One of the Best Small-Cap "Sparks" You Can Find

From the Editor: We've been showing you Sid's research because his Small-Cap Rocket strategy gives you a brand-new way to make money. You've seen the charts. But now let's look at another one of the "sparks" Sid likes to see before he recommends a stock. This one is powerful, and typically way off Wall Street's radar...

We all know that - in the end - earnings drive share prices. And most people understand the impact that beating earnings estimates can have on a company's stock. Just look at the way the financial media will dissect the information and report the highlights - sometimes to the point of redundancy. But there's another earnings event - one far off the media's radar - that is much more powerful. That's why I want to show you how to find them today.

These "sparks," as you'll see, actually allow you to get in ahead of the Big Boys.

And that's when the magic begins...

A "Green Light" for Big Gains

Analysts' upward earnings revisions just don't get much press. That's mostly because earnings revisions aren't as sexy as when a company like Apple Inc. (Nasdaq: AAPL) blows the doors off expectations.

Here's a 60-second breakdown of how earnings estimates are derived, in case you're not familiar with them.

An analyst identifies a catalyst that has yet to be priced into the market. These catalysts could be any one or a combination of improving trends in recent earnings, or upbeat management comments to the public, or the announcement of a key contract or new technology, or  an improvement in the macro-economic condition of an entire industry, just to name a few.

Once the analyst identifies the catalysts, he can go to work crunching the numbers in order to come up with new projected earnings and price targets.

It doesn't really matter why the estimate was revised - as long as it's logical, and indicates the potential for future profits is greater than it was before.

Once the estimate is revised, the analyst puts together a report - complete with the rationale behind the improved estimates - and sends it out to institutional investors and preferred clients.

The new estimate is added to the existing group of estimates, and an average consensus estimate is generated.

When the consensus estimates are improving, it indicates analysts are expecting earnings to improve - and that catches the eye of institutional investors (or the Big Boys, as I like to refer to them) who have literally trillions of dollars to invest.

Put the Big Boys to Work for You

Here's where the fun starts.

Unlike you and I, the Big Boys can't just go out and establish an entire position in the click of a button or a single call to a broker. Instead, they need to strategically build that position over time in order to not push the price up too high, too fast.

Because of that, it can take institutional investors weeks - and even months, in some cases - to fully build a position.

Now, multiply one institutional investor by 10, 20, or more and you've got a rally under way that can last months and push a stock price to new highs - making a lot of money for investors who were savvy enough to get in ahead of the big boys.

That's one of the goals in my Small-Cap Rocket Alert - to get in ahead of the Big Boys and establish positions in exciting small-cap opportunities. And one of my favorite strategies is to focus on companies with improving earnings estimates.

It's really pretty straightforward. If earnings are being revised to the upside, then there is a pretty darn good chance that there is a new catalyst pushing those revisions higher.

My team uses a lot of expensive data feeds in order to track earnings estimate trends - but you can track them on a company-specific level using a free service such as Yahoo! Finance.

Let me show you how...

Tracking the Trends Couldn't Be Easier

Enter the ticker of a company you're interested into Yahoo! Finance's Look Up box. That takes you to a page with a summary of the company.

Most people understand that much, already. It's what comes next that might be new to you...

Once you're on the summary page, scroll down the list of choices on the left side of the page and click on the link titled Analyst Estimates.

Since we've already talked about it, let's use Apple as an example:

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After you arrive at the Analyst Estimates page, you'll want to scroll down to the section titled EPS Revisions.

What we see when we look at AAPL shares is that analysts have upwardly revised current year (September 2013) earnings 18 times in the last 30 days and 10 times in the last 7 days alone.

That's pretty darn good, and it probably has a lot to do with why the stock has climbed nearly 12% since September 30, 2013.

I'm only using Apple as a demonstration because we're all familiar with the company. I'm not making a recommendation one way or the other.

But now that you see the correlation between earnings estimates and performance, I invite you to look at some of you favorite stocks and see how the analyst community is viewing them.

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If you see an improving trend over the last week or month, you could experience improved performance in the stock - which of course we all like to see.

On the other hand, if a company you're currently holding in your portfolio is experiencing a wave of downward revisions, you might want to consider selling it or, at the very least, tightening up your trailing stop.

Speaking of trailing stops, we'll wrap up today with a quick discussion of how to effectively use them.

Common wisdom thinks of a trailing stop as a way to protect your downside - and that's absolutely correct.

But what most investors overlook is that using trailing stops is a great way to capture profits on your winners, too.

Instead of using typically losing strategies, like second-guessing or attempting to time the market,  it's much easier to initiate a trailing stop, strategically tighten it up as your positions increases in value, and then let the stop take you out - hopefully with a tidy profit along the way.

In the coming weeks I'll be covering even more of the techniques we use at the Small-Cap Rocket Alert. I hope you enjoy them and that they give you some new tools to put in your personal investing tool belt.