Imagine you’re running up a 5,280-foot hill. That’s a 1-mile increase in elevation. You start at a pace of 2 miles an hour and expect to finish in a half hour.
Then you decide to double your pace. That’s 4 miles per hour, or about 15 minutes per mile. You’re an experienced runner so that should be manageable.
For the last stretch, you want to double your pace again. Now you need to run at 8 miles per hour or a 7.5-minute per mile pace. You’re a strong runner, but after climbing up that steep incline, you just don’t have the strength to double your pace again.
Without getting too caught up with the numbers here, know that there’s a point to this example…
Stocks face the same kind of challenge you did when running up that hill. It gets increasingly harder with each attempt to double your pace — as it does for stocks to double in price.
We want to keep this important concept in mind when zeroing in on the stocks that will deliver us the largest profits.
Let’s take a closer look at what this really means for us as investors…
Smaller Stocks: A Fast Track to Gains?
Let’s say you start with a stock trading at $1. To double in value, the stock needs to gain $1. That’s possible if there is news about the company. A shift to more bullish sentiment could also push the stock up by 100%.
More news could double the stock again, from $2 to $4. And another shift in sentiment could drive the price to $8. We see this all the time with young, flashy high-growth companies.
But from there, big gains become more challenging. News could add $4 to the price, but that’s only a 50% gain. Still a solid gain, just not that 100% we enjoyed in those initial rallies.
It’s simply easier for a smaller stock to deliver big percentage gains compared to a high-priced stock. At least based on logic.
Of course, in trading, we can’t rely on mere logic. We need to quantify market behavior that can be unpredictable and irrational at times. We want to be sure that what we think should happen actually happens.
Data Shows the Growth Potential of $5 Stocks
To quantify this, I looked at all the stocks trading on the Nasdaq. Last week, there were 3,160 stocks on the tech-heavy exchange. About a third of them were priced below $5 six months ago.
I focused on the price six months ago in order to see if it was easier for smaller stocks to deliver larger percentage gains.
In the past six months, 70 Nasdaq stocks gained more than 100%. Of those, 43 (61%) were trading for less than $5 six months ago.
About 1 in every 24 low-priced stocks doubled. On the other hand, just 1 in 78 stocks priced above $5 doubled in that time.
The pattern becomes stronger as the size of the gains increases:
- 21 Nasdaq stocks gained at least 200% in the last six months.
- Of those, 18 started below the $5 level.
- Three of those sub-$5 stocks went on to gain 1,000%!
This tells me that opportunity lies on the smaller side of the market.
I obtained similar results using different time frames and groups of stocks. Smaller stocks were always overrepresented on the biggest gainers list.
Find the Right Small Stocks
We can see the practical implications of this info. But the bottom line is … if you want to increase your chances of rapidly doubling your money on a stock, you need to focus on smaller stocks.
Of course, that’s no easy feat. There are thousands of stocks trading below that $5 level. Identifying the tickers with the greatest potential takes time and loads of data.
And that’s exactly what my colleague and Chief Market Strategist Adam O’Dell has set out to do with his timely stock research.
He’s sharing his top $5 stocks in the market that he found to have the potential to deliver exponential profits in the next 12 months. And the opportunity to get in on the action is now.
Until next time,
Mike Carr
Chief Market Technician
