How to Identify the Best Small Cap Stocks By Using Algorithms

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This article on how to identify best small cap stocks was written by Samantha Fischler, Junior Financial Analyst at I Know First.


  • There are 3 benefits to small cap stocks: large growth potential, more opportunities for the individual investor, and the improper lower pricing of shares
  • Small cap stocks are riskier investments that involve more research than mid and large cap stocks
  • I Know First’s algorithm makes discovering small cap companies easier and does important research on those companies, making an investor’s decision-making process easier
  • The I Know First algorithm is very accurate in its forecasts for small cap stocks
  • Buy-side financial institutions are interested in the use of algorithms to predict small cap stocks

The Big Question: Why Small Caps?Best Small Cap Stocks

To start off, let’s answer the question: Why would I even be interested in investing in stocks with small market capitalizations? Is it worthwhile when I could invest in mid to large cap companies without all the hassle of the research that goes into an informed small cap investment decision?

Small cap trading has 3 main benefits. The first is that there is huge growth potential. Everyone wants to invest in the next Apple or Microsoft and even those companies started out small. Likewise, the small cap stock that you invest in today could end up being a huge corporation and your investment could have a large payoff. The second benefit is that with small cap stocks, there are more opportunities for the private investor, as opposed to investment firms. Mutual funds are unlikely to invest in small cap stocks because the payoff is unlikely to alter their fund’s performance. This is due to SEC regulations that control how large of a position a mutual fund can hold in a company. Therefore, an individual investor has the potential to recognize and invest in a promising company before large investment firms invest and push up the price. Lastly, small cap stocks are often under-recognized. Because these companies are so small, they are often unheard of or not reported on and therefore may be improperly priced, with each share costing less than it should. Despite all of these benefits, it is important to note that small cap stocks are much riskier and volatile than mid or large cap stocks. Additionally, there is much more research involved in the investment decisions that come along with small cap stocks being that there is little to no analyst coverage on them and ratios are often not reported so potential investors would have to do the tedious math themselves to make an educated decision.

Informed Investment Decisions Becoming Easier

I Know First comes in here to help make informed investment decisions and to do the research for the investor. This is done based on data using I Know First’s algorithmic technologies. I Know First uses an advanced algorithm to predict and analyze the stock market based on Artificial Intelligence and Machine Learning with the incorporation of elements of Artificial Neural Networks and Genetic Algorithms. It thereby rids the investment decision-making process of irrational human interference based on emotions, reducing the risk of selling based on normal cyclical fluctuations. The information derived from the algorithm is based on market data from the last 15 years and automatically updates itself as new information is released. The algorithm is an effective tool used by investors to help make decisions regarding different stocks, indices, commodities, etc.

Even once all of the number crunching ratios are completed, it’s still hard to predict a trend early on before it starts to reverse itself. I Know First’s algorithm takes into account the latest patents and news when making its predictions, making it easier for it to predict trends even before the patterns really manifest themselves into trends. This allows the investor to buy into the trend early on when stock prices are low and sell their shares before the stock begins to depreciate in value.

Best Small Cap Stocks

Our Results

As modeled in the chart below, I Know First’s self-learning algorithm accurately predicted 8 out of 10 small cap stocks for a 14-days period ranging from July 17th to July 31st, 2019. The I Know First Average came out to 3.36% as opposed to the S&P 500’s of -0.79%. The highest return from this period was an extremely impressive 19.50% rise in TSEM over that short span of time. This exemplifies the accuracy with which I Know First is able to forecast small cap stocks, a daunting task without an algorithm.
Best Small Cap Stocks

Another notable instance is when I Know First’s self-learning algorithm accurately predicted 8 out of 10 stocks under $10 for a 3-days period ranging from August 16th to August 19th, 2019.

Best Stocks Under 10

The I Know First Average came out to 5.01% as opposed to the S&P 500’s of 2.67%. The highest return from this period was an extremely impressive 18.33% rise in ICON over that even shorter span of time than previously mentioned forecast.

To gain deeper insight into the algorithmic performance of I Know First AI algorithm we suggest to read our most recent Performance Evaluation Report covering the last half year period. It provides extensive analysis on the returns and hit ratio of forecasts provided to our customers who subscribed for Stocks Under 10 Dollars Package.

Interest From the Corporate World

Even buy-side companies are intrigued by the idea of using an algorithm to predict stocks with a small market cap. Small cap investments are not as liquid as mid and large cap investments so finding the right small cap stocks to invest is in much trickier.

Who can really say for certain what the next big thing will be? In general, gaining exposure to companies with small caps can be difficult and using an algorithm such as I Know First’s can ease that burden by putting in the work for the private investor. Will Wall, head trader at RiverFront Investment group, currently learns about small cap companies from exchange-traded funds, but even gaining exposure through ETFs isn’t easy. The process of discovering new small cap companies can be greatly enhanced using I Know First’s algorithm.


To answer the original question: Yes, small cap stocks are risky, but they can be very worthwhile investments. They do however involve extensive research to make an educated investment decision. An algorithm such as I Know First’s is an extremely effective tool for doing so, as the ratios used in ratio analysis are often not otherwise worked out for small cap companies, and the algorithm helps bring in positive returns to investors in the market for small cap stocks. This is not to say that a potential investor should just use the algorithm and forgo doing their own research. Rather, they should use this immensely useful tool to ease the process of discovering and doing follow up research on small cap stocks before they invest their money in the small cap companies.