John Reese is CEO of Validea.com and Validea Capital, and portfolio manager for the Omega Consensus funds. Globe Investor has a distribution agreement with Validea.ca, a premium Canadian stock screen service. Try it.

In the stock market, thinking small can lead to big rewards.

That's what 85 years of history has shown. From 1927 through 2012, one dollar invested in the total U.S. stock market would have grown to just shy of $3,000, according to Index Fund Advisors. The same dollar invested in a basket of small U.S. stocks? It would have grown to nearly five times as much: $14,580.

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In explaining the reason why small stocks have outperformed their larger peers, Eugene Fama of the University of Chicago has noted that smaller stocks tend to be riskier and have a higher cost of capital, which means investors demand higher returns for investing in them.

In today's era of information overload, small stocks may have even more of an advantage. That's because larger stocks are followed by hordes of analysts, making it harder to find hidden gems. Smaller stocks, meanwhile, may be followed by few, if any, analysts.

That doesn't mean you should just dive headlong into any old small stock. In fact, because small stocks and smaller companies can be more volatile, you should use a rigorous approach when analyzing them.

That's what my Motley Fool-inspired Guru Strategy does. Based on a method laid out by brothers Tom and David Gardner, co-creators of the Motley Fool website, this small-cap strategy looks at 17 variables, putting smaller stocks through the wringer to make sure they are on solid financial footing – and trading at a good price.

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Since 2003, I have tracked a series of model portfolios on my research site, Validea, and the Motley Fool-based portfolio is one of the best – returning 15.1 per cent annually (compared with 5.3 per cent for the S&P 500). And the excellent performance has continued. In the Canadian market, the 10-stock Fool strategy on Validea Canada has jumped 37.4 per cent, far outpacing the S&P/TSX composite's 7.6-per-cent gain since its August, 2010, inception.

The Fool-based model's criteria include:

Meeting all of these criteria is exceptionally difficult, and it's very rare that a stock will get a perfect 100 per cent score. But even when a stock scores in the 70- to 80-per-cent range, that can mean it's a good opportunity.

Here's a look at some of the Fool-based model's favourite Canadian stocks right now. Keep in mind that some of these are very small, lightly traded stocks, so they may be subject to a good deal of short-term volatility.

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