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Six Months To Double

11/15/11 11:11:10 AM
by Mike Carr, CMT

In the past six months, two stocks have provided triple-digit gains. Pizza Inn and have some traits in common. Let's take a look.

Security:   PZZI, STMP
Position:   Buy

Two stocks show gains of more than 100% in the past six months at a time when the Standard & Poor's 500 has declined by about 5%. Pizza Inn (PZZI) and (STMP) seemed immune to the long-term trend and have moved sharply higher (Figure 1).

FIGURE 1: WEEKLY. PZZI and STMP both show big gains on the weekly charts, moving higher while MACD has been on a buy signal.
Graphic provided by: Trade Navigator.
Big winners often start from a very low price. This was true with PZZI, which was near $2 a share when it broke out. STMP was trading closer to $12 at its six-months lows. More important than price, market capitalization seems to be a critical factor. Both companies are very small-cap stocks. STMP is more than 10 times larger than PZZI and has a market cap of more than $400 million.

Those traders looking for a list of the biggest gainers of the future should start by reviewing microcap stocks. While these stocks carry great risk, they also have the greatest potential rewards. Tomorrow's winners are probably trading with a market cap of less than $300 million today, a level usually considered to be the cut-off point for microcaps.

Relative strength showed different characteristics in each stock. PZZI shows the expected pattern of great strength before the increase and throughout the runup. STMP saw a spike in relative strength followed by a break below the 50% level before sustained strength. See Figure 2.

FIGURE 2: RELATIVE STRENGTH. RS rankings are a good indicator of potential big winners, but it is not infallible.
Graphic provided by: Trade Navigator.
Both companies showed strong gains in both revenue and earnings during their gains. Even after doubling, both have price/earnings ratios in the 30s -- not cheap value stocks, but a reasonable price for the growth they have enjoyed.

Volume will be very light in many of these stocks. PZZI averaged less than 20,000 shares a day before breaking out and averaged less than 100,000 shares a day even after doubling in price. Limit orders for entry can help reduce both the risk and the trading cost.

Judging from history, candidates for big gains are likely to be microcaps showing a moving average convergence/divergence buy signal.

Mike Carr, CMT

Mike Carr, CMT, is a member of the Market Technicians Association, and editor of the MTA's newsletter, Technically Speaking. He is also the author of "Smarter Investing in Any Economy: The Definitive Guide to Relative Strength Investing," and "Conquering the Divide: How to Use Economic Indicators to Catch Stock Market Trends."

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