How to Find the Best Small-Cap "Sparks" (in 90 Seconds or Less)

Today I'm going to show you how to find the best-performing small-cap stocks of 2014.

Employing the approach in 2013 helped spot some huge winners...

Puma Biotechnology, for example, jumped 452.2% in 2013, on a series of positive results and news related to its various clinical trials programs - a classic disruptive technology.

Tesla Motors is another great example. The luxury electric automaker trounced earnings estimates way back in the first quarter of 2013, which led to analyst upgrades... and, of course, a 344.1% gain for shareholders.

And then there was Netflix, which gained 279.6% after the company crushed fourth-quarter 2012 earnings, proving the company had righted its ship.

All very different businesses and industries, but one thing in common: sparks. They come in different shapes and sizes, but they all do the same thing: make you a lot of money.  

This year's first batch of gains can come quickly, too. Plug Power (PLUG) generated a spark on Jan. 2, confirming it had met fourth-quarter 2012 order targets. Shares jumped 34% that following morning... and were up another 35% by the next afternoon.

And here's the thing: Sparks are easy to find, too. No need to study ambiguous chart patterns, watch 24 hours of business news channels, or pore over valuations.  

All it takes is five simple steps...

Step 1: Get Access to the Entire Stock Market
Start by opening a free stock screen, such as the one located at FINVIZ.com. I don't have any relationship with the folks at FINVIZ.com - I'm mentioning FINVIZ because it's free, easy to use, and it allows us to screen for recent performance.

Step 2: Target the Small-Cap Universe
For the purposes of screening for small-cap opportunities, you can limit the screen to companies with a market cap between $300 million and $2 billion. This will limit your choices to smaller companies (that still have plenty of upside) while at the same time screening out companies that are too small - and too risky.

Step 3: Look for an Igniting Spark
Set the screening parameter to only include companies that have experienced at least a 20% move over the last week. I know a 20% move in a week sounds like a lot - and it is - but we're targeting companies that could deliver 200%, 300%, 400%, or more in a 12-month period, so letting the market demonstrate its conviction early on is a fair trade-off.

Step 4: Isolate Your Target Group
Once you have your list of results (there were only 11 results when I ran the exact same screen recently), take a moment to check in on each company using a handful of news/research sites. I like to use IBD, Yahoo Finance, Market Watch, and Money Morning, but you can use any source as long as you're comfortable that the news feed is thorough.

Look for news stories that could explain why the stock moved over 20% in the last week. If the move has long-term legs, it will probably have at least one recent story that could explain the move. If the stock has been climbing for longer than one week, you might need to look at older news stories to identify the spark.

When looking for news events, focus your attention on the most powerful sparks.

Here's a list of the ones I target for readers of my Small-Cap Rocket Alert:

• Quarterly earnings that beat expectations

• Upward revisions or analyst upgrades

• A new game-changing contract

• The announcement of a heavy-hitting institutional investor establishing a position, a research report (from a reputable company) that indicates the company has a top-of-class disruptive technology, or a management change. Perhaps the company is just a leader in a sector that is turning around (think solar stocks in 2013).

Step 5: Confirm the "Sparks"
Finally, once you think you've got a winner, with a legitimate spark, take a moment to make sure the company's fundamentals are in order - increasing revenue and net income, stable or improving margins, and a reasonable debt level.

And remember...

If you're focusing on a biotech company, many of the small firms don't actually have a product on the market yet (that's why they're in the clinical trials process in the first place). That means they might not have any revenue or earnings. If that's the case, make sure the company has enough cash to run operations for 18 to 24 months. Otherwise, the company might have to issue more stock to raise cash, which can drag the stock down.

This process is by no means the only way to identify small-cap winners with profitable sparks, of course. But it is one simple method you can use at home to help you tune out a lot of the noise.

The payoff is often huge.