Enough Panic. Let's Make Some Money!

It doesn't look good out there.

The stock market's wild volatility continues. The U.S. Commerce Department has confirmed that the economy is contracting, just as we all suspected. Stories of layoffs and plant closings are everywhere -- and there are many more to come.

Nonetheless, fortunes will be made in the coming months and years -- in the stock market.

I'm not just talking about professional traders, many of whom love volatility of any kind. Ordinary investors who choose to make extraordinary decisions in these extraordinary times will see extraordinary profits.

Those extraordinary decisions will require courage and foresight -- but the foresight, at least, is right here for the taking. In fact, I'm going to hand it to you on a silver platter in a moment. What you do with it is up to you.

I'll say this: I plan to get my full share of those profits. How about you?

Fortune favors the bold
It's commonly said that the Chinese symbol for "crisis" combines the symbols for "danger" and "opportunity." A Chinese language expert tells me that that's not true (the symbols apparently mean something more like "dangerous moment"), but it's a great idea, and a great description of where we are right now.

The Great Panic of 2008 has turned the markets into a Great Bargain Bin -- but these bargains won't last. If history is any guide, prices will start climbing right when things seem to be at their worst.

But where do we look for the biggest gains? History has an answer there, too: New bull markets have historically been led by big surges in small caps.

The most fertile territory in the market
Small-cap growth stocks are the field in which the fortunes of the next decade are being sown now. And some of the best small-cap stocks are incredible bargains at the moment.

I just ran a screen in the Fool's CAPS system, looking for small-cap stocks that have high ratings and are trading at 40% or more below their 12-month highs. Some, maybe most, of these are great growth prospects that are trading at a discount because they were indiscriminately sold off by hedge funds and mutual funds that needed to raise cash in a hurry.

Their losses can be our gains -- if we move decisively. Check out some of the names I came up with just now:

Company

CAPS Rating

% Below 12-Month High

NIC (Nasdaq: EGOV  )

*****

47.1%

Gulfmark Offshore (NYSE: GLF  )

*****

56.1%

Heartland Payment Systems (NYSE: HPY  )

*****

50.4%

Universal Display (Nasdaq: PANL  )

*****

59.2%

optionsXpress (Nasdaq: OXPS  )

*****

53.8%

Sun Hydraulics (Nasdaq: SNHY  )

*****

56.3%

Vasco Data Security (Nasdaq: VDSI  )

*****

64.1%

Source: Motley Fool CAPS.

Look at those discounts! And note that all of these have five-star CAPS ratings, an excellent indicator of future potential. Of course, not all of these will be multibaggers, but with some research we'll be able to up our chances of buying some major winners -- and of getting our fortune-building efforts well under way.

Before you load the boat
A word of caution here: Unless you're a very aggressive investor, it's probably not a good idea to hold nothing but small-caps, even now. Small-cap stocks tend to be more volatile than the market as a whole (and that's saying something these days!), and smaller companies in general are often more vulnerable to serious downturns, even bankruptcies, during a recession.

There's a very strong case for holding other kinds of stocks right now -- large-cap dividend stocks, for example -- to balance the risks inherent in small caps. Keep the economy in mind as you do your research.

Or, if you'd like some well-researched recommendations to buy today, take a free trial of the Motley Fool Hidden Gems newsletter service. The Hidden Gems team has created list of the best recession-resistant buys for right now, and while I don't want to spoil the surprise, I can say that I think there are some tremendous opportunities -- future doubles, triples, and more -- on that list. A full-access 30 day trial costs nothing and takes only a moment to accept. Won't you join us? There's absolutely no obligation to subscribe.

Fool contributor John Rosevear has no position in the companies mentioned. Sun Hydraulics and Heartland Payment Systems are Motley Fool Hidden Gems recommendations. Universal Display is a Motley Fool Rule Breakers pick. Vasco Data Security and optionsXpress Holdings are Motley Fool Stock Advisor recommendations. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy.


Read/Post Comments (2) | Recommend This Article (6)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 30, 2008, at 6:04 PM, RiskAverseAlert wrote:

    Your recommendation to diversify is well taken. Likewise, splitting purchases over, say, the next 15 weeks seems well-advised (though you didn't mention it). So too would be thoughtful consideration of longer-term risks. Agreeing there appears significant opportunity building, one cannot deny risks recently exposed ("hedge funds and mutual funds [needing] to raise cash in a hurry") likewise might not significantly diminish. This makes your recommendation to diversify all the more important, because if, in fact, small caps do not lead as spectacularly as they have in the past, the investor might then better know "something ain't stirring the Kool Aid" (in other words, that significant risks remain). Given this contingency, then, it might be wise to have a plan of action...

  • Report this Comment On February 27, 2009, at 11:34 AM, SteveTheInvestor wrote:

    15 weeks??? More like 15 months in my opinion. I'm guessing that the first thing to make stocks rise will be those people getting out of cash. Greed will rear it's ugly head and they won't be happy with the pathetic returns on cash. I don't think that will happen in the next 15 weeks though.

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