10 Stocks Under $5 Outperforming in 2012

BOSTON ( TheStreet) -- Whether you think of it as "risk on" or the "dash for trash," several penny stocks are soaring after only a month since the new year started. Under $5 stocks such as Energy Conversion Devices ( ENER) and Rosetta Genomics ( ROSG) have more than doubled already this year.

After underperforming in 2011, small-cap stocks are outperforming the broader market so far this year. The Russell 2000 index, a measure of share performance for smaller companies, dropped more than 5% last year but has risen 6.6% in January. By comparison, the S&P 500 index of the largest U.S. companies was flat in 2011 and is trailing the Russell 2000 in 2012 with a gain of 3.4%.

There are a few explanations why riskier assets have led the market. The most obvious is the phenomenon known as the so-called January Effect, where small-cap stocks tend to outperform the broader market in the first month of the year. That's when investors who sold out of positions at the end of 2011 recognize a capital loss for tax reasons and reinvest in those small-cap names once the calendar flips over.

Another explanation is the reversal of the flight-to-safety trend witnessed in late 2011, which was largely prompted by the European debt crisis. Investors became highly risk-averse on fears of another global economic recession due to the spreading debt contagion, which forced many into safe havens like dividend-paying, large-cap stocks, U.S. Treasuries and cash.

But with bank stocks and other financial shares among the top performers in 2012, investors are dubbing the recent surge in equity prices the "dash for trash." Bespoke Investment Group noted earlier this month that the biggest losers in 2011 are among the top performers this year. Those gains are coming in the shadow of the continuing debt crisis in Europe, with Greece working frantically with creditors to avoid a default.

Still, many inexpensive stocks have generated huge returns for lucky stock pickers, whether the run higher is justified or not. But given the volatility in the equity market, investors must be careful in searching out small-cap stocks worth the risk, as fortunes can be lost with only one bad trade. For example, stocks like Columbia Laboratories ( CBRX) and Sgoco Group ( SGOC) have each sank more 40% in January.

Some small-cap winners have doubled and, in one case, quadrupled already this year. The following pages detail the best-performing stocks under $5 in January on the New York Stock Exchange, Nasdaq and NYSE Amex, ranked by total return in 2012.

10. China Sunergy ( CSUN)

Company Profile: Headquartered in China, China Sunergy manufactures solar cell and module products for the photo-voltaic (PV) industry.

Like most solar stocks, China Sunergy has surged in 2012 after getting brutalized last year. Other names like Hanwha Solarone ( HSOL), SunPower ( SPWR), and Trina Solar ( TSL) have rallied between 30% and 90% in January. Bloomberg noted over the weekend that solar panel manufacturers expect installations to double this year and for more consolidation in the industry.

Share Price: $2.39 (Jan. 27)

2012 Total Return: 113%

Analyst Ratings: Collins Stewart is the only research firm with a recent research report out on China Sunergy, rating the stock "neutral" on Jan. 5 with a price target of $1. TheStreet Ratings rates China Sunergy as a "sell."

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