methodology — delivered to your inbox daily, without fail.

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