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Bottom of the Barrel: Explaining Small-Cap Methodology

After a long break, it's always good to reassess and reaffirm. So after a three-week hiatus, Bottom of the Barrel returns with a review of the mission and methods of this weekly small-cap column.

It's been nearly two years since this column debuted, but its goal remains the same: to uncover small-cap companies (typically less than $1 billion in market cap) that are unknown, underfollowed by traditional analysts and underappreciated by investors. In a universe dominated by large-cap, blue-chip offerings, these are companies you've either never heard of or typically wouldn't think twice about. They not only hold the potential to become tomorrow's blue-chips, but also have some compelling stories, even among those destined to remain small.

I've profiled several relatively unknown companies, such as Met-Pro (MPR), which produces pollution-control and fluid-handling equipment used in a wide variety of industries. This $88 million market-cap company has a solid balance sheet, forward-thinking management, steady growth and dominance in a niche market. Yet it's too small to garner any interest from analysts. The result: Since it was profiled here in October 2001, its stock has gained more than 27%, not including an attractive (and safe) 2.5% dividend yield.

Around the World

The most commonly asked question about the Bottom of the Barrel column is where I find the stocks for the portfolio. That's a good question with an eclectic answer. The ideas come from all over my universe. In my daily work as an analyst and an investor, clients often ask me if I've heard of some esoteric company. Usually the answer is no, but I always write it down and take a quick peek at it when I have time. Many of my ideas come from conversations with clients and colleagues.

Other ideas come from reading local newspapers and industry publications or from scanning small-cap screens from Standard & Poor's or Value Line.
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