Armies of analysts don’t cover the small stocks. This leads to piles of unread press releases, innovative new products and fast-growing businesses that go unnoticed by the investing community at-large. It’s a treasure hunt filled with future high-flying companies that no one will bother to find until they become the next hot company on Wall Street.

Now, you can add a new tool to aid you in your quest for smaller stocks with share prices that might be lagging behind their growth potential.

Studies show that a company that beats the number is more likely to do it again in the near future. And according to the Wall Street Journal, investors and analysts are both slow when it comes to reacting to the good news…

If the Street is slow in reacting to the good news within the broader market, it would be safe to assume this lag is especially pronounced in the world of small-cap stocks. And there are plenty of small stocks that offer us earnings surprises every quarter. When I screened for small stocks on the NASDAQ showing a positive earnings surprise in the most recent quarter, almost 100 companies fit the bill.

Here’s the screen:

Last price < $5
Last price > $1
Market Cap < $1 billion
Positive earnings surprise = in the last quarter
Exchange = NASDAQ

Of course, these criteria will just get you started. You could narrow this field of 100 or so stocks by industry, price-to-sales margin or net profit margin to get closer to what you might be looking for. Or, you could tack on this earnings surprise statistic to one of your proven screens.

Remember, it’s those unexpected events, like surprise earnings, that can eventually cause a major price change in a stock. It may go virtually unnoticed once or twice, but investors won’t shy away forever. If you beat them to the punch, you’ll walk away with the big gains.

Best,
Gunner
June 11, 2007

P.S.: We’ll dig deeper into some more hidden small stocks next week. Until then, you can check out all of my latest small-cap stock picks in Penny Stock Fortunes.

P.P.S.: Chris Mayer also takes advantage of the Street’s “learning curve” every month to bring his readers stocks with hidden assets that practically sweat cash.

Quest for Hot Penny Stocks was originally featured in the Penny Sleuth.