The charade is over! For the past couple of years, a lot of folks on Wall Street were pretending to be something they’re not. Mathematicians were posing as financial experts, strutting into town determined to make a quick buck. With their sophisticated computer programs in place, they pumped more than $100 billion into complex investment vehicles known as arbitrage hedge funds.

I’m sure you’ve heard about this investment trend in the news lately, but if not, let me tell you a little bit more about it. Arbitrage investing is when someone buys a security in one market and then sells it in another market for a quick profit. Traders in the Japanese yen carry-trade, for instance, buy Japanese currency and then convert it into another currency, profiting from the difference in interest rates. It’s quick and easy, and it can be very rewarding.

Traders and hedge funds invested in these super-risky investments and were bursting at the seams with subprime loans. Others placed big bets on the idea that financial stocks would continue to plummet and sold them short.

Well guess what happened?

In August, many of these trading schemes blew up. We saw several short-covering rallies that decimated these arbitrage hedge fund strategies. As the credit crunch escalated, investors fled battered hedge funds in droves, and many of these arbitrage players were left holding the bag. It wasn’t a pretty sight.

These math guys thought they were so smart, but they didn’t realize a simple financial fact—liquidity often dries up in August. I’ve been at this game for nearly 30 years, and anyone with any experience knows this. August is when all of the Wall Street big shots head over to the Hamptons. No real trading gets done. So these math geeks saw their sophisticated computerized trading systems get overloaded as world markets violently whipsawed back and forth.

The arbitrage players have been forced to deleverage their positions since their trading schemes failed, and they’re now facing mass redemptions. Record trading volume followed as they unwound their over-leveraged positions. Finally, on August 16, the stock market reached Capitulation Day, which marked the definitive stock market low. That was when the Dow staged its incredible 344-point intraday reversal. This was important, since Wall Street was finally convinced that the stock market had bottomed out.

Stick to the Fundamentals

Even though a lot of these Wall Streeters are in a world of hurt right now, I have to admit that I’m absolutely ecstatic with how well the stocks on my legendary Emerging Growth Buy List held up during the chaos. The reason is simple: We steered clear of the risky investments and focused on fundamentals. This is exactly why I stress fundamentals so much. After these arbitrage strategies blew up, our stocks saw heavy buying from institutional investors.

I’ll give you a perfect example. One of my favorite Emerging Growth stocks is Crocs (CROX), the shoe stock. The numbers here are amazing. In May, the company said it would earn $1.48 a share. I have to admit I was impressed by that, but I was floored when Crocs revised its EPS forecast in July to $1.93. That’s the kind of stat that sets our Emerging Growth stocks apart from the rest of the pack. Sales for Crocs in the second quarter doubled. But what I really like about Crocs is its profit margins. Crocs regularly delivers profit margins around 60%. That’s great for a shoe company. Actually, that’s great for any company!

This is why I wasn’t bothered by the selling panic last month because I knew that the cream would soon rise. Since its August 16 low, shares of Crocs are up an amazing 31%, and I expect to see lots more gains in the future. I currently rate CROX a moderately aggressive buy to $68 a share.

Another fundamentally superior stock I like from my Emerging Growth Buy List is Manitowoc (MTW). This isn’t a well-known company, but it should be. The company makes ice machines and beverage dispensers for restaurants. But lately, Manitowoc is most famous for its cranes. The company makes boom cranes, tower cranes and telescopic cranes for construction and mining. Business is booming, and just like Crocs, the stock has rallied strongly since its August 16 low. Shares of MTW are up over 20% in just three weeks. I rate Manitowoc a conservative buy up to $86 a share.

While this summer will go down as one for the record books, what happened is further evidence of the market’s seismic shift away from value stocks and into growth stocks. Arbitrage is out of favor, and fundamentals are back in. Stick to fundamentally superior stocks like the ones in my Emerging Growth service.

I guess those arbitrage quants run by younger guys with all their hair gel can learn a lesson from an old guy like me. In fact, they may want to check out a copy of my new book, “The Little Book That Makes You Rich.” It’ll be hitting bookstores next month.

In Emerging Growth you’ll receive the precise buy/sell guidance you need to take advantage of the tremendous profit-making opportunities in small-cap stocks. According to The Hulbert Financial Digest, our long-term track record is one of the best around. In 22-1/2 years, our Buy List is up nearly 54-fold.

And don’t miss Navellier’s new book, The Little Book That Makes You Rich. It’s a steal for less than $20!