One of the best hunting grounds for possible multi-year baggers is the world of small-cap stocks. However, there are many promotional companies that do not generate real cash flow and spend money on marketing their own stocks. To minimize the risk of falling into these companies, evaluating the company’s ability to grow its earnings or cash flow is the first step.

Another valuable metric (which the famed investor Peter Lynch likes) is called the price earnings to growth ratio or known as the PEG ratio. This combines the price of the stock relative to its earnings and expected earnings growth. In theory, the lower the ratio the more attractive the stock is.

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