How to spot the best small cap stocks

Small cap stocks are companies with a “market cap” (the value of shares they have outstanding) below $1 billion, or some other arbitrary figure.

Small cap stocks have the potential for large gains, but they are generally more volatile than large-cap stocks. Temporary setbacks, such as a poor quarterly earnings report or the loss of a contract, can quickly cut their share prices. That’s why we view even the best small cap stocks as aggressive.

To find the best small cap stocks for lower-risk gains, we recommend looking for sound companies that stand to benefit as the economy continues to improve. It’s also important for these stocks to be well-established, with strong management and prominent positions in their industries.

(In the latest issue of Wall Street Stock Forecaster, we’ve published our special analysis of four U.S. small cap industrial stocks that are leaders in their fields. One of these companies, Tennant Corp. (symbol TNC on New York), has a new “green” invention that’s helping lift its earnings. Read on for further details.)

Right now, small caps as a group offer above-average potential. That’s because small caps, good and bad, have fallen out of investor favour during the recent market volatility. As a result, some offer tremendous value.

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New floor cleaner has this small cap stock seeing green

Tennant Corp., one of the four U.S. industrial small-cap stocks we’ve analyzed in the latest Wall Street Stock Forecaster, makes industrial floor-cleaning equipment, including scrubbers, sweepers and polishers. It also makes cleaning equipment for garages, stadiums, parking lots and city streets. Tennant’s clients are mainly municipal governments and businesses.

Many of Tennant’s customers held off on buying new cleaning equipment during the recession. However, demand is improving as the economy recovers.

As well, the company is enjoying strong demand for its “ec-H2O” floor-scrubbing machine, which uses electricity to make tap water act like a detergent. That eliminates the need for soaps and cleaning agents, and lowers the machine’s operating costs.

Research spending increase a big plus for Tennant

Strong demand for the ec-H2O helped the company’s earnings rise sharply in the latest quarter from a year earlier. Sales also gained.

Tennant aims to develop more environmentally friendly products like the ec-H2O. It spent $6.4 million, or 3.9% of its sales, on research in the latest quarter. That’s up 12.8% from $5.7 million, or 3.8% of sales, a year earlier.

You can get our special analysis, including our clear buy/sell/hold advice, on Tennant and 3 other U.S. small-cap industrial stocks in the latest Wall Street Stock Forecaster. What’s more, you can get this issue absolutely free when you subscribe today. Click here to learn how.