Great traders and true value investors know that it’s not only the return function that dictat...
Kennedy's A-Team Small Caps
04/23/2004 12:00 am EST
Kevin Kennedy, editor of Coolcat Explosive Small Cap Growth Stock Report specializes in high growth, micro- and small-cap stocks. Here, he offers his advice to reduce the trading risk of small caps, as well as offering some current favorite opportunities.
"While there is risk in any stock, smaller companies do generally exhibit more volatility than their larger counterparts," says Kennedy in an interview with CBS MarketWatch.com. "Each piece of key news or shifting sentiment about a company's future prospects tends to sway investors more readily to either climb on board or dump the stock, and these shifts have more impact on the stock price of a smaller company because they have fewer shares outstanding. Fortunately, there are several ways you can counter that volatility and in fact make it work for you:
Diversify your portfolio into a basket of at least 20 to 25 stocks when fully invested, and preferably more.
Develop some unemotional selling rules that allow you to keep your losses relatively small while allowing you to reap the benefits of some occasional big gainers when you get it right.
Take at least some partial profits along the way when you catch a big winner. At the same time, try to hold some stocks for a period of six months to a year, because it usually takes that long to fully realize your best chance of significant gains.
Develop relatively rigid stock selection criteria, which increases your chances of finding some solid winners that share the characteristics of previously successful stocks.
Don't chase hot stocks. Wait for them to cool off and look to buy during their first decent price pullback from their highs.
"To find our stocks, we identify the market's biggest winners over the past year and then try to identify characteristics they had in common before they made their big move. My research consistently indicates that some of these winning characteristics are a low stock price, a low market cap, a low number of shares in the stock's trading float, high relative price strength, high industry group strength, new 52-week highs and the sudden appearance of much higher trading volume than before.
"To reduce our risk, we like to look for a price pullback of at least 20% to 25% off the highs. Very few stocks are going to break out and soar to their ultimate high on a straight line. Most will bob and weave on their way to glory, and focusing your buying on pullbacks puts you into stocks in a strong uptrend while they're taking a breather and reloading for the next leg up. A good example of this is Camtek Ltd. (CAMT NASDAQ), an Israeli manufacturer of optical inspection systems for printed circuit boards. The stock made my screens in mid-January when it broke out to a new 52-week high at 3.80 and ran to $7.87. I then waited for the stock to cool off and I was able to get what I felt was a decent entry at 5.25, where I felt it looked poised for another leg up in the coming months. Three other small tech stocks also look well placed to me on the same basis. Call them my A-team: Arel Communications & Software (ARLC NASDAQ), which makes conferencing software; AltiGen Communications (ATGN NASDAQ), a manufacturer of call center solutions and telephone systems; and ACE*COMM (ACEC NASDAQ), a provider of products and software applications employed in wired and wireless networks."
Meanwhile, in the latest issue of his Coolcat
Report, he adds two new stocks to his buy list. He says, "Two microcaps
have passed my basic screens and also meet additional criteria that has been
present in top winning stocks:GMX Resources (GMXR NASDAQ),
with a market cap of just $34 million, is an independent natural gas production
company headquartered in Oklahoma City, Oklahoma. The company has 53 producing
wells in Texas and Louisiana, 24 proved and developed non-producing reservoirs,
48 proved undeveloped locations and several hundred other development locations.
Its strategy is to significantly increase production, revenues, and reinvest in
increasing production. Hauppauge Digital (HAUP
NASDAQ), with a market cap of $74 million, is a developer of
digital video TV and data broadcast receiver products for personal
computers. The company designs and develops analog and digital TV receivers
that allow PC users to watch TV on their PC screen in a resizable window
and enable the recording of TV shows to a hard disk, digital video editing,
video conferencing, receiving of digital TV transmissions, and the display of
digital media stored on a computer to a TV set via a home
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