myICLUB Blog


Unlocking the Secrets of Small-Cap Stock Investing


Buying at the right price works differently than you might think, especially for small company stocks.

One of the strategic advantages of Q-GARP investing (the “Quality and Growth At a Reasonable Price” methodology we use in selecting stocks for the SmallCap Informer) is that it allows us to follow broad market shifts.

As bear and bull markets duke it out for supremacy, investors who follow strict value or growth strategies can be rewarded—and then, in turn, punished.

When markets are rising, pure growth investors are rewarded as they chase turbocharged stocks even as those stocks reach stratospheric valuations. When markets are falling, pure value investors often reap extra rewards from identifying discounted stocks.

I often joke that the best investors come from the American Midwest, where frugality is ingrained in the ethos and where overspending is a cardinal sin. For all of his billions, Warren Buffett exemplifies the parsimonious Nebraskan, having famously lived in the same relatively modest house in Omaha for more than five decades.

Ralph Seger, the founder of our sister newsletter, the Investor Advisory Service, preached that buying a stock with a P/E ratio greater than 25 was discounting not only the future, but the hereafter a well. Ralph was a Michigander through-and-through.

This same ethos and constant search for “a good deal” is represented by the “Reasonable Price” criteria in Q-GARP. But we have no hard-and-fast rules about what constitutes “reasonableness” in terms of how much we believe an investor should pay for a stock. Instead, we can accommodate broad market shifts, avoiding faster-growing businesses during bull markets when valuations tend to get lifted across the board and put the valuations of many stocks into what we consider to be “expensive” territory.

But in bear-trending markets when investors flee equities en masse, we might find those same faster-growing businesses to be quite sensibly priced and are more than happy to load up the truck. We become more growth-oriented.

As valuations become stretched in up markets, then, our strategy pushes us towards slower-growing companies that may have been overlooked in the rush for more “exciting” opportunities. We become more value-oriented.

In no way do we intend to veer too far in either direction, towards the traditional value investor who seeks out companies with low price/book ratios or hidden assets on balance sheets, or of the prototypical growth investor who buys fast-growing businesses with little more than a glance at valuation metrics.

The blended approach of Q-GARP allows for an abundance of opportunities to earn respectable returns while investing in stocks throughout all market cycles.

But I did not expect that our company selections had veered so strongly towards the value side as I observed after a recent style analysis of our coverage list.

As expected, companies that we cover in the SmallCap Informer are overwhelming small-caps. (Our large- and mid-cap stocks are primarily companies that have grown since coverage began, and our policy is to continue coverage as long as fundamentals remain strong.)

By style, our companies currently lean 41.3% towards value and 58.7% towards growth. This fits with the observation I made last month about our approach—that high growth, high P/E stocks carry more risk (in terms of volatility most especially) that I and many investors can comfortably tolerate. In the SmallCap Informer, this has pushed us further towards the small-cap Value style quadrant and away from small-cap Growth.

Given our track record, I am satisfied with the Q-GARP approach we have defined for the newsletter, with elements of growth and value investing styles both incorporated into a defensible and deployable investing methodology.

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We often like to be contrarian in our picks. When our conviction meets rational analysis and the results look promising despite the market’s myopic reaction to a company’s circumstances, we will take advantage of the opportunity being gifted to us. This is the case with this month’s focus stock, a return to a digital business that is profitable when many peers are recording losses, and for which the long-term outlook still seems sunny.

As always, stay the course!


Subscribers can read Doug's complete commentary and the in-depth profile of our recommended small company stock in the March 2024 issue of the SmallCap Informer stock newsletter. Not a subscriber? Subscribe to the SmallCap Informer and get monthly small company stock recommendations and updated buy/sell prices for each of the 47 high-quality small company stocks currently covered in the newsletter.