Around this time last year, shares of a little-known small-cap company -- Fleetmatics (NYSE: FLTX) -- jumped 40% in one day. Over the prior weekend, the company agreed to be bought by Verizon (NYSE: VZ) for $60 per share in cash -- a massive premium to the previous day's closing price. A 100-share stake that was worth $4,296 on one day was now worth $5,959.
These deals signify a fact of life that corporate executives -- and successful game-changing stock investors -- know too well: it's easier to buy something than to build it from scratch.
In the case of Fleetmatics, for instance, Verizon was looking to instantly enhance its IoT (Internet of Things) portfolio. Instead of having to develop its own surgical implants that mimic the heart's blood-pumping function, all Medtronic will have to do is sign the dotted line (and fork over the cash).
Companies that possess disruptive or proprietary technologies, or those that have made inroads into a new, riskier business -- those are the ones that have the best chance to be taken over. Those are the ones that offer investors strong potential for a substantial price appreciation -- not to mention a no-brainer exit strategy.
These are exactly the kinds of stocks I spend a lot of time looking at and bringing to my subscribers' attention as the Chief Investment Strategist of Game-Changing Stocks.
Most of my analysis in Game-Changing Stocks is concentrated on smaller-cap stocks, companies with market capitalizations under $3 billion but which are still highly liquid in terms of trading volume.
That, of course, is because it's much more likely that The Next Big Thing -- a true market disruptor, a possessor of a riskier technology that has a potential to be a game-changer -- is a company that's just getting started, or is sufficiently nimble enough to pursue promising new opportunities. Many of these companies have started with just one idea, a new product or technology, an industry shift or a new market trend.
Smaller stocks can also appreciate faster than larger-caps in similar businesses, thanks in part to the law of large numbers (which makes it easier for a $2 billion company to double in value than a $200 billion company).
This is not to say that I concentrate only on small-cap companies that present attractive acquisition targets in Game-Changing Stocks. After all, while a corporate takeover can create instant gratification, being in on the ground floor of a company with a good idea -- and sticking with it -- can provide an even better outcome if you find the right stock.
A number of factors can contribute to a rally in a growth stock or give a new life to a beaten-down value stock. Many of them qualify as game-changers: a large contract win, a successful entry into a new market, a change in a company's cost structure, or even new management. A few of these developments could also be signs of a company in a turnaround; I've seen numerous, highly profitable examples of this in my first year running this newsletter.
My job is to find companies most likely to have one or more such triggers in the near future, and to present them to subscribers in Game-Changing Stocks.
To be sure, because of a relatively higher failure rate, small caps in general are riskier than most other types of stocks. To help present the complete picture on a company -- including the risks -- I work up a SWOT analysis (Strengths, Weaknesses, Opportunities, Threats) for each recommendation in Game-Changing Stocks. Also, to help compensate for the higher risk on any single holding, my portfolio includes a couple dozen positions, on the idea that big gains in only a handful of companies will more than compensate for the majority that may not pan out.
In my hunt for promising game-changers, I focus on several exciting industries: cyber-security, data storage, the Internet of Things, the cloud, biotech, clean energy, self-driving cars and e-commerce. There're exceptions, of course, but companies in these sectors are much more likely to grow faster than the rest of the economy -- provided, again, that they are well-managed, their proprietary technologies don't fizzle, and they don't run out of cash before their big idea starts to play out. Brand strength is also an area I pay special attention to; the stronger the brand, the better the company is positioned to compete.
In my inaugural issue of Game-Changing Stocks, I added three solid companies to my new portfolio. Since that time, I've closed positions that earned gains like 50% in just five months or 35% in just two. Right now, I have my eye on a little pharmaceutical company that's already established itself as a crucial partner of bigger players in the industry. It's unique positioning means that the potential windfall from its market-leading treatments won't be shared with anyone -- except its investors of course. And now looks like the the time to buy.
This article originally appeared on Street Authority.