Validea’s new “Strategy of the Week” feature highlights one of our guru models, offering a deep dive into its fundamental criteria, why they matter, and the top stocks currently favored by the strategy. This feature blends educational investing insights with potential investment ideas, helping you better understand and apply these time-tested approaches in your own investment process.
Strategy of the Week: The Motley Fool Small-Cap Growth Investor Model
This week’s featured strategy is the Small-Cap Growth Investor, based on The Motley Fool Investment Guide by David and Tom Gardner. This approach identifies high-potential small-cap stocks with strong fundamentals and rapid growth prospects.
The Small-Cap Growth Investor model is designed for investors seeking undiscovered, high-growth stocks with solid fundamentals. By applying these criteria, the strategy aims to uncover small companies with the potential for outsized returns.
Key Criteria for Stock Selection
To find small, fast-growing companies, this strategy evaluates stocks based on a diverse set of fundamental metrics:
✔ Profit Margins – A minimum after-tax profit margin of 7% is required, ensuring the company maintains strong profitability within its industry.
✔ Relative Strength – Stocks must outperform at least 90% of the market over the past year, as strong momentum often signals continued performance.
✔ Insider Ownership – Companies where insiders own at least 10% of shares indicate strong confidence from those who know the business best.
✔ Cash Flow from Operations – A positive cash flow shows the company generates enough cash to fund growth, acquisitions, or dividends without excessive borrowing.
✔ Profit Margin Consistency – Stable or improving margins over multiple years indicate efficient management and a sustainable competitive advantage.
✔ Cash and Cash Equivalents – A strong cash position suggests financial stability and the ability to invest in future growth without relying on debt.
✔ Inventory & Accounts Receivable Control – The model favors companies that maintain steady inventory and receivables relative to sales, signaling operational efficiency.
✔ Low Long-Term Debt – Companies with little to no debt are preferred, as they don’t need to rely on borrowing to fuel expansion.
✔ The Fool Ratio (PEG Ratio) – This is a key metric in the strategy. A company’s price-to-earnings (P/E) ratio must be in line with or lower than its earnings growth rate to ensure valuation remains attractive.
✔ Sales Size – The strategy targets companies with annual sales below $500 million, looking for hidden gems that institutions haven’t widely discovered yet.
Small Cap Growth Model’s Risk and Return Stats
Since 2003, the ten stock, tax efficient portfolio has delivered a 13.5% annualized return (1,455% cumulative), far outpacing the S&P 500’s 8.4% annual return (477% cumulative). While it has led the market over time, much of the recent outperformance has come from explosive gains post-COVID in 2020, along with strong returns in 2023 and 2024 as growth stocks rebounded.
But high returns come with high volatility. This strategy had big winning years like 2013 (+65.9%), 2020 (+106.5%), and 2021 (+51.7%)—but also suffered steep declines, including 2008 (-27.0%), 2011 (-16.7%), 2015 (-9.6%), and 2022 (-30.3%).
Investors often focus on returns, but the real challenge is sticking with the strategy through the ups and downs. Understanding both the market risk (volatility, drawdowns) and behavioral risk (staying invested during tough times) is critical when following concentrated, systematic strategies like the Small Cap Growth model.
The next date for the portfolio rebalance / review is March 28th, 2025. Click here if you’d like full and complete access to the portfolio.
* Returns are model returns and do not reflect actual trading. Full performance disclaimer
Top Rated Stocks in Today’s Market
The following table highlights the top ten highest-rated stocks based on the Small Cap Growth Investor model. Click on the ticker symbols to access a detailed guru analysis for each stock.
| Ticker | Company | Current Score | Latest Close | Market Cap ($mil) | PE Ratio | EPS Growth | Yield | Relative Strength | Shareholder Yield |
|---|---|---|---|---|---|---|---|---|---|
| USLM | UNITED STATES LIME & MINERALS INC | 93% | $90.32 | $2,585 | 23.8 | 38.0% | 0.2% | 90 | -0.1% |
| IGIC | INTERNATIONAL GENERAL INSURANCE HLDGS LTD | 85% | $24.44 | $1,102 | 8.3 | 46.0% | 0.3% | 94 | 2.2% |
| VITL | VITAL FARMS, INC. | 85% | $30.39 | $1,345 | 25.5 | 99.6% | 0.0% | 90 | -2.8% |
| PNRG | PRIMEENERGY RESOURCES CORP | 83% | $183.20 | $315 | 7.9 | 43.7% | 0.0% | 92 | 5.8% |
| ITRN | ITURAN LOCATION AND CONTROL LTD | 83% | $38.37 | $763 | 14.2 | 39.0% | 3.3% | 86 | 0.3% |
| TCBX | THIRD COAST BANCSHARES INC | 83% | $33.82 | $466 | 13.5 | 29.2% | 0.0% | 91 | -21.7% |
| PLMR | PALOMAR HOLDINGS INC | 83% | $125.34 | $3,344 | 28.0 | 74.5% | 0.0% | 91 | 0.6% |
| WLFC | WILLIS LEASE FINANCE CORP | 83% | $181.84 | $1,201 | 12.9 | 31.4% | 0.1% | 97 | 2.0% |
| TZOO | TRAVELZOO | 83% | $15.17 | $179 | 14.4 | 74.4% | 0.0% | 91 | -1.0% |
| HIMS | HIMS & HERS HEALTH INC | 81% | $34.39 | $7,640 | 64.7 | N/A | 0.0% | 95 | -80.3% |
For those interested in a deeper dive into the methodology, you can watch this video overview on Validea’s YouTube, which explains how the Small Cap Growth Investor model selects stocks and why it may be an effective strategy for identifying high-potential investments.
Investors interested in deploying this model in their investment process can take advantage of the powerful research tools and stock screening capabilities available on Validea. Use the links below to jump to the detailed stock analysis, model overview, and screening tools, helping you identify and track high-scoring small-cap growth opportunities.
