As editor of Diligent Investor MicroCap Hot Sheet, I have to scour the markets every day for the best growth micro- and small-cap stocks. Believe me, it's not an easy feat.

Many companies go public at extremely low prices (or sometimes they get listed as an “over-the-counter” offer on the grey market by market makers, which has a high degree of risk if you don't know what you're looking for.) And most companies have small markets with no industry or sector propulsion behind them that ensures their failure before they even have a chance to succeed.

Take, for example, some of the stocks I had the pleasure of looking at today…

H.E.R.C. Products Inc. (HERC.PK): This company treats water scale and corrosion on ships. Its main clients are the U.S. Navy and the Coast Guard. How would growth ever happen for this company? Exactly… that's why it's been sitting at 50 cents per share since 1998.

No amount of news would entice me to buy this company's stock.

Or another example… a much more terrible one.

National Health Trends Corp. (BHIP:NASDAQ). This is a nutritional supplement and natural food company. The company IPO'd in 2005 at $17.25 per share during the height of the health food craze… and has fallen ever since. Now, not even two years later, it is trading for $2.18 per share.

Not only is this a micro-cap (actually a nano-cap, the lowest market capitalization rating) but it's a good example of a failed IPO.

Sometimes Initial Public Offerings (IPOs) by exchange-listed stocks operate the same way as failed micro-cap investments. Let's just say that in both instances it's hard to separate the grain from the chafe.

While both micro-cap stocks and IPO's are viewed as novelties by some beginner investors (you feel like you're getting a bargain for a company that has to be “good enough” if it's going public), they are still extremely risky investments and should be undertaken with a load of due diligence.

Although I'm not a fan of the man, I do agree with Jim Cramer's assessment that today's investment strategy is not “buy and hold,” but “buy and homework,” meaning you better read the company's reports, its headline news, and especially study its fundamental analysis.

While micro-cap stocks can take a while to take off, as the public is waiting for news of its first product or contract, IPOs work in a similar fashion.

Not all IPO's rise in price straight off the bat.

Case in point: Oculus Innovative Sciences (OCLS:NASDAQ). This company makes products that prevent infection in wounds. It was priced out as an IPO on Jan. 24, 2007 at $8 per share. Less than a month later it's priced at $6.81 per share, down 14.9% from its public date.

The company hasn't harvested any substantial news since March 8, 2006, when its product was granted FDA approval.

It pains me that investors would be that interested in buying an IPO from a company that hasn't proven itself to the market.

I'm not saying all IPOs are bad news. My Diligent Investor newsletter already made gains of 136% on half of its MasterCard Inc. (MA:NYSE) holding and is keeping the rest for higher gains.

But I have to admit, that was an easy one. It's a different ballgame comparing small, focused IPO companies to such heavyweights as MasterCard or Google Inc. (GOOG:NASDAQ) when it comes to IPOs.

As with micro-cap stocks, you have to look for IPOs with large profit potential that also have industry support and market need for its products, not some company that just decides it needs to go public to pay off its debt using shareholder monies.

It's amazing to me that such companies can even pay for the research and the underwriter expenses incurred in such ventures.

But there is a light at the end of the tunnel. Since December 18, 35 companies have IPO'd on the American market. Some have already returned phenomenal gains.

The best performer is Trina Solar Limited (TSL:NYSE). So far it has returned over 100% in gains to IPO investors who bought at $18.50 per share. It's a Chinese manufacturer of solar power modules and is reaping the benefits of being part and parcel of what is currently a booming industry, rife with ideology and change.

Also, there's Accuray (ARAY:NASDAQ), a company with an already FDA-approved robotic radiosurgery system (called the CyberKnife) for ridding the human body of tumors. Because the company already offers value, its IPO investors proved to be extremely smart in investing in it. The stock has already returned gains of 58.6% since its initial posting.

I'm of the school of investing that claims the “wait and see” approach. I'm much more comfortable recommending hot penny stocks that offer value, instead of pumping them up and then dumping them for personal gains.

The same goes for IPOs. Wait and see, watch and learn, and then invest in a company because it's providing value to the marketplace, not just adding heft to their own pockets.