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Stock Strategist

Seeking Moats in the Small-Cap Universe

If they mind the pitfalls, individual investors can get a distinct advantage over large money managers in the small-cap arena.

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I’m excited to kick off a monthly series on small-cap stocks for Morningstar.com. The focus of the series will be identifying smaller firms that exhibit moatworthy characteristics and are run by skillful management teams. This is a promising combination for any company to have, but it’s particularly attractive for smaller companies with long growth runways, as they have the ability to compound shareholders' capital at high rates of return over long periods of time.

Easier Said Than Done
Of course, it’s not a simple task to identify such companies at just the right time. Indeed, there are many "false positives" for enterprising small-cap investors to sort through during their research process. For an illustration of the concept, consider the following examples.

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Todd Wenning does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.