How I Build and Manage My Small-Cap Portfolio
Powerful tips I want to share with you
I launched my small-cap portfolio at the end of February 2024. Since then, it has delivered a 27.3% return (approximately 30% annualized). Year to date, the portfolio is up 7.7%, outperforming the S&P 500 by 5 percentage points.
I didn’t achieve these results by taking excessive risks, chasing trendy stocks, or attempting to time the market, quite the opposite. In this article, I will share the powerful tips and methods I use to select stocks for my portfolio. My goal is to provide you with the insights and tools to better understand the stock market, analyze companies, and ultimately enhance your investment performance.
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1. Laser-focused stock selection
Every stock in my portfolio meets strict criteria to ensure long-term growth and stability. I focus on companies that are increasing their market share within expanding industries, positioning themselves as leaders in sectors with strong future potential.
Additionally, I prioritize businesses with improving profit margins, as this indicates operational efficiency, pricing power, and the ability to generate sustainable earnings growth. Margin evolution is a really important element in valuation too, as I describe in this article.
Valuation also plays a crucial role in my selection process. I seek stocks that are not only fundamentally strong but also reasonably priced relative to their growth potential. The price earnings-to-growth (PEG) ratio is a key metric I use to identify companies trading at attractive valuations while maintaining robust earnings expansion. Most of the stocks in my small-cap portfolio have a PEG below 1.
If you are looking for stocks with a PEG below 1, check out my article, where I highlight 23 stocks with a PEG under 1 and EPS growth of 15% or more.
Of course, I also consider other metrics like ROE, ROCE, ROIC, FCF, and FCF yield. However, since some stocks are still in their early stages, certain metrics may be less relevant. Insider buying stocks is also a great metric to follow.
2. Resilient business models
I prioritize companies with a strong and widening moat, ensuring they have a sustainable competitive advantage that protects their market position over time. This could come from proprietary technology, network effects, switching costs or cost advantages that make it difficult for competitors to replicate their success. A widening moat is even more critical, as it indicates that a company is not just defending its position but actively strengthening it. I described it in the article just below.
Businesses that continue to build on their advantages are better positioned to withstand market downturns, fend off competition, and deliver consistent long-term returns.
Equally important is competent management with a clear, easy-to-follow strategy. I look for leadership teams that have a proven track record of execution, a deep understanding of their industry, and a transparent vision for the company's future. A great business can struggle under poor management, while a well-run company can navigate challenges and capitalize on opportunities.
Clear communication, sound capital allocation, and a commitment to shareholder value are key traits I seek in leadership teams. By focusing on these factors, I ensure my portfolio consists of companies with both structural advantages and strong leadership, increasing the likelihood of sustained success.
The quality of management is especially crucial for serial acquirers, as acquisitions are complex and challenging to execute successfully. Some business models are better suited for integrating other companies, making effective management even more important. I also prefer acquisitions that generate commercial synergies (such as expanded market reach or enhanced product offerings) over those that focus solely on cost synergies.
3. Targeting 20%+ annual TSR
In the article below, I explain how I calculate projected total shareholder return (TSR), a key component of my investment process. Estimating TSR is essential to my strategy, and I incorporate elements of this calculation in each of my deep dives to give you insight into how I evaluate potential investments.
Before making an investment, I estimate each stock’s total shareholder return (TSR), which encompasses all potential returns from price appreciation, dividends, and buybacks. To do this, I assess several key factors: growth potential, margin expansion, dividends and buybacks, and valuation. I evaluate a company's ability to generate sustainable growth through its core business model, along with the potential for increasing margins as it scales.
Only the most promising stocks make the cut after this thorough evaluation. I set a high bar, with a 20% TSR threshold, which ensures a margin of safety. While I generally target higher returns, I may accept a lower TSR in specific cases where a company demonstrates a strong competitive advantage, exceptional metrics, or other compelling factors. By carefully analyzing these elements, I ensure that every stock in my portfolio is built on a solid foundation, positioning it for strong, long-term performance.
4. Money management
To improve my returns, I follow a set of disciplined rules:
I aim to buy near support levels, where the stock is more likely to reverse direction and rebound
When a stock is trending upward, I continue to add to my position during local pullbacks, taking advantage of short-term price corrections
However, if a stock is declining, I don’t buy every dip immediately. Instead, I establish buying targets based on technical analysis, typically setting these targets at least 20% apart
I never add to a position if my investment thesis no longer holds or if the stock's fundamentals are deteriorating. In such cases, I act decisively and sell without hesitation.
For more details, you can check out my latest articles, where I analyze buying zones for 50 stocks, linked below.
Conclusion
Of course, there are many factors to consider when buying and selling stocks, but these four elements provide a solid foundation for making informed decisions.
Feel free to share your own top tips in the comments section!
If you are interested in learning about my investment framework, be sure to check out this article!
Thank you !
I find it strange you use a bunch of value metrics for investing, but also use technical analysis, when they are logical opposites. Its like being an atheist who still prays to god before making a decision.