Small Stock Newsletter

Every day the financial stations cover a familiar list of great stocks: GOOG, HAR, XOM, VLO, UTX, CAT, ESRX . . . the list goes on and on. They are liquid, the companies are growing their business, and they are all close to $100 in price. Even ‘lower priced’ great stocks such as CTSH, FFIV and INFY to name just a few range from $35 to $75. How can the average investor with a smaller investment account participate in the big gains winning, leadership stocks provide?

Mutual funds? If you want to guarantee mediocrity even in the best years you can go this route. Sink all of your money in a few shares of UTX? Even if it moves up for you the percentage gain just won’t be that great. It is the same old problem: how do you make good money without having a ton of money to put into the market?

The answer: seek out the smaller priced stocks with the right technical and fundamental characteristics that put them in position to become more expensive stocks!

The New Leaders.

We are not talking dogs that everyone else has picked over and passed. They may not be household names, but leaders have to start their journey from somewhere. Hardly any stocks debut with the fanfare of a Google that pushes it to $85/share before it even trades. Most fly under the radar screens of money managers who look for large names to buy into. Indeed many of the stocks we cover go from unknown to well-known and the toast of fund managers (examples).

Our stocks are liquid. They may not trade millions of shares per day, but they have the volume to move into and out of easily, and enough institutional interest to really show the volume on the breakout moves.

The current market continues to be a great one to invest in smaller stocks. The economy continues to move out of recession and into expansion, and small stocks are leading the way. After the market bust and subsequent recession, the economy changed. The big companies are still laying off workers and downsizing while new companies are created and come to market. The new ideas they bring will create the next generation of leading stocks.

The gains are not limited to just new issues either. After the bust many solid companies had their stock prices knocked back to reasonable levels. As the economy continues to grow, those with the solid business plans and the right products and services will grow with it. New products, new management, a new game plan; any of these can turn an older stock into a winning stock.

Many Advantages

For those with smaller investment accounts but who still want to see the excellent returns leadership stocks provide, lower priced leaders are the key.

-Better leverage using stock positions.

We can use options on many of these stocks to make our money work harder for us, but we don’t have to if we don’t want to. The price allows us to put more of our money to work in a position that can grow faster.

-Smaller moves equal larger gains.

Because the prices are lower, a stock does not have to move as much to provide much better percentage gains. A 20% gain on UTX requires a $20 move, something that takes a lot of time for that stock even if it is running. A $5 stock only requires a $1 move to provide a 20% return, and with the stocks we seek, they have the technical attributes to cover that ground fast. Great patterns, strong accumulation, and winning sectors are just some of the attributes we look for in our plays.

-Smaller investment accounts, big percentage gains.

For the same reason our investment account will show better gains: we can take larger positions and those positions yield larger gains. That is a major advantage and gives our accounts extra power and super returns.

-Small stocks can grow to large stocks.

Not all stocks turn into big winners, but the stocks we focus on have the attributes to do so. If we can hold a stock for 10 years and see it gain 10,000%, we will happily do so. Sound crazy? Big winners of the past (e.g. CSCO, DELL, QCOM) showed these kind of long term gains. The next batch of leaders can do the same.

Even if they don’t provide multiyear runs we can capture consistent strong gains from these smaller leaders, gains that will often outperform returns from the bigger household names.

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