10 Little Stocks With Big Potential

Average daily trading volume for Great Northern Iron, for example, is just 2,300 shares. That can make it hard to get in and out of positions even for individual investors. And it certainly makes it impossible for most large institutional investors to buy these shares.

Sifting for Winners

How do you identify good investments in the world of micro-caps? Forget about Wall Street analysts. As you can see in the table above, most micro-caps aren't followed by any analysts. That's not surprising. Because there's almost no institutional buying or selling interest in these stocks, Wall Street doesn't have a reason to produce research on them. Micro-caps aren't exactly profitable investment banking clients, either. So count out investment banking fees as motivation.

In the micro-cap world, stock screens -- and word of mouth -- are an investor's best friends. To come up with my list of 10 micro-caps for macro profits, I tweaked two screens that I built recently to look for unknown mid-cap blue-chips. You can see my original thinking on unknown stocks in my Oct. 15 column. For cash-cow stocks, see my Oct. 22 column.

The simple tweak? Instead of ruling out all stocks with market caps of under $200 million, I required every stock on the list to have a market capitalization of $200 million or less.

After due diligence on the 27 stocks that made the first cut of either of these two screens, I wound up with nine micro-cap candidates. I added one stock that didn't make either list, Calavo Growers, but had popped up on my personal radar a few months back.

What do these stocks have in common? Not their structure, their industry, their market share or their technologies.

Higher yields. Atlas Pipeline Partners (APL Quote) and Great Northern Iron Ore are structured as a partnership and a trust to pass almost all earnings through to investors. Atlas yields 6.6%, while Great Northern Iron yields 7%.

Niche dominance. Some, like Calavo Growers, are dominant companies in small niches that are using profits to expand into new markets. In Calavo's case, that means selling avocados to new customers in Japan, where sales grew by 40% in the most recent quarter, and adding papayas and prepared foods to its product line.

Scavenging. Others thrive by being tough competitors in a business dominated by larger companies. Agricultural chemicals producer American Vanguard (AVD Quote) is finding a way to make a profit by buying product lines that larger companies have abandoned.

Hot trends. Education and job training in the case of Concord Career Colleges (CCDC Quote), and video security and surveillance gear in the case of Silent Witness (SILW Quote).

New blood. Others on my list have found growth in "old" industries such as adhesives (Cohesant Technologies (COHT Quote)) and banking (Middleburg Financial (MBRG Quote)).

But because I started with two screens that emphasize cash flow and consistent earnings growth, these micro-caps share many of the fundamental characteristics of their larger blue-chip brethren. (Although because of the volatility that comes with smaller daily trading volumes, I wouldn't put any of these stocks in the blue-chip category. They're intrinsically riskier than that.)