Micro-cap stocks can indeed offer significant returns for investors who are willing to endure the associated volatility and risks. The article primarily focuses on James O’Shaughnessy’s Tiny Titans stock-picking strategy, which emphasizes micro-cap stocks that meet stringent criteria concerning value, size, and momentum. Historical data indicates that small-cap stocks generally excel during economic recoveries, with O’Shaughnessy’s strategy yielding an impressive average gain of 24.5% annually since its inception in 1998—far outpacing the S&P SmallCap 600 index’s 7.3% over the same time period as of October 31, 2024. This performance data positions the Tiny Titans strategy as an appealing option for patient investors seeking exceptional long-term gains.
The Tiny Titans approach is rooted in O’Shaughnessy’s extensive research and methodologies highlighted in his renowned books, “What Works on Wall Street” and “Predicting the Markets of Tomorrow.” The AAII (American Association of Individual Investors) has adapted these strategies into a screening model that identifies micro-cap stocks. These stocks typically have market capitalizations between $25 million and $250 million, and they often receive limited attention from analysts and institutional investors. O’Shaughnessy suggests that this lack of coverage creates opportunities for substantial surprises in performance, allowing micro-cap stocks to potentially outperform larger companies. Additionally, these stocks exhibit low correlations with broader market movements, thus adding a diversification benefit to investors who predominantly hold larger-cap stocks.
O’Shaughnessy’s Tiny Titans stock screening involves a careful filtering process to isolate potential investments. The first step removes all foreign companies and over-the-counter (OTC) stocks, subsequently concentrating on U.S.-based firms that fit the required market cap range. A critical criterion is the price-to-sales (P/S) ratio, which must be below 1.00. This measure serves as an indicator of “cheapness” and reflects O’Shaughnessy’s belief that sales figures are more reliable and less susceptible to manipulation than earnings. Historical analysis supports his assertion that stocks showcasing low P/S ratios tend to yield higher returns over time. To enhance the portfolio’s risk management, O’Shaughnessy advocates holding a diversified mix of 25 stocks, selected for their strong relative price strength, compared to the S&P 500 index.
The Tiny Titans screening criteria consist of several key components. To summarize, stocks must be U.S.-listed, have a market cap ranging from $25 million to $250 million, maintain a price-to-sales ratio below 1.00, and demonstrate high relative strength over the past 52 weeks. By focusing on these specific aspects, AAII ensures that the resulting selections represent companies with potentially strong performance characteristics. The final list features the 25 firms that rank highest based on their relative price strength, creating a curated group of micro-cap investment opportunities for further analysis.
Importantly, the stocks identified by the Tiny Titans screen should not simply be viewed as a direct “buy” recommendation. Investors are urged to conduct thorough due diligence before assuming any positions in these stocks. Maintain an understanding that the volatile nature of micro-cap stocks can lead to substantial fluctuations in performance, meaning potential investors must be prepared for short-term challenges. The assurance of a strong screening process, combined with a historical track record, helps provide a foundation for making informed investment choices.
For those who wish to navigate market volatility with greater confidence, becoming an AAII member can provide valuable resources and insights. Overall, O’Shaughnessy’s Tiny Titans strategy stands as a well-documented approach toward micro-cap investments, offering potential for substantial returns for patient and diligent investors willing to engage in the unique dynamics of this subset of the stock market. With a comprehensive understanding of the criteria and principles behind the Tiny Titans approach, investors may find themselves better positioned to capitalize on opportunities in the micro-cap realm.
