How to Pick Small Cap Stocks

How can stock pickers minimise the risks of smaller company investment, while still benefitting from long term growth?

Todd Wenning 31 October, 2013 | 9:55AM

Last week, I kicked off a monthly series on small-cap stocks for our US website and received enough interest from UK readers that I thought I would run a parallel series here on Morningstar.co.uk using UK company examples. The focus of the series will be identifying smaller firms that exhibit signs of possessing an economic moat—that is, a durable rather than fleeting competitive advantage—and are run by skilful management teams. This is a promising combination for any company to have, but it’s particularly attractive for smaller companies with long growth runways, as they have the ability to compound shareholders' capital at high rates of return over long periods of time.

Easier Said Than Done

Of course, it’s not a simple task to identify such companies at just the right time. Indeed, there are many "false positives" for enterprising small-cap investors to sort through during their research process. For an illustration of the concept, consider the following examples.

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The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Rating
De La Rue PLC130.00 GBX0.00

About Author

Todd Wenning

Todd Wenning  is an equities analyst with Morningstar.

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