Bottom of the Barrel: Explaining Small-Cap Methodology

I also find ideas at the grocery store, the discount store, the drugstore and just about everywhere I go. A great example of that is Arch Chemical (ARJ Quote). I always wondered who made the chemicals that purify our neighborhood pool. So when I learned that Arch was HTH's parent, I was intrigued.

In short, my thesis is that the everyday world is one big investment test tube. We often tend to focus on blue-chip, liquid names in our daily investment pursuits, but we still have to be on the lookout for solid investment ideas in the world around us. Of course, Peter Lynch may have popularized this concept, but it holds true for the best investment ideas in the small-cap world. Not every idea turns into an investment, but without ideas, there are no investments.

Lastly, one of the most important sources of ideas for this column is you, the reader. If you send me a suggestion and I use it, I'll send you a TheStreet.com T-shirt or cap for your efforts. So fire me an email with your idea -- including the reason why I should be interested.

Macro Themes in Micro-Caps

In recent months I have written a lot about the criteria used to select stocks for the barrel portfolio. For example, I have outlined my criteria for assessing small-cap earnings as well as evaluating the strength of management teams at small public companies.

That type of company-specific analysis is key in developing a winning strategy for small-cap investing. It's also important to examine the big picture -- macro trends -- and figure out which small-cap names might benefit.

For example, as natural gas and oil prices began to rise, energy stocks would clearly benefit, especially exploration-and-production companies that are successful in drilling for gas and oil. That led me to Energy Partners (EPL Quote), which has gained more than 30% since its December profile.