An MBA Level Primer on Small Cap Opportunities

I’m thrilled to introduce you to one of Cabot’s most talented analysts: Tyler Laundon. [Cabot Wealth Network](113/d2zn7704/VX1Wmr9fFR3sW7JPNZt1mS20PW4zFhY953lR0kN50kgP23qn9gW7lCdLW6lZ3pPW4r0Gmt2NqxVVW2Zpzn36TQ6_YW58DbJc3WLVt4W4Xpkfm2fQwHjW2hWzWn721yJxW7cKyg74Fzng3N4P9V-Wc8S-vW772lvG8d4LG0N4Q_MFmXrtmDW1_c6zl2yMSWPW39g3cy1RMbZpVznnHQ5QlmVvW49fgq29005rHW7wNDpJ7gcxXqW6g0zQf4dTl4yN8QjvNcY8md1W4CKh7p3MhQF6N4HZ721WnjcTW2R-tYB1bFT93W8TT59z7pV1v_N23x1FtthZh8W9kJYfQ2R0CfZW29QlP63LqcBBV1l3mr6Y7rsXf6GQTSl04) A Note From Cabot’s CEO, Ed Coburn: I’m thrilled to introduce you to one of Cabot’s most talented analysts: Tyler Laundon. Tyler has a truly unique story as an investor. He was a general contractor for over a decade when the Great Financial Crisis hit. His business dried up so he went back to business school graduating with his MBA at the head of his class. Now he runs Cabot Small Cap Confidential. I’ve asked Tyler to give you a high-level look at how to invest in small cap stocks. Don’t miss this essay… How to Find Small-Cap Stocks Here’s how to find great small-cap stocks in five steps: 1. Search for paradigm shifts that are opening up new opportunities. I search for paradigm shifts in any field of business that requires a unique, new solution that will be provided by a stand-alone company. I then seek a niche supplier that will become an equal benefactor to that pioneering company. I call these companies “pure plays.” A good example of such a paradigm shift was the move from the mainframe computer environment to the personal computer environment in the 1990s. All the new personal computers needed to be connected! And Cisco (CSCO) filled the void, supplying the industry with networking tools and its stock increased 70-fold. I try to dig deep to uncover the small company suppliers to the transition leaders—just as the top suppliers to Cisco, Sonic Solutions and Hansen became equal beneficiaries of the paradigm shifts, yet remained largely unnoticed by institutional investors until well into their industry transitions. 2. Invest only when the market opportunity is huge—and quantifiable This is the Law of Large Numbers: Only invest in small companies that serve large, burgeoning markets because the companies can realize tremendous growth with even small market share. The sheer size of the markets creates the potential for huge gains while helping to reduce your risk profile. Large medical patient populations and new technology users are examples of vast markets to target. Here’s an example: By the age of 60, half of all men will have an enlarged prostate, a condition known as Benign Prostatic Hyperplasia (BPH). Research tells us that treatment for this condition will cost upward of $10 billion per year. The opportunity for a small company that captures even a fraction of this market would be enormous. 3. Invest in companies before the institutions notice them This strategy is called robbing the train before it arrives at the station. By gaining a research advantage, we can invest in companies before most big investors get on board—including mutual funds, hedge funds and pensions. In many cases, I’ll invest in companies that have less than 50% institutional ownership. The idea here is that subsequent investments by institutional investors will drive up the value of the stock. 4. Invest in stocks that offer both growth and value Big, growth-oriented ideas are awesome, but it’s also important to consider valuation and buying when valuation as compared to peers is reasonable. A good candidate may be a young company that has demonstrated significant growth in sales yet is undervalued based on the company’s market potential versus its total market capitalization. I also want to see a balance sheet with cash and little, if any, debt. Cash is important because it can carry a company through unexpected events. For example, should the much-anticipated launch of a product be delayed, I want the company to have enough cash available to see the product to market. 5. Avoid big losses It’s last on my list, but certainly far from my least important rule for how to find small-cap stocks. Since 1925, small-cap stocks have posted greater gains than any other asset class. That long-term outperformance helps to make a strong case for owning small-cap stocks. But investors do need to understand the larger moves to the upside are typically mirrored on the downside during bear markets and market corrections. The idea here is to avoid catastrophic losses. A couple of 30% losses a year is not a big deal. But allowing those losses to get bigger really does curb the overall profit potential of your portfolio. Ultimately, you’ll need to decide what stop loss level works for you, and what will make sure you sleep well at night but the strong long-term performance of small-cap stocks makes this an asset class worth your investment. If you’re interested in learning more about Tyler’s service, this is a great time to get started. That’s because as a new Cabot reader, you can claim a steeply discounted membership to Cabot Small-Cap Confidential. Normally access to Tyler’s service would cost you $1,997 for a year. But through this special offer, you can [a full 30 days for just $1.](113/d2zn7704/VX1Wmr9fFR3sW7JPNZt1mS20PW4zFhY953lR0kN50kgN85nXHsW5BWr2F6lZ3mvW1f9S0l1jSrm7VG2TfT4vgqbHN6H4ld-F3y4_W7Mgl0s48sDtSW6XczKd5wDZ8xW1PBBq36CbLHBW6Q0ZfN85k2hqVpdhMc8NYn6PVpgF-_1fcnKlW42hQtd5bv82wW68tLJQ5-sCpDW58FMkx1kfKlwW3K383z8hLTf0W5fxPVx7pyrzWW8RZGk145W_MdW6G6xqM2My6jkMKMhlGdmq6mW4mwdhl97ZGhHW5-K_Cj94KpS6W5H97j11G5MvPW31lFwK4mKKl-V1Dpvz61wtVhV83FR-6TpGWHV4BCNp49VsR6W6MVsN85VXNGCN5S258M4pS1cW2Rvf0t6ZD2msV9JwDl8B1_4DW4GNz379l93lHW4LbW-V91TXyNW25hVPq6k_ymJW99jQfP2Fp-FvVbbwBf94086MW2bk2FK4QpgZ7f5Pyky604) [Click here to see the full offer.](113/d2zn7704/VX1Wmr9fFR3sW7JPNZt1mS20PW4zFhY953lR0kN50kgN85nXHsW5BWr2F6lZ3ntVy70HZ3plZhKW4NCFvW5Bd29dW3bSysn28wQt3W7LvcKg6W1TNcW5FJ_hs40frGXW35b-yq6YxjMVW8vn-8J326bGfVvwM8t545QqSVMzfZn8-f70dW5qLmyz2lt2H2W4mnlrL25z54XW929yZp22qbvXVjm_Hk8fsDl3W5J5FRq5JKrZ8W7QSNbb2HcD_7W3BhtV15czwNfW4Q5pxk4bmNMPVY-Np76lgVGsW5m53QW5R7X9xN1dTVzz-KltvW1jGVGv61TsK1VcZpgH7zlgcrN4bRQ-VxSCHFW3h6rGr1wNLRfW19ThVd3sywPZN7hnGgWvBdkbW8fTwhq12TcLmW4jFcM52xSc2FN5tLlY-6QjnkW56T1ds1qlBmBW366M7G3j1nWsW3q1-XL5LD1BpW4Q88TQ5QQXDGW64SnGj7kkhRndxmLsR04) This offer expires soon. Don’t miss it. Thanks for reading, [Coburn sig] Ed Coburn President & Publisher Cabot Wealth Network Cabot Wealth Network, 201 Washington St. Ste 215, Salem, MA 01970, United States, (978) 745-5532 [Unsubscribe]( [Manage preferences](