Investment Policy and Objectives

The primary objective of the SmallCap Informer (SCI) is to discover superior small-cap stocks and consistently outperform the S&P SmallCap 600 Index over the long term. The strategy aims to capitalize on the upward movement of the market driven by economic growth as well as the increase in company valuations driven by fundamental performance while mitigating downside risk through a focus on company quality.

Investment Philosophy

SCI employs a proprietary Q-GARP (Quality and Growth At a Reasonable Price) methodology. This approach is grounded in the belief that earnings growth drives share prices over time. The strategy focuses on a long-term, buy-and-hold approach rather than attempting to time near-term market direction.

Selection Criteria

To be considered for coverage, companies must generally meet the following criteria:

• Company Size: Annual sales typically between $100 million and $2 billion at the time of initial coverage, though coverage may continue as companies grow beyond this range. Penny stocks are excluded as a rule, but some micro-caps may qualify for coverage.
• Growth: Companies must demonstrate a track record of sales and earnings per share (EPS) growth, typically targeting annual growth potential of at least 8%.
• Quality: The strategy prioritizes high profitability, low profit volatility, and minimal use of leverage. Pre-tax profit margins and return on equity should compare favorably to peers and industry competitors.
• Valuation: Stocks must be purchased at reasonable valuations where the Price/Earnings (P/E) ratio is reasonable compared to historical averages and future growth expectations.
• Risk/Reward: Investments should generally offer a projected upside-to-downside ratio of at least 3-to-1 at time of recommendation and purchase.

Risk Management

• Volatility: The strategy acknowledges that covered stocks often have higher betas than the overall market, accepting higher volatility in exchange for the potential for higher returns.
• Diversification: While SCI focuses on small-caps, it advocates that subscribers maintain well-diversified portfolios that include large and midsized companies to balance risk.
• Debt and Leverage: Emphasis is placed on companies with prudent debt management, though specific debt levels are analyzed relative to industry norms.

Sell Discipline

Stocks are recommended for sale or discontinuation of coverage under the following conditions:

• Fundamental Deterioration: When a company’s fundamentals decline significantly, and the desired total return becomes increasingly unlikely to be attained.
• Valuation Extremes: When a stock’s price excessively exceeds traditional valuation metrics (entering a “hypervalued” phase), resulting in unacceptable downside risk. Stocks are rarely sold purely due to moderate overvaluation; the preference is to hold high-quality companies through periods of rich valuation.
• Operational Uncertainty: Companies may be placed “On Probation” or sold if they face uncharacteristic challenges that obscure future visibility. Companies that continue to demonstrate weakness will be discontinued.