This Stocks Under $10 alert was originally sent to subscribers June 20 at 10:14 a.m. EDT. It's being republished as a bonus for TheStreet.com readers.

No doubt about it, a volatile market environment like we're seeing now, can give investors the jitters. But this is also the time when market participants can take advantage of bargains and reap outsized gains once the market rebounds.

Given this environment, we want to provide some historical perspective on the low-priced stock sector so that readers can maximize the value of the stocks in the Under $10 model portfolio, which I manage for

TheStreet.com

.

Without question, the market has been disappointing since May 11: The

Nasdaq

has lost 7.1%, the

Dow

has fallen 4.8%, and the

S&P

500 has given back 5%. And although there is no specific benchmark for the under $10 sector, a look at the Russell 2000 -- a widely-used benchmark for small-cap stocks -- indicates that small-cap stocks have taken the brunt of the recent market weakness, with the index down some 12% since May 11.

The model portfolio has not been immune to the selloff, but the portfolio is still up 3.8% year to date even as the S&P and Nasdaq are in the red (the Russell 2000 is up 1.8% year to date). That said, history suggests that the under $10 sector, and small-cap stocks in general, will outperform the major indices when the market rebounds.

For instance, the Russell 2000 lost 8.7% from Sept. 12, 2005, through Oct. 12, 2005, vs. a 5% loss for the S&P 500. Although the decline in the Russell 2000 caused significant damage to many portfolios, investors who took a bigger-picture approach to their portfolios and bought quality small-cap stocks into weakness realized that small-cap stocks -- particularly those that are low-priced -- are the best place to be when the market rebounds.

In the ensuing nine months, the S&P 500 rebounded 12.6%, while the Russell 2000 added 25.8%. In other words, those who managed their portfolio wisely into the market's rally in early 2005, using strength to build a nice cash war chest, had the funds to buy the dip when the market inevitably turned down. These investors benefited disproportionately while others fought hard to get back to break-even. This type of experience is also a valuable lesson, and gives investors the tools the next time around to better weather a tough market.

This year, as the market peaked in May, the

Stocks Under $10

model portfolio held nearly 25% cash vs. our usual cash position of about 10%. At that time, we used the market strength to book gains in a number of winners, such as

Emcore

(EMKR) - Get Report

and

RightNow Technologies

( RNOW), given our belief that stocks were getting ahead of themselves.

However, during the market's steep selloff, we have been putting that money to work in secular growth stocks such as

Arris

(ARRS) - Get Report

, which is benefiting from growth in voice services from cable providers, and

Novatel

(NVTL)

, which should see revenue growth accelerate as more professionals adopt mobile Internet solutions.

Looking ahead, we have never been more confident in the potential of the model portfolio holdings. A number of the stocks, such as

Allscripts

(MDRX) - Get Report

and

Smith Micro

(SMSI) - Get Report

, are trading at attractive valuations based on earnings estimates that we expect will prove conservative.

Allscripts is benefiting from strong demand for electronic health records, while Smith Micro is well-positioned to benefit from wireless broadband and music download services. Also, we have been able to add stocks such as

TradeStation

( TRAD) and

Evergreen Solar

( ESLR) at low prices that would have been inconceivable just two months ago.

We want to make it clear that we are not calling a bottom in the market. However, we know from experience that the best stocks to own in a market rebound are low-priced, and the recent selloff has created a great opportunity for investors with six- to 12-month time horizons.

William Gabrielski is a research analyst at TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Gabrielski welcomes your feedback;

click here

to send him an email.

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