Small caps are great hunting grounds, but they also require way more discipline from you as the investor. There’s less coverage, fewer analysts stress-testing the numbers, and management narratives often go mostly unchallenged.
I’ve noticed a lot of the worst mistakes don’t come from picking bad industries… they come from trusting headline metrics too quickly. A stock can look cheap on P/E or EBITDA while the actual business is relying on acquisitions, working-capital swings, or financing to support the story.
I wrote up a simple framework I run through before touching small caps. Basically what I want to understand before assuming the market mispriced something.
Also curious to hear what others here look for. What’s red flags that has saved you from a bad small-cap investment?