By Brad Thomas, Editor, Wide Moat Daily

As of this writing, Nvidia was up 185% for the year.

That’s impressive, especially considering Nvidia carried a market capitalization of $1.2 trillion to start the year. And the stock is way ahead of the S&P 500, which is “only” up 27%.

I understand why people are so impressed with Nvidia’s performance and why it’s making weekly – if not daily – headlines. But that obsession means you might not know there’s a stock that’s gained 757% year-to-date.

That’s right. 757%. More than four times that of Nvidia.

The company is called Root (ROOT), and it’s an insurance company that offers automobile, homeowners, and renters coverage. You know, the usual stuff.

So why in the world is it doing so well?

Well, it’s apparently out to disrupt “the archaic, trillion-dollar insurance industry” by “creating powerful insurance products and technology platforms that rewrite the rule for today’s world.” Its website goes on to cite “fairness, simplicity, and personalization” as its goals… all through its mobile app and, to a lesser extent, its website.

So why don’t you see it making the headlines on at least a semi-regular basis?

Well, unlike Nvidia, it’s a small-cap company: a publicly traded business that’s valued between $250 million and $2 billion. In Root’s case, its market cap is around 1.35 billion.

As such, it only has two analysts currently covering it. As opposed to Nvidia, which has over 40.

In short, nobody cares about Root. Nobody except for its growing customer base and its very happy investors.

The same goes for:

  • Sezzle (SEZL), up 978%

  • Dogness International (DOGZ), up 1,264%

  • Bright Minds Biosciences (DRUG), up 2,587%

These powerhouses show how worthwhile holding small-cap stocks can be.

A Few Small-Cap Checks to Know About

Then again, these small-cap powerhouses show how volatile small-cap stocks can be.

After all, Dogness, for one – a high-end pet-gear designer, manufacturer, and retailer – was up over 1,500% a week ago. And back in October, it was closing in on a 1,600% gain.

So its current 1,264% increase actually marks an intense drop over a short amount of time. Moreover, it could drop a lot further still.

That’s the risk you run when investing in small-cap stocks. They tend to come with more surprises than their mid- and large-cap cousins.

Sometimes those surprises are in investors’ favor.

For instance, look at Root again, the company reported negative earnings of $7.8 million during the second quarter. But what a difference one quarter makes. By quarter three, Root had swung that figure to a positive $22.8 million, a first for the company and a major surprise for the analysts covering it. The stock more than doubled after the announcement.

That’s one of the benefits of small caps. Meaningful improvement in financial performance can have an outsized impact on the share price.

But sometimes it goes the other way. And it can be difficult to tell which ones are going to succeed in the long run and which ones aren’t.

It’s not as if you can rely on analyst opinions. As I’ve already noted, those opinions are harder to come by.

Small caps are very often small because they’ve only been around a few years. So good luck trying to successfully analyze past business decisions they’ve made.

The same goes for their price-to-earnings ratios, their dividends, or other such indicators. So much of that is based on where they’ve been before. And most of these companies just don’t have much of a history.

As for their balance sheets, yes, it’s very important to look at those before you decide to invest. That’s true of any company, no matter what size.

Just keep in mind as you’re pouring over the books that small caps almost always have elevated debt levels – often twice as much, actually, as compared to their profits. This is because they’re still so busy establishing themselves, exploring new markets, gaining lenders’ trust, making mistakes… and literally paying for them.

That’s why they’re considered so much riskier than larger companies: They come with so many unknowns.

Yet here I am launching a small-cap service anyway – and one I’m excited about, too! You see, I know a secret to identifying small-cap companies with the greatest chances of long-term success.

It’s an ingredient I can sum up in one single word…

Where the Small-Cap Buck Stops

Management.

You always want to know who’s running the company in question. Who’s calling the shots?

While no owner, CEO, or executive team is ever going to be perfect – and while there will always be unknowns that can hit a company of any size – good management can adapt, navigating through problems and particulars as they come up.

Great management can even figure out how to profit along the way.

These men and women come prepared. They know their consumer base. They know their competitors. They know their potential, but they also know the dangers involved; they’re confident but not cocky. Optimistic but not naïve.

Unfortunately, this isn’t always something you can glean from black text on white backgrounds.

That’s why I prefer to speak to CEOs directly. And, in the case of small-cap companies, I like to meet them in person as well.

The more boots-on-the-ground information I can get about them and their operations, the better.

For instance, I just spoke with a Canadian landlord yesterday who owns 38 malls. These properties amount to 13.4 million square feet and are valued at around $4.1 billion.

Compare that to Simon Property Group’s (SPG) 191 million-square-foot portfolio, and you can immediately label this Canadian competitor as a small cap.

Perhaps a perfect one for my new service, Wide Moat Confidential.

While I’m not ready to pull the trigger yet on recommending this real estate investment trust (“REIT”), I am impressed with its CEO so far. He provided some significant insight into the REIT’s business model, as well as larger reasons to invest in Canadian stocks.

For instance, did you know that Canada has somewhat of an unregulated oligopoly in terms of retailers like drugstores, grocers, banks, and the like? I didn’t until yesterday.

But now I understand why our northern neighbor isn’t suffering the same wave of store closures the U.S. is seeing. It’s because there was no overbuilding that then needed to be corrected.

More importantly, I also learned something about this small-cap CEO’s character. I got a closer look at how he thinks… what his vision for the company is… and how willing and able he is to answer questions.

In short, I got a better feel of whether he’s the kind of leader who can make something great out of something good. Someone who can take investor money and bring real long-term value out of it.

Perhaps even one who can bring about gains that put Nvidia to shame.

That’s the kind of leader I’m looking to recommend in Wide Moat Confidential. So we’ll see if this guy makes the final cut!

I’ve got a lot more research to do until then.

But if you’d like to be among the first to know about a future recommendation, I’d encourage you to go right here. As I said, I just launched a small-capitalization service dedicated to finding these small companies with explosive growth. If you’d like to know our strategy, or what I’m recommending next, you can learn more right here.

Regards,

Brad Thomas
Editor, Wide Moat Daily

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What would you like to see in Brad’s new Wide Moat Confidential service? Write us at [email protected].