Under the Radar: Five Small-Cap Stocks Wall Street Is Missing

One of the biggest mistakes investors make is spending all their time looking for what is cheap and almost no time looking for what is working.

Do not get me wrong.

I love cheap stocks.

Anyone who has followed my work for more than about 15 minutes knows I will happily spend my weekends digging through community banks trading at 60% of tangible book value, REITs nobody wants to own, and ugly little companies that have been left for dead by Wall Street.

Value investing has been very good to me over the years.

There is another side of the market, however, that deserves attention.

Some of the biggest stock market winners in history were not statistically cheap when their great runs began.

They were smaller companies growing rapidly, gaining market share, delivering earnings surprises, and attracting institutional investors.

The stocks kept going up because the businesses kept getting better.

Peter Lynch understood this better than almost anyone.

Lynch famously said, “Big companies have small moves, small companies have big moves.” That observation remains as true today as it was when he was running the Magellan Fund.

A $500 million company can become a $5 billion company.

A $5 billion company can become a $50 billion company.

A $500 billion company has a much harder road ahead.

That simple reality is why investors should always keep a portion of their attention focused on smaller companies that are executing well and seeing strong momentum in both their businesses and their stock prices.

William O’Neil built an entire investment empire around this concept.

While traditional value investors searched for stocks making new lows, O’Neil searched for stocks making new highs.

His research showed that many of the market’s greatest winners were already outperforming before they went on their biggest runs.

That idea sounds completely backward to most investors.

Human nature tells us to buy things that have fallen and avoid things that have risen.

The market frequently rewards the opposite behavior.

Strong companies often become stronger.

Stocks making new highs often continue making new highs.

Institutional investors do not build positions in a day.

They buy over weeks and months, creating the persistent upward trends that momentum investors love to see.

The challenge, of course, is finding these companies before they become household names.

Twenty years ago, that meant spending endless hours sorting through financial statements, earnings reports, and stock tables.

Today, there is a much better way.

One of my favorite features in Pro is the Scanner tool.

Investors can screen for accelerating earnings growth, strong revenue trends, unusual volume, relative strength, breakouts, and market capitalization thresholds in just a few clicks.

Instead of searching through thousands of stocks, you can quickly narrow the field to a handful of companies demonstrating exactly the characteristics that Lynch and O’Neil would have found interesting.

Running those screens recently uncovered five fascinating small-cap companies that combine growth, momentum, and compelling business stories.

Pediatrix Medical Group (MD) is one of those stocks that almost nobody talks about at cocktail parties, which is usually a good thing.

The company is one of the largest physician-services providers focused on neonatal, maternal-fetal, pediatric cardiology, and other specialty healthcare services.

Demand for these services is not tied to consumer confidence or the latest economic headline.

Recent operational improvements and stronger profitability trends have attracted institutional investors, helping fuel impressive price momentum.