Five Single-Digit Plays With Big Potential

I stopped looking at single-digit stocks a few months ago because they were getting hit too hard in the falling market. But this unique category is on the mend these days, as speculation makes a timely reappearance on Wall Street. So let's pull up a basket of small wonders and see what's attracting buying interest.

These stocks are cheap for a reason, so do your homework before risking capital in this corner of the market. Also keep in mind that most small companies aren't profitable and don't have a ton of money in the bank. This increases the likelihood they'll knock down the value of your holdings through secondary offerings that dilute outstanding shares.

Those untimely announcements can kill great patterns in a single session and trigger substantial losses. The best way to manage this additional risk is to keep your position size small and place tight stop losses. It also helps to shorten your holding period and take aggressive profits as soon as the stock approaches an obvious resistance level.

Cheap stocks come in two varieties. First are beaten-down companies that have fallen from great heights at the expense of unhappy shareholders. Second are emerging small-caps, which have weak balance sheets but prospects for rapid growth. This latter category tends to perform better because it's free from selling pressure at higher price levels.

OK, enough said. Let's look at five little guys that could move higher in coming weeks.

Valence Technology (VLNC)

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Source: eSignal

Valence Technology (VLNC Quote) dropped from $40 to 45 cents in a bear-market decline that ended in 2002. The subsequent bounce failed just above $6, with price entering a steady downtrend that bottomed out last summer. The battery maker has charged higher since that time, with a sharp rally that's lifted price to a three-year high.

The stock has been pulling back from its March peak for the last six weeks. Underlying accumulation has stayed healthy through this grinding pullback, and it now looks like the small double pattern at $2.75 will mark the corrective low.

This support sets the stage for a strong recovery that lifts price up and through the most recent high.