So you finally found the perfect company to invest in. The only problem -- nothing's happening! Odds are you're dealing with one of these two major dilemmas:
1) Nobody else has heard of the company (or nobody cares), and they probably won't for a long, long time. Without any support, it stays stuck in a rut.
2) Everybody else has heard of the company (and everybody cares), so analysts carefully cover its every move. With all this support, kiss "getting the edge" goodbye.
But it is possible to find companies that toil in relative anonymity today, but are just moments away from becoming the next-big-thing. Even Goldilocks would consider these companies "just right." Uncovering these hidden gems isn't hard, as long as you know what to look for.
About to Break the $5 Barrier
For the most part, large chunks of a company's shares are held by mutual funds. However, there are many stocks that these funds simply can't touch, due to rules laid out in their by-laws. For example, many funds (but not all) can't own stocks trading below $5. It’s an arbitrary rule without any real merit. But if a stock rises above that threshold, it can suddenly pop up on many investors' (and funds') radars.
Experiencing Rising Trade Volumes
In a similar vein, mutual funds tend to focus on stocks that have ample trading volume. If a stock only trades 20,000 shares a day, but the fund wants to acquire 250,000 shares, it's likely to force that stock up to a much higher price. (And selling off that stake would also push shares down to unappealing levels.) So funds tend to focus on stocks that trade at least 100,000 to 200,000 shares a day. It pays to look for stocks that are seeing rising trade volumes.
In 2007 through 2009, chip maker Integrated Silicon Solutions (Nasdaq: ISSI) often had average daily trading volume of 100,000 to 200,000 shares. That figure plunged to just 51,000 last October, but has steadily surged since then 466,000 in September, 2010. That kind of move is often a precursor to an eventually higher share price.
Approaching a Higher Market Cap
Many mutual funds are also prohibited from owning companies that are too small, as defined by market value. The threshold is usually $250 million, unless that fund explicitly focuses on micro-caps. That's why it pays to notice small companies that are building a head of steam. If their market value is approaching $250 million, you may want to get in before the pros jump in and push shares even higher.
Of course, nothing helps a stock like a favorable analyst report. Sadly, companies only attract analysts when they represent potential banking opportunities. So any company looking to raise capital to either pull off some deals or shore up its balance sheet is likely to hear its praises sung by analysts in the form of a bullish new report. Any time that you hear a company wants to raise money, you can bet analysts will pick up coverage on the company fairly quickly.
Rising Sales and Profits
Finally, nothing gets attention like rising sales and profits. So it pays to continually look for companies posting steadily improving results but with only a few analysts following them. The best move is to find stocks with increasing trading volume, a share price still below $5, and rising sales and profits. All of these factors can conspire to move stocks from being a wallflower to the life of the party.
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