The Little Book of Big Profits from Small Stocks + Website: Why You'll Never Buy a Stock Over $10 Again

From the Author: Three Stock Types You Need to Know About

Fallen Angel Stocks:
What are they?
These are stocks that were once widely owned and if not loved, at least admired and respected. Something went drastically wrong for these companies and the share price plummeted into single digits.

What you need to know:
When it comes to identifying true fallen angels, there are two key questions you need to ask. The first question is what went wrong. Before you can even consider investing in a fallen angel stock you need to know exactly what went wrong and who is responsible for the problems. The next question then becomes can it be fixed? If so we have a candidate for a fallen angel stock and in my experience the companies that do achieve a turnaround can then see their stock price double or even triple before too much time passes.

Example:
Starbucks (SBUX). Everyone has heard of Starbucks. The stock was a favorite among growth investors for years and rose steadily from its IPO in 1992 until it fell out of favor in late 2006. Wall Street had concerns about competition from McDonald's and Dunkin Donuts, as well as decreased spending from consumers. In 2008, former CEO Howard Schultz returned and was a catalyst for positive changes, revitalizing the company.

It was very easy to answer the question of "can it be fixed?" Positive changes were already underway when the stock market began to fall in earnest and carried Starbucks stock price into single digits. The company made the right decision to protect the brand and not compete on price but instead upgrade the customer experience. The market decline just made a decent opportunity into a great one. The stock proceeded to rise by more than 500% as the economy and the market began to recover.

Undiscovered Growth Stocks:
What are they?
If you can find a great growth company in the early phases of its journey, you can make enormous amounts of money just by sitting still.

What you need to know:
When looking for undiscovered growth stocks we have to think a little differently. We do not necessarily want to own the most popular exciting stocks. If everyone likes them and already owns them, they are probably pretty high in price and much of the gains are already discounted in the price. During the California Gold Rush a few miners got rich, but many more went bust. Almost all of those who went to the territory with the idea of selling supplies to the miners did very, very well for themselves. It might not have been as exciting, but it sure was profitable.

Example:
Magic Software (MGIC). One of the reasons MGIC is undiscovered is that it is based in Israel, and Wall Street often misses smaller international companies. I got interested in the stock earlier this year because Magic is in the midst of an impressive turnaround and has recently increased its offerings in the key areas of cloud and mobile applications. This is the type of opportunity to go after in today's market. It's a solidly performing company with improving financial results and a demonstrated ability to grow its software product and integrate acquisitions. Its strong cash position also helps lessen risk in a slow-growth economy.

Bargain Bin Stocks:
What are they?
Everybody loves to buy something for less than it is worth and the resell it for a large profit. Low-priced stocks that sell for less than the value of the assets they own are one way to accomplish exactly that. I fondly call these bargain bin stocks.

What you need to know:
Finding a bargain bin stock is like buying a Picasso for $1 at your neighbor's yard sale. Bargain bin stocks sell below their book value, which is nothing more than what a company's net worth is. These stocks sell below book value for many reasons. Sometimes it is just a stock that is too small for analysts to follow and the stock price has languished as the assets have grown.

Example:
Zales (ZLC). A great example of a stock that sold for less than its assets and was totally misunderstood is Zale Corporation. The company saw a steep decline in business as the recession took hold and the company came perilously close to going under during the credit crisis. However, Zale management made all the right moves. They brought in outside investors to prop up the balance sheet and allow Zale to survive the tough times. As the economy began to get somewhat better, so did Zale. In November 2010 it was clear the company was in solid financial shape and on the way back to prosperity. At the time I was able to buy the stock as low as $3.23 when Zale's tangible book value was about $4.40. Zale's stock doubled in just six months and I quickly sold the stock to lock up 100% gains when the shares traded at 1.5 time's tangible book value.