The smallest companies offer the greatest potential for investors because they tend to grow much faster than larger businesses. And as the US economy improves, investors are more willing to bet on stocks with total stock market values of less than $1 billion—or even microcaps, which have the lowest market capitalizations—even though they can be far more volatile. Microcaps have gained an annualized 19.5% over the past three years based on the Russell Microcap Index, versus 18.5% for the Standard & Poor’s 500 stock index.

The best tiny stocks today can be found in growth industries such as technology that are being propelled by trends likely to last for several years…

  • Trend: With health insurance and government reimbursements shrinking, hospitals are seeking help to improve efficiency and reduce expenses. Favorite stock: Omnicell (OMCL) provides software and automated dispensing equipment to improve distribution of medications to doctors and patients in hospitals. Three-year annualized performance: 20.7%.
  • Trend: Consumers and businesses are seeking protection from identity theft. Favorite stock: LifeLock (LOCK), which started issuing stock to the public last year, provides risk-assessment and fraud-protection services for more than two million subscribers. Year-to-date performance: 44%.
  • Trend: Companies always seek ways to harness the power of the data they collect. A more scientific approach to product pricing can have a meaningful impact on profitability. Favorite stock: Pros Holdings (PRO) provides computer software that helps businesses mine vast databases to improve pricing and increase profits. Three-year annualized performance: 66.4%.

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