Not many investors can afford to buy 1,000 shares of Apple (AAPL) at $120. For the rest of us, there are always small-cap opportunities in stocks that are $10 or less.
According to trading expert Jamie Dlugosch it’s easy, if contrarian, to find small-cap stocks that can be huge gainers, using a system based on the PE gap.
The PE gap is the difference between a stock’s price-to-earnings ratio and its expected profit growth rate.
If it’s negative, buy the stock. If it turns positive, sell the stock.
Annually, Dlugosch picks 100 to 150 stocks attractive to the PE gap methodology.
“There are a lot of small cap stocks,” Dlugosch says. “The idea for stocks under $10 is we use the PE Gap to identify the most attractive under $10 stocks, and then follow some very simple rules.”
Here are those simple rules used to identify the most attractive small-cap stocks under $10….
The Small-Cap Trading Rules
1.) Buy 10 stocks under $10 every month.
2.) Set a stop-loss at 10%. If a stock loses 10 percent, sell it and forget it.
3.) When you hit your target of 40%, with the goal being a double, sell it (not before!).
4.) If you can, keep it for 12 months plus one day for tax purposes, then close it out.
Does this work?
“Let the winners win, and you’ll see many more gain 10%,” Dlugosch states.
Of course, he does warn against volatility, which can be deadly on small stocks.
Think about a $5 stock losing 50 cents, and a $100 stock losing 50 cents.
“It’s simple,” Dlugosch says, “It’s buying growth at a cheap price.”
Now let’s take a look at 3 small-cap stock picks for today…
3 Small-Cap Stocks to Buy
Roadrunner Transportation Systems (RRTS)
Roadrunner Transportation (RRTS) stock saw a huge drop in just days, but that turned the PE gap strongly negative, making it a buy.
Sigma Designs (SIGM)
Sigma Designs (SIGM) is in the sweet spot of home development technology. It was selling at $9.20 recently with a strongly negative PE Gap.
“RadNet (RDNT) trades at a premium, but that’s OK if you’re buying 82 percent profit growth,” says Dlugosch.
This post originally appeared in mainstreetinvestor.com.