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The Five Keys to Finding Big Microcap Winners

By Matt McCallFeb 07, 2020

I admit it. I’m a stock nerd. Though I prefer to think of myself as a profit nerd.

Any day that I get to explain my unique five-factor analytical model to evaluate early stage companies set to soar is a good day for me.

It can be a good day for you, too, because I’ve seen the wealth-generating power it can put in the hands of investors just like yourself.

As I showed you in yesterday’s MoneyWire, and in other writings and podcasts recently, the real action going into what I’m calling the Roaring 2020s will be in microcap stocks. That’s where explosive growth can reach its peak.

That’s where investors can make explosive profits.

This smaller market is almost like a secret stock market… and it’s where we could see gains that reach 500%, 1,000%, or even 2,000% or more in just one year.

Of course, we all know massive gains like that won’t come to just any microcap stock on the market. Many small companies never grow large enough to make investors rich.

So how do you separate the winners from the losers?

It takes time, pain-staking research, and even a little bit of instinct gained from decades of experience to zero in on the right companies.

It also takes a system, which brings me back to today’s topic — my five-factor analytical model.

Let me show you how it works.

Five Key Qualities to Making Money in Microcaps

In my experience, the biggest microcap winners tend to have five key attributes that define their businesses. Not every single winner has all five, but most do. The more of these qualities you see in a microcap company, the greater your chance of investment success.

I like to frame our model as a series of five questions. Every company we invest our hard-earned capital in must answer these to our satisfaction, or at least have a clear path to the right answers.

Question #1: Are you hunting elephants or hunting mice?

A small company can’t grow large if it isn’t going after a big market. We have to know the size of the market a company is trying to tackle.

The term for this is total addressable market, or TAM for short. I discussed this at length in my Microcap Millionaire Project webinar just this week.

For example, Amazon (AMZN), Alphabet (GOOGL), and Facebook (FB) all went after giant markets. Amazon went after books… and then pretty much all of retail. Google went after online search. Facebook went after the broad-use social media market.

By contrast, a company that sells software just to the legal industry is in a niche market that’s dwarfed by the others I just described.

Similarly, a restaurant that offers everything from burgers to pizza to vegetarian food has a much larger TAM than a restaurant that offers only plant-based Ethiopian food.

Don’t get me wrong, companies can perform well in niche markets. But as microcap investors, we’re looking for companies going after massive or potentially massive markets. We’re hunting elephants – not mice.

Question #2: Is the company’s technology clearly better or much cheaper than its competitor’s technology?

Almost everybody has lived through a “systems change” horror story sometime in their professional lives.

Most of these horror stories go like this: A company someone works for or owns decides to switch to a different software system, phone system, website, payroll system, etc. Although the company selling the new system promises everyone that the change will be quick and easy, it turns out to be a miserable slog that causes tons of problems.

Since so many people have lived through a “systems change” horror story – and since people are naturally resistant to change – any new way of doing anything must be CLEARLY better or MUCH cheaper than the current (aka, “old”) way of doing things.

That’s why we want to own innovative companies with new products and services that are clearly superior or significantly cheaper than what’s already on the market.

Question #3: Is the business scalable?


It’s one of the most repeated words in Silicon Valley, the land of small tech companies that get big. A business must have scalability in order to grow large in a short time… and make you lots of money quickly.

Scalability is the ability of a business to massively grow revenues while minimally growing the costs associated with producing those revenues.

For example, a lawn mowing business is not scalable. If you own a lawn mowing business and want to double in size, you’ll have to buy twice as many lawn mowers as you have now and you’ll have to hire twice as many lawn mower operators as you have now.

Because of this, your revenue cannot soar far beyond your costs.

On the other hand, you have businesses like Facebook and Twitter (TWTR). These businesses are very scalable. It took a lot of work in the early days to create the technologies and businesses behind Facebook and Twitter, but once they were in place, these two businesses could add new users and increase their advertising revenues much, much faster than they increased costs. Their market values exploded higher as a result.

Question #4: How big is your moat?

Legendary investor Warren Buffett has helped make the term “moat” one of the most popular words in the investment world. And for good reason. You want every company in your portfolio to have as big a moat as possible.

“Moat” is how resistant a company’s business model is to outside competition. The name comes from the time when a wide moat could keep people inside a castle safe from invaders.

Free market capitalism is survival of the fittest. As soon as one company is successful in one area, dozens of competitors will rise up to imitate it or decapitate it. Today’s big winner can be tomorrow’s roadkill.

That’s why a critical part of my analysis is studying a company’s competition. I look at their products, services, patents, marketing strategies, people, and distribution networks. We always want to own companies that are several steps ahead of the competition.

Question #5: How much are you worth?

Figuring out what an early stage company is worth is one of the most difficult tasks in all of finance. This is because most early stage companies earn little to zero profit.

For example, some small tech and biotech firms generate almost no revenue because they are basically science projects. They’ve raised money from investors and are spending it on research and development. They hope their work will lead to a breakthrough and huge sales.

Of the microcap companies that do generate sales, many of them plow the money right back into growing the business, leaving no profit at the end of the year.

Because of all this, conventional valuation metrics like the price-to-book value or price-to-earnings (P/E) ratio are often useless when it comes to valuing microcap businesses. This means that conventional stock screens are also pretty much useless for uncovering potential winners.

But this actually gives us an edge. Most people prefer doing things the easy way. Since uncovering and valuing microcap companies is harder than valuing conventional businesses with earnings, fewer people do it. They can’t be bothered.

So much of our analysis comes down to old-fashioned detective work. Instead of using cookie cutter valuation metrics, we base our valuations on how assets are being valued in specific industries, potential market sizes, and the quality of innovations.

I spend thousands of hours per year speaking with industry experts… attending conferences… personally testing products and services… evaluating business plans… poring over balance sheets… and studying industry reports.

After all that work, I arrive at the valuations I place on companies… and of course look to buy them at discounts. It’s just as much art as science, and it will never fit inside a conventional stock screener.

I hope this helps you understand the power and the strategies for investing in microcaps. These are the stocks that can change your life with just a small investment.

P.S. Making money in microcaps just makes sense when you think about it.

It’s much harder for Apple (AAPL) to go up 10X when it’s valued at $1.4 trillion than it is for a small cap to go from $1 billion to $10 billion. 

My system is designed to identify small stocks with the best chances to grow large… and make investors a lot of money in the process.

I explain it all in the recent Microcap Millionaire Project event that I just held this week. You can watch the full presentation here.

I also just released my nine favorite microcap stocks right now. Each one is in a high-growth industry that could soar 1,000% or more. Click here to learn more.

Matt McCall’s MoneyLine Podcast

Click here to listen to Matt McCall’s MoneyLine podcast! This week,  Matt discusses Amazon’s (AMZN) ascent to the $1 trillion value milestone. What does its rise tell us about investing and, more importantly, how do we find the next Amazon? Matt also dives into the upside potential of microcap stocks and unveils a new portfolio aimed at the smallest stocks in the market.

You can subscribe to this podcast on iTunes, Stitcher, Spotify, or wherever you listen to podcasts.

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