Please Note: Blog posts are not selected, edited or screened by Seeking Alpha editors.

The Most Potent Stocks

Zacks Investment Research

The Most Potent Zacks Rank Stocks

It's been clear from day one. The best Zacks #1 Ranked stocks are small caps. In fact, the smaller the stocks, the better the returns.

Granted, these stocks have always been available on our website by sifting through the Zacks #1 Rank list. Unfortunately it's been difficult to provide these recommendations in any of our subscription services because each one had too many members on board. If they all bought or sold the same stock at the same time, then the price would move too much and the potential for great returns would be eroded. So for years we stewed over this problem, wondering what to do with all of these profitable picks.

The "Ah Ha!" Moment

Sometimes the answer is right in front of your face. Such was the case here. In fact the answer is so simple that it's almost embarrassing to mention it now.

If the problem is that these small cap picks can't be shared with too many investors at the same time, then the solution is to have an exclusive service with fewer subscribers on board. This solution got the wheels turning on what has become our most profitable service yet, the Zacks Small Cap Trader.

Below I will share with you some of the findings from the research study that went into the creation of this exclusive service. This information will help you pick more profitable stocks even if you never subscribe to the Small Cap Trader.

4 Factors All in Your Favor

Hopefully by now you know that our Zacks Rank stock picking system is based upon 4 factors. Let's quickly run down the 4 factors and explain how small caps garner the lion's share of the benefit.

1. Agreement: This is about the percentage of analysts who are in "agreement" that the earnings outlook for the company has improved. The greater the agreement of the analysts that future earnings will be moving higher, the more comfortable investors feel about getting on board. Small caps have fewer analysts covering the stocks. Thus, it's much easier to get 100% agreement from 2 to 4 analysts than 10+ analysts who would normally cover larger stocks. This leads to more investors buying up shares pushing prices higher.

2. Magnitude: Here we are talking about the size of the percentage change in earnings estimates. If estimates increase from $1.00 to $1.02, that's nice. If they increase to $1.20, that is a whole lot better and will attract more investor attention. As you might imagine small cap stocks can grow much faster than their larger counter parts. Thus, much more likely to have significant changes in their earnings outlook, which is a sirens song that attracts growth investors to the shares.

3. Upside: This factor concentrates on the most accurate estimates versus the consensus, which shows the upside potential going into the next earnings announcement. Meaning it's a leading indicator of potential earnings surprises. Small caps quite often have the biggest potential for earnings surprises. And this factor allows you to get on board these stocks BEFORE the announcement and before the stock jumps on the news.

4. Surprise: Stocks that had a positive surprise in the past are more likely to do it again in the future. Further, the bigger the surprise in the past, the bigger the potential surprise the next time around. By now it's getting kind of obvious. If you guessed that small caps generate the biggest earnings surprises and subsequent gains.then you are correct.

The data for each of these 4 factors is available for free on Just go to the Estimates page for your stocks and you will discover the information there. Note that each of these factors individually helps investors pick better stocks. But when you blend them together in the Zacks Rank it puts an almost unfair advantage in the hands of investors...apply it to small cap stocks and the advantage could be called "obscene".

Good Better Best

Our research study covers the period from January 2000 through end of September 2009. That means we have two bear markets and only one bull market in that time frame. Certainly not the most lucrative time for stock investors as the S&P 500 actually fell on average of -2.8% per year over that stretch.

Things got going in the right direction when we narrowed our focus to just Zacks #1 Ranked stocks, which rose +17.6% per year during that same time. When we turned our gaze to just the small cap #1 Ranked stocks the returns came up a bit more. Then with more fine tuning on parameters we ended up with a group of #1 Ranked small caps with a +32.7% average annual return.

To be honest, the above paragraph does not do justice to the outperformance in play here. If you put $100,000 into these prime stocks then, you'd now be sitting on a portfolio worth $1,473,400. Compare that to the losses most everyone endured in those trying years.

It's important to note that not all small caps are created equal. However, through our rigorous testing, we've come up with the right blend of metrics to help us pick the best of the best from the small cap universe.

How to Find the Best Small Cap Stocks

I highly recommend that you explore this opportunity to get the best Zacks Rank stock picks.

Especially now with the market so rocky.

Especially now with our special discount offer.

Especially now with our best ever guarantee.

Click here to learn more and sign up for free Zacks Small Cap Trader.