Investing in Low-Priced Stocks

Betting on Alpha Plays

Our Alpha Factor is designed to identify stocks that could be the next to soar more than 1,000% in just a matter of months. We studied 25 stocks that have come from seemingly nowhere to make large percentage moves. We have come up with a list of criteria -- such as a low float and minimal Wall Street coverage, among others -- that must be met to be considered a potential Alpha play. We have also developed a system to look at stocks that have made big moves and know when it's time for you to take your gains and move on. While not a perfect science, it is insightful and profitable, as long as we stick to our discipline and don't become greedy.

Roxio (ROXI Quote), a stock we owned in the model portfolio, is a classic example of how our Alpha factor works in practice. The company, which owns the Napster brand for downloading music, met most of our Alpha requirements with its low float, small Wall Street following and potential for big news that would scare the bears that were short some 5 million shares. Rapid sales of Apple's(AAPL Quote) iPod and the release of Microsoft's (MSFT Quote) Janus technology platform that allows for portable subscriptions, increased the buzz around Roxio. We ended up booking a 60% gain in our stake in less than two months. (Not all of our positions generate such enormous returns. Our total return through November is 7%, vs. 17.7% for the Russell 2000 and 8.8% on the S&P.)

In addition to TheStreet.com's proprietary rating system discussed above, we also categorize new picks as "Game Breaker," "Inflection Point," or "Stealth Stock" plays.

A Game Breaker is going to change the landscape of an industry, as Intel(INTC Quote) did in semiconductors, Microsoft in software, Wal-Mart (WMT Quote) in retailing and Dell (DELL Quote) in personal computers. Investors made big money owning these stocks by getting in before the crowd, and that's what we want to replicate when we add a Game Breaker to the portfolio.