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.

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). 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), which has gained more than 30% since its December profile.

Moreover, it always pays to look for secondary plays on a theme, especially in small-caps. In this case, I looked at Maverick Tube ( MVK), a maker of drill pipe that's sold to those searching for natural gas and oil. It only made sense that if more wells were going to be drilled, more drill pipe would be needed. Also, drill pipe would be sold before the wells were actually drilled, making Maverick an early-cycle beneficiary of the trend.

Indeed, Maverick is up nearly 40% since its profile in January. Although the company preannounced a weaker-than-expected second quarter Monday and is issuing convertible debt, it remains an interesting proxy for the expected pickup in the energy sector. But at these prices, I'm not as enthusiastic as I was in January.

Another strategy that has worked well is developing a portfolio of small-cap stocks that pay healthy dividends. With the new dividend tax cut and investors growing more focused on current yield than on growth, dividend stocks have performed well. A number of the stocks profiled -- Hawaiian Electric ( HE) and Acadia Realty ( AKR) come to mind -- have been solid performers largely because they have solid dividend yields. Again, this macro trend is providing support for small-cap names that fit the bill.

There's a look under the hood of the Bottom of the Barrel process. It's not rocket science, but an amalgamation of information, research, discipline and common sense. Next week, I'll review the portfolio's names and do a semiannual housecleaning. Then it's back to the stock-picking process.

Christopher S. Edmonds is vice president and director of research at Pritchard Capital Partners, a New Orleans energy investment firm. He is based in Atlanta. At time of publication, neither Edmonds nor his firm held positions in any securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. While Edmonds cannot provide investment advice or recommendations, he welcomes your feedback and invites you to send it to Chris Edmonds.

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