Big Reasons to Think Small

This is the time of year when I spring a batch of low-priced stocks on you. Every year since 2001, I have put out a list of 10 stocks -- all priced at less than $10 a pop -- that I feel have a chance to grow their way up and shine.

Let's go over the past few years and pick apart some things that I've learned along the way.

2001
It all started in the summer of 2001, when I wrote the original "Ten Stocks Under $10" column. Looking back, despite a pair of debacles in chip maker ESS Tech and satellite radio superstar Sirius, it's hard to ask for more.

Buying into low-priced stocks is risky, but did you notice that four of my 10 picks have gone on to be acquired at hefty premiums? That is the beauty of thinking small. If a small player begins to do something right, larger competitors will pay handsomely to gain that advantage while snuffing out a future rival.

2002
I was back a year later with another low-priced roundup. Would I strike it rich again? Well, the overall returns weren't as mind-blowing as my 2001 class, but 2002 is no slouch.

Another pair of buyouts. Another pair of debacles. It happens. The key is to let your winners run. A single 10-bagger could offset the other nine picks going to zero. Let's hope it never gets to that point.

The 2002 picks were helped by a pair of picks that more than doubled. Actually, I'm using Monday's closing prices. As of Tuesday, a third pick has gone on to double. Motley Fool Hidden Gems recommendation Nuance Communications (NASDAQ:NUAN), which I singled out five years ago when it was ScanSoft, had a monster report yesterday and shot up as a result.

2004: Vote for low-priced stocks.
I took 2003 off. I apologize. I didn't see this is an annual rite at the time. These days I'm holding off for the claymation re-enactment rights! Anyway, my 2004 installment proved humbling.

Sure, there was another pair of buyouts. This time there was only one real debacle. However, despite four of the picks graduating into the double digits, none have doubled. So I'll take that 22% average gain and like it, even if I realize that the S&P 500 is getting the best of me this time.

2005
My picks bounced back with 2005's list. Despite half of the selections presently sporting red, huge gains out of Jones Soda (NASDAQ:JSDA) and The Knot (NASDAQ:KNOT) helped pump up gains 64% higher.

And no, there weren't any buyouts this time, yet The Knot and CNET (NASDAQ:CNET) wound up making the cut as Rule Breakers selections.

2006
I am not doing so hot with last year's picks.

Only half of them are in the black, and steep losses without any multi-baggers are dragging the average down to a 10% loss.

The setback doesn't discourage me. I'm still thinking big through thinking small. Come back later today when I will share the first five low-priced stock picks for my 2007 list.

Small-cap stocks might just be where the next big performers are lurking. If you want to see which small caps besides Nuance Communications and Radyne have great potential, take a free 30-day trial of the Motley Fool Hidden Gems newsletter. Your portfolio will thank you.

TiVo is a Motley Fool Stock Advisor selection. Imax, The Knot, and CNET are all Rule Breakers picks.

Longtime Fool contributor Rick Munarriz really does relish panning for gold in dirty waters. It's why he always keeps a Wet-Nap handy. He does own shares in TiVo. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.