Sneak Preview: Learn Momentum's Rhythm

Editor's note: This is a special excerpt from Jim Cramer's book, Jim Cramer's Mad Money: Watch TV, Get Rich. To order your copy and read all the rules, click here.

6. There's a rhythm to investing in small-cap stocks with momentum and not much analyst coverage. If you know the rhythm, you'll make money and avoid getting burned. In my last book I talked about small-cap stocks with little analyst coverage that become the flavor of the year and take off. They go higher and higher as more and more funds see that they're performing and decide they want to get in on the action. The stocks also start to attract more and more attention from analysts, who tell people to buy the stock because it has been going up and they don't want to fight the momentum.

There's a simple and easy way to speculate on these stocks, but in Real Money I didn't have an example, so I didn't make it into a rule. On Mad Money I found an example, and it's one that I played perfectly. With these stocks, you want to ride them all the way up, obviously taking some off the table as per my earlier instructions, but once enough analysts are telling people to buy the stock, once it starts trading at more than twice its growth rate and the stock has become priced for perfection, that's when you bail.

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I have an example to show you exactly how this works. When I started Mad Money on March 15, 2005, not a single analyst covered Hansen Natural (HANS - commentary - Cramer's Take), a company that makes natural sodas. It had, however, already been one of the best-performing stocks of 2004 and 2005.

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From Jim Cramer's Mad Money by Jim Cramer. Copyright 2006 by Jim Cramer. Reprinted by permission of Simon & Schuster, Inc.

At the time of publication, Cramer had no positions in stocks mentioned.

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