Investing in Low-Priced Stocks

We then complete a thorough process of due diligence that includes talking with management teams, reading SEC filings, scanning news, talking to traders and reading other Wall Street analyst opinions and analyses before we issue an opinion on a stock. This process gives us a leg up on our competitors who have to spend time trying to decipher press releases and waiting for call backs from management and IR teams when news hits the wires.

After our research process is complete, we rate our companies based on four components: management, underlying fundamentals, technical indicators and our proprietary Alpha factor.

We put a lot of emphasis on the management teams in the Stocks Under $10 space. For one, these are the people that are trying to engineer bigger and better things for the companies they run. Unlike larger companies that have layers of bureaucracy between management and employees, managers in the Stocks Under $10 market are interacting with sales people, customers, suppliers, distributors, potential partners and employees directly on a day-to-day basis.

When it comes to the fundamentals, our No. 1 concern is, "Can the company fund its operations?" A lot of low-dollar stocks are burning cash to achieve their business objectives, opening up the risk of running out of money prior to profitability. We don't want to carry the risk of holding a company that could end up in Chapter 11.

We also include a small amount of technical analysis into our equation. Daytraders and momentum traders alike look to exploit the misinformation and potential leverage in the Under $10 universe to make money based on technical readings. We don't want to fall victim by ignoring charts. Although we don't use charts to make investment decisions, we do make timing decisions based on our opinion of a stock's chart.