When investing in small-cap stocks, one of the key disciplines for success is performing “due diligence,” or making sure you know as possible about a company, its products, its management and its prospects before you make a move.
Here are the keys for carrying out due diligence on small company stocks you’re considering making part of your long-term investment portfolio.
Study the company’s financial data. Analyze the company’s history and growth trends using Toolkit 6 and the StockCentral or BetterInvesting data to get a snapshot of the company’s momentum. If you notice wild fluctuations or inconsistent patterns, beware. Such companies may not be fit into a solid long-term investing strategy.
Smaller and newer companies’ financial data might not yield much useful history. Consider digging deeper to investigate such companies, including those that went public more recently. More information is available through these companies’ S-1 registration statement and other documents filed with the Securities and Exchange Commission.
One sure way to learn more about a business is to visit the company’s website. With each SmallCap Informer recommendation, we include a link for “Investors” or an “Investor Relations” link. A trove of information about companies is usually available here, including press releases, financial statements, annual and quarterly reports, management presentations, calendars of events and expected EPS release dates, transcripts of conference calls, company overviews and much more.
Take advantage of the opportunity to receive email messages from the company’s investor relations department, to stay on top of SEC filings, press releases and announcements as you get to know the company. Some companies’ management teams publish guidance about internal expectations of future performance, which can add useful perspective.
Expand your research by searching on financial websites for related articles from third-party sources, newspapers, blogs and other publications. Also check to see what any Wall Street analysts have to say by going to Yahoo! Finance and Nasdaq.com for the consensus of analysts’ estimates of EPS growth. Finally, see if you can compare a company’s financials to some key industry averages to see how it stacks up to the competition. It is surprising how far a little due diligence goes in helping you make informed decisions.