What to Look for in Small and Micro Cap Stocks

Whereas in traditional large companies, many of the techniques to evaluate an entry point into the stock is backward-looking in that there is a mass of historical financial data to by analyzed, in the universe of small cap stocks and especially micro cap stocks (sometimes "penny stocks"), the first and foremost analysis has to be forward-looking. That is, when evaluating whether to invest in a micro cap stock, the estimates about future revenues and earnings are more pertinent than past limited financial history (the latter of course can be a good quantitative screen).
What is essential when it comes to a penny stock or an emerging micro cap company is to first understand the product or service being offered: Is the target market scalable? How is the company's product better than the competition?
Secondly, focus on the business strategy and model of the small company: Is the strategy different and superior to other similar large cap or micro cap stocks? Is the strategy flexible enough to accommodate possible changes in future trends of the segment market?
Thirdly, ensure there is a strong leadership in place to guide the micro cap through exponential growth to turn it into a larger capitalization company. This should not be simply done by looking at the biographies of the management team but digging a little deeper to get to their "personality" and passion for their vision, through being on conference calls or even better by meeting in person. Remember Bill Gates did not have an impressive degree or corporate career!
Of course, it is not practical for an investor to be on quarterly conference calls or management visits, but there are many online resources such as newsletters which perform all three levels of due diligence for you. Additionally, good penny stock newsletters also perform quantitative and technical analysis. You can visit www.hypergrowthstock.com to see one of the superior examples of a micro cap newsletter.