Some investors shy away from small stocks, thinking they are too volatile and risky. But BusinessWeek takes a look at such stocks and finds some that could offer a lot of potential for growth.
It can be hard to find small companies that have great growth potential. Since most Wall Street analysts ignore smaller companies, it is often tough for investors to find the research that they need in their selection process, so they have to rely on their own research in order to find that perfect small cap stock.
One thing to look for when examining small cap stocks is a long and established track record. The downside to this approach is that these stocks are not going to be the next "big thing" and bring you huge profits in the short run. These stocks are the ones that typically serve a niche market, and perform that service successfully. While these will not make you rich overnight, they are fairly reliable companies you can look to for nice and steady returns. If you are the type of investor who likes to buy and hold, these are the small cap stocks for you.
One of the advantages of small cap stocks is that they typically have business models that are and easier for the average investor to get his or her head around. A few examples of these stocks that the article takes a look at are Buffalo Wild Wings (NASDAQ: BWLD), which is starting to spread nation wide, Shutterfly (NASDAQ: SFLY), a digital web photo outfit, and Peet's Coffee & Tea (NASDAQ: PEET), which has huge potential to spread its products into coffee houses and retail outlets.
As a last piece of advice, BusinessWeek recommends that before you choose a small stock be sure to take a look at the executive team. Being a small company, it will definitely show more vulnerability to incompetent management.
The bottom line: small caps can prove to be very successful for the patient investor. If used properly, you can witness some really nice gains using these smaller stocks. But if you looking to buy small companies to watch them skyrocket into huge fortunes, you could in store for a wild ride.
Eliza Popescu is a financial writer for the online investment advisory service Investor's Observer.
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