However, as the source of information is much scarcer when compared to large caps, analyzing microcap stocks can take much more time and effort. Even though the information were publicly available. One other logical reason could be that as the coverage of microcaps by major investment banks is non-existing - due to the fact that microcaps do not generate fat enough banking fees - all information is not immediately priced correctly into the microcap stock.

How come microcaps are able to outperform large caps? One factor often offered by the academics is that greater risk requires greater return. In addition, if a reader would be interested in trying out this type of a strategy, I will as well reveal how this kind of a basket would look at the moment. In this article I will demonstrate how well a carefully selected basket of microcap stocks has performed in the history. In addition, as this asset class has historically had a lower correlation when compared to S&P 500, international equity and fixed-income security ( source), having this kind of a satellite portfolio next to your core one is a viable option in the quest for additional diversification and extra return. However, this outperformance has meant higher risk in the form of stock price volatility and business performance (see Fama and French). Why should an investor add microcaps to his/hers portfolio? It is academically studied that smaller market capitalization stocks have historically produced better returns than large cap counterparts. Depending on your broker and country, microcap usually refers to stocks with a market capitalization of less than $ 300 million but in this article I will draw the line to $250 million. This segment could provide better diversification and possibility for better future investment returns for a portfolio. An investor might in this kind of a situation ask where (s)he should turn to in order to find value or get better diversification? One possibility to achieve this is the microcap segment.

When compared to historical valuation metrics, blue-chip stocks seem to be currently overvalued.

List of micro cap stocks 2016