Fishing for Small-Cap Jewels

We have been live-testing our strategy of buying small-caps that are especially popular among hedge funds, per 13F filings, and this strategy has returned 47% since September. Those kinds of results aren't out of the ordinary, either: Our research shows that such small-caps outperform the broad market by an average of some 18 percentage points per year. (We define small-caps as stocks with market capitalization between $1 billion and $5 billion.)

Institutional investors, such as mutual funds, don't tend to own small-cap stocks quite as frequently as bigger names. As a result, it would appear that those shares are more likely to be either undervalued or overvalued -- thus explaining their collective outperformance. Individual managers' favorite small-caps, then, may serve as intriguing sources of initial investing ideas....473 more words left in this article. To read them, just click below and try Real Money FREE for 14 days.

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