5 Small-Cap Stocks You Should Know

Finding new stock ideas is challenging for all investors, but it's particularly difficult for new investors, who may have a limited understanding of key financial metrics and accounting.

Sure, stock screens are great, but they're only as good as their users' input. If, for example, you don't know what "return on equity" or "price to book" means, a screener isn't much use.

It's about to get easier
With that thought in mind, we at the Fool combined the investing knowledge of our top analysts, and data from our Motley Fool CAPS screener, to come up with four preset model screens -- Value, Dividend, Small Cap, and High Growth.

For our Small Cap screen, we asked Motley Fool Hidden Gems advisor Seth Jayson what he looks for in promising small caps. Among other things, Seth focuses on small stocks with modest debt, strong business models, and four- and five-star CAPS ratings.

That last point is particularly important, because we've found that these highly rated stocks have outperformed the market as a group by a respective 12 and seven points annually from November 2006 to July 2008.

And now, for the stocks
Using the preset small-cap CAPS screen, here are five stocks you should know about:

Company

CAPS Rating

Long-Term Debt/Equity

Return on Equity (TTM)

Research

Frontier Oil (NYSE: FTO  )

****

0.14

26.5%

FTO

Grey Wolf (AMEX: GW  )

*****

0.40

19.3%

GW

Gulfmark Offshore (NYSE: GLF  )

*****

0.22

17.1%

GLF

Meridian Bioscience (Nasdaq: VIVO  )

*****

0.00

23.8%

VIVO

OM Group (NYSE: OMG  )

****

0.04

17.1%

OMG

Source: Motley Fool CAPS, as of Aug. 18, 2008. TTM = trailing 12 months.

Are these the next home run stocks? Only time will tell, of course, but in the meantime, we invite you to learn more about these promising companies on Motley Fool CAPS. You can get started by heading to CAPS -- it's 100% free.

Todd Wenning knows the price of nothing and the value of everything -- at least he thinks he does. Try any of our Foolish newsletter services free for 30 days. The Fool's disclosure policy keeps Fooldom running.


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