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.

MOST NOTEWORTHY: GPC Biotech, Akamai, Qwest, Shutterfly and LDK Solar were today's noteworthy downgrades:

• GPC Biotech (NASDAQ: GPCB) was downgraded to Sell from Neutral at Goldman, to Sell from Hold at Deutsche Bank and to Underweight from Overweight at Lehman after the company's phase III trial of satraplatin to treat prostate cancer did not meet its primary endpoint.
  
• Deutsche Bank downgraded shares of Akamai Technologies (NASDAQ: AKAM) to Hold from Buy on valuation following the recent rally as they believe concerns around slowing growth, margins and capital efficiency will limit upside.
  
• Qwest Communications (NYSE: Q) was downgraded to Sector Performer from Outperformer at CIBC and to Neutral from Overweight at JP Morgan following the company's disappointing Q3 results.
  
• Jefferies downgraded shares of Shutterfly (NASDAQ: SFLY) following the better-than-expected Q3 results due to valuation.
  
• Piper downgraded shares of LDK Solar (NYSE: LDK) to Market Perform from Outperform, as they expect higher blended poly cost for the company due to tightening scrap poly supply and increased competition.

OTHER DOWNGRADES:

• Maxwell Technologies (NASDAQ: MXWL) was downgraded to Underperform from Market Perform at JMP Securities.
  
• UBS downgraded Estee Lauder (NYSE: EL) to Sell from Neutral.
  
• Merrill downgraded CommScope (NYSE: CTV) to Neutral from Buy.
  
• Under Armour (NYSE: UA) was downgraded to Underperform from Market Perform at Raymond James.
  
• RBC Capital downgraded Beckman Coulter (NYSE: BEC) to Sector Perform from Outperform.

MOST NOTEWORTHY: Shutterfly, Drugstore.com, S.Y. Bancorp and Stericycle were today's noteworthy initiations:

• Oppenheimer started shares of Shutterfly Inc (NASDAQ: SFLY) with a Buy rating and $42 target. The firm believes secular growth in digital photography and increasing adoption of user generated print publishing will drive EBITDA growth of 30%-40% over the next 2-3 years.
  
• Oppenheimer also initiated Drugstore.com Inc (NASDAQ: DSCM) with a Buy rating and $5 target, as they expect growth in the company's higher margin beauty segment could drive EBITDA above consensus estimates.
  
• Baird is positive on S.Y. Bancorp Inc's (NASDAQ: SYBT) valuation, capital-rich balance sheet, and top-tier profitability and resumed coverage with an Outperform rating.
  
• The firm also started shares of Stericycle Inc (NASDAQ: SRCL) with a Neutral rating, noting it would be more aggressive on shares in the mid-$40s or if earnings catch up with the passing of time.

OTHER INITIATIONS:

• UBS initiated Praxair Inc (NYSE: PX) with a Buy rating and $94 target and added shares to its Strategic Stock Selection List.
  
• Lehman initiated Infosys Technologies Ltd (NASDAQ: INFY) with an Equal Weight rating and Wipro Limited (NYSE: WIT) with an Underweight rating.
  
• William Blair reinstated coverage of the commercial real estate services sector, starting FirstService Corporation (NASDAQ: FSRV) with an Outperform rating, Jones Lang LaSalle Incorporated (NYSE: JLL) with a Market Perform rating and CB Richard Ellis Group Inc (NYSE: CBG) with a Market Perform rating.

MOST NOTEWORTHY: ORBComm Inc (NASDAQ: ORBC), Weingarten Realty Investors (NYSE: WRI) and Regency Centers Corporation (NYSE: REG) were today's noteworthy initiations:

• ORBComm was initiated with a Market Perform rating and $16 target at Piper Jaffray, as the firm believes the company may need to launch at least 25 satellites over the next few years to continue servicing its existing subscribers, which could lead to further losses. The company was initiated with an Outperform rating at Raymond James.
• Baird initiated Weingarten Realty with an Outperform rating and $56 target due to its strategy to accelerate growth and initiated Regency Realty with a Neutral rating and $88 target citing valuation and lack of catalysts.

OTHER INITIATIONS:

• OceanFreight Inc (NASDAQ: OCNF) was initiated with a Buy rating and $24 target at Cantor.
• UBS initiated shares of Ocean Power Technologies Inc (NASDAQ: OPTT) with a Buy rating and $20 target and shares of Omega Healthcare Investors Inc (NYSE: OHI) with a Neutral rating and $18 target.
• Shutterfly Inc (NASDAQ: SFLY) was initiated at JMP Securities with a Strong Buy rating and $25 target.
• Corn Products International Inc (NYSE: CPO) was initiated with a Buy rating and $48 target at BB&T Capital Mkts, as the firm believes CPO will be able to generate strong earnings growth, as well as use its strong cash flow to grow its specialty ingredients business, raise its dividend, use for a share repurchase or a combination of the above.

Analyst summaries provided by TheFlyOnTheWall.com (subscription required).

MOST NOTEWORTHY: Shutterfly, Inc (SFLY), Marvel Entertainment, Inc (MVL), National CineMedia, Inc (NCMI) and Wal-Mart Stores (WMT) were some of today's noteworthy initiations:

• Cantor sees significant opportunities for growth at Shutterfly Inc (NASDAQ: SFLY), driven by new business lines, international expansion and new products, among other things, and started SFLY Shares with a Buy rating.

• Stifel initiated Marvel Entertainment (NYSE: MVL) with a Buy rating and believes the impending film slate provides a long-term growth opportunity and serves as a catalyst.

• Thomas Weisel started National CineMedia Inc (NASDAQ: NCMI) with an Overweight rating, as the firm still believes the company is among the fastest-growing, ad-supported media companies in the U.S. given its ownership in NCM LLC, which has established a leadership position in the cinema advertising market.

• FTN Midwest started Wal-Mart Stores Inc (NYSE: WMT) with a Neutral rating.

OTHER INITIATIONS:

• Jefferies started Conexant Systems, Inc (NASDAQ: CNXT) with a Hold rating.

• Wachovia initiated NYMEX Holdings, Inc (NYSE: NMX) with an Outperform rating.

• Goldman Sachs started LSI Corp (NYSE: LSI) with a Neutral rating.

• Citigroup started Kroger Co (NYSE: KR) with a Buy rating.

• Stein Mart, Inc (NASDAQ: SMRT) was initiated Morgan Joseph with a Buy rating.

• Citigroup started Time Warner Cable (NYSE: TWC) with a Hold rating based on valuation.

Analyst summaries provided by TheFlyOnTheWall.com (subscription required).

Jim Clark is a legend in tech, having been the co-founder of Silicon Graphics(NASDAQ:SGIC). From there, he co-founded Netscape, as well as other companies like Healtheon/ Web MD Corp(NASDAQ:HLTH).

In fact, one of his dot-com investments –- Shutterfly (NASDAQ:SFLY) -– recently went public. However, Clark has decided to relinquish his role as chairman of the board.

Actually, this is not a sign he has doubts about the company's prospects; rather, it is that he has doubts about US securities regulations, especially Sarbanes-Oxley.

You can check out his resignation letter on the SEC site.

According to Clark:

As I understand it, Sarbox dictates that I not Chair any committee due to the size of my holdings, not be on the compensation committee because of the loan I once made to the company, not be on the governance committee, and it even dictates that some other board member must carry out the perfunctory duties of the Chairman. What's left is liability and constraints on stock transactions, neither of which excite me.

It seems pretty clear to me that lawmakers have gone too far in considering a large shareholder to be inappropriate in the roles, but it is equally clear that I have no ability to change this in the near term. My only solution is to become an outsider. I wish to be treated as such effective immediately.

Yes, there is talk that there may be some changes to Sarbanes-Oxley. Unfortunately, in the meantime, it will continue to be tough for public companies – especially smaller ones – to attract top-notch talent.

Tom Taulli is the author of various books, including the Complete M&A Handbook and the EDGAR-Online Guide to Decoding Financial Statements.

MOST NOTEWORTHY: Shutterfly (SFLY) tops today's list of initiations. JP Morgan, Jefferies and Piper Jaffray initiated Shutterfly today.

• The group of firms believe Shutterfly, Inc. (NASDAQ:SFLY) is positioned to be the dominant play in the photo-based personal publishing space, which allows for premium pricing.

OTHER INITIATIONS:

• Bank of America initiated Leisure stocks today:
  • Bank of America would buy cruise line stocks as they believe the worst is over. As such, the broker initiated Royal Caribbean Cruises (NYSE:RCL) and Carnival Corp. (NYSE:CCL) with Buy ratings.
  • The firm is also bullish on the video game cycle and initiated Activision, Inc. (NASDAQ:ATVI) and THQ Inc. (NASDAQ:THQI) with Buy ratings, Electronic Arts (NASDAQ:ERTS) and Take Two (NASDAQ:TTWO) with Neutral ratings, and recommends buying Activision and THQ Inc today.
  • Bank of America would stay out of toy stocks at current levels due to valuation, and initiated Hasbro, Inc. (NYSE:HAS) and Mattel, Inc. (NYSE:MAT) with Neutral ratings.
  • They are also cautious on powersport companies and initiated Harley-Davidson (NYSE:HOG) and Brunswick Corp. (NYSE:BC) with Neutral ratings. The bank also started Polaris Industries (NYSE:PII) with a Sell rating.

Analyst summaries provided by TheFlyOnTheWall.com (subscription required).

Back in the 1990s, if a company said it had Jim Clark as an investor or an advisor, it meant success was practically guaranteed. After all, he co-founded the original dot-com break-out company, Netscape. He was also an old-school tech guy, having founded Silicon Graphics.

But after the dot-com bust, even the mighty Clark was unable to save many of his bets. Rather, it was only a select few dot-coms, such as Google, Inc. (NASDAQ:GOOG), that were able to thrive.

Well, in the New York Times, there is an excellent story on one of Clark's investments (in 1999), Shutterfly, a provider of online photo services.

Of course, in the nuclear winter for dot-coms, Shutterfly had to cut jobs and focus like a laser-beam on profitability. It also required about $90 million in financing.

While the company recently went public, with a market cap of only $315 million, it's certainly not a home-run for the VCs.

And that's a big problem. Even though the IPO market has come back during the past few months, it has not been enough to really help VC firms. Basically, VC firms need significant returns to justify the big risks.

As a result, it would not be surprising to see a contraction of the money in VC funds. For example, there were many funds that were launched in 1999-2000, and funds usually have a life-span of only six to seven years. So if there are mostly losses to show to investors, how many are going to re-up? Probably not a lot.

Tom Taulli is the author of various books, including the Complete M&A Handbook and operates InvestorOffering.com.

The year has been tough for tech IPOs, that is, until recently. Some of the blow-out offerings include DivX and Riverbed.

Today there was another tech deal: Shutterfly. True, the stock increased only 3.7%. But, then again, the stock was priced at the top of its $13-$15 range.

Shutterfly was founded in April 1999 and even has a dot-com legend as its Chairman, Jim Clark. He founded Netscape, Healtheon/Web MD Corp, and Silicon Graphics.

As for Shutterfly, it is a Web-based consumer property that allows users to share, print and preserve their pictures. It is also possible to turn these pictures into physical photos and even books.

But unlike many dot-coms, this one has morphed into a real business. Over the past year, sales have been roughly $108 million. In fact, revenues are growing at 30%+.

There are certainly risks. After all, the company has lost money this year. Also, the current valuation is hefty – at 3X revenues.

Yet, with the Christmas season coming, there is probably some momentum left in this stock. But definitely do not expect a smooth ride.

Tom Taulli is the author of various books, including the Complete M&A Handbook and operates InvestorOffering.com.

Today, Shutterfly filed to go public. Founded in 1999, the company is now a leader in Web-based publishing of digital photos for consumers (allowing such things as editing, sharing, and printing).

Shutterfly's revenue model is to sell high-quality prints. In fact, to ensure quality control, the company has its own manufacturing facility in Hayward, California.

Another key advantage of the Shutterfly model is that content costs are practically nothing (the company's users create the content by uploading pictures).  Also, because people want to share photos with others, Shutterfly has a viral distribution model.  In May, the site attracted 4.1 million unique visitors.

Up until now, online photo companies have been selling out to major companies, like Yahoo! (bought Flickr) and Google (bought Picasa). In other words, Shutterfly faces intense competition.