Explosive Small-Cap Stocks

Posted by Ryan Irvine - Keystone Financial

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Market Buzz – 9 Steps to Uncovering Explosive Small-Cap Stocks
Below are the 9 simple steps we follow in order to find, research, and analyze small-cap stocks that could put big gains in your portfolio;

Step 1: Growth Trends: Identify growth trends and market sectors positioned for rapid growth in the years to come. Be they sector specific such as energy (oil & gas), gold & precious metals, technology, healthcare, etc. or geographic such as China, India, Brazil, North America, Europe, etc.

Step 2: Old Fashioned Real Research: Actually read over the financial statements and MD&A’s of more than 7,000 publicly traded companies to find relatively unknown, high growth small to mid-cap stocks that display GARP and are positioned to grow.

Step 3: Financial Performance – The Fundamentals are Key: Review and evaluate key metrics in the company’s financial statements to understand historical financial performance. Strong fundamentals within an individual company can often lead us to growth trends within an industry.

Step 4: The Business Matters: Understand the business and industry of the potential investment, including products, services, and management’s ability to run the business.

Step 5: Quality Management: After reviewing the company’s financial statements and reading their MD&A, if the company meets our fundamental GARP based criteria, we find it important to interview key management to understand their strategy and clarify their outlook going forward.

Step 6: Earnings Quality: Look for red flags that indicate anything from cyclicality, financial manipulation or even fraud to avoid investing in these types of situations.

Step 7: Growth Outlook: Develop an understanding of expectations for growth to make valid valuation comparisons.

Step 8: Peer Comparisons: If they are available, we find it instructive to compare relative valuations of companies within the same specific business or industry to provide more “apples to apples” type information on how the market values similar companies or at least those within its industry segment.

Step 9: The Investment Decision: Factoring in all of the relevant information above, and paying particularly close attention to current market valuations, we determine whether or not the investment is a good BUY. If it is, we issue a full report to our clients with the corresponding BUY action and within what price range we find it attractive.

Looniversity – Short Selling Shorts

Contrary to popular belief, short selling has nothing to do with hocking a pair of Bermudas on Bay Street. No, ladies and gentlemen, short selling can be defined as the sale of securities, which the seller does not own. Huh? Selling something I don’t own? Sounds pretty sweet – let’s take a closer look at the mechanics.

Short selling begins by contacting your friendly neighbourhood broker and declaring your intention to short a security. Then, your broker will loan you the securities out of its inventory. Sell your borrowed securities into the market as you would with any other securities you own. Following this, the proceeds of the short sale are deposited in your account. Now, take the money and run (kidding). Instead, you must complete the process by depositing the required margin in your account.

Essentially, profits are made whenever the initial sale price (via the short sale) exceeds the subsequent purchase cost. As such, short sellers are looking for investments (e.g. stocks) which they believe are overpriced and due to experience a price decline over time. Now, if you could only short shares in that guy selling Bermudas on that street corner – we think you would have a winner.

Put it to Us?

Q. Can you give me the quick “411” on stop-loss orders?

– Tania Wijata; Toronto, Ontario

A. Ahh, the stop-loss order – that magical phrase that orders your broker to immediately stop making poor decisions and pay back all of your recent losses. A nice thought, but it ain’t gonna happen.

Essentially, a stop loss is an order to sell shares you already own, which effectively becomes a market order (in this case, the best available asking price) when the price of your shares trades at or below your stated limit (stop) price. Investors use this type of order in two common situations: to try to reduce the amount of loss that might be incurred or to protect at least part of a profit.

In the case of the former strategy, an investor in company BAD ($1.00) may only be willing to lose 20% of his/her investment and therefore sets a Stop Loss Order at $0.80. Whereas, the latter strategy can be applied to a situation in which one has purchased shares in company GOOD, which have subsequently appreciated to the $1.50 level. As a result, he/she may wish to “lock in” at least a 30% profit and therefore set a stop at $1.30.

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