Screening the Top Gainers

• Ian Wyatt
• On 5:30 pm EDT, Friday October 2, 2009

Over the last two weeks, we've been discussing how to use the daily "Top Gainers" list to discover quality small cap stocks that can generate short-term and potentially long-term prices. The Top Gainers list is simply the tally of stocks that have made the biggest move on a particular day. On Yahoo! Finance, it's referred to as the Most Price % Change.

We know that small cap stocks move the most, especially coming out of a recession. And the stocks on this list are usually putting in nice one-day gains in the 10%-20% range. There are often one or two that will be up 30%, 40% sometimes even more. And they all have one thing in common: they all appear on the verge of moving much higher. 

It's true some will move higher. The majority, however, seem to reverse quickly, despite the positive news that seems to be driving the stocks higher.

So, in the September 21 edition of SmallCapInvestor PRO, I set out some rules that will help individual investors avoid the "Top Gainer" stocks that are likely to quickly reverse and stick you with immediate losses and focus on the stocks that may have more upside coming. As a recap, here are those rules (or suggestions, if you will):

First and foremost, check the volume. You'll want to make sure that volume is exceeding the daily average volume for that stock by a wide margin. Like 8X or 10X the daily average. High volume can often be a sign that it's not just day traders ramping a stock.

Avoid the biotechs. It's been my experience that biotechs are very difficult to trade based on breakout moves. It happens so often that a biotech gaps and runs higher after what appears to be good news. Then, the stock will give the gains right back. Not that there are never opportunities in breakout biotech stocks, but I sometimes wonder if the phrase "sell the news" was invented for biotech stocks.

Dig into the news driving the stock higher. Stocks usually hit the Top Gainers list due to a news item. The key to finding the right stock is to properly qualify the news. Is the news a one-time event? Or does it represent a fundamental change in the company's fortunes? The right answer here can lead to big gains.

Check the chart. Always check the chart for a prospective investment on the Top Gainers list. If the news has been anticipated, you'll likely see a steady rise into the day of the breakout. Investors who have bought are likely to take profits on the big advance you're seeing. Conversely, if the stock has been flat, and then suddenly breaks higher, it might mean that the news is a surprise and is causing investors to revalue a stock.

One final note: Beware the downtrend that's suddenly broken by a sharp up day. That may be short covering. Of course, you can make money on a short squeeze. But it's also possible that the stock will resume its downtrend once the short has covered.

On September 29, I also added follow sector trends to the rules. The idea here is to watch for more than one stock from the same sector or industry on the Top Gainers list. This can often be a sign that there is widespread investor buying of specific sectors, and that can lead you to quality stocks that will move higher.

We've seen groups of small oil and natural gas stocks hit the list together. Tri-Valley (AMEX:TIV - News), Metrogas (NYSE:MGS), American Oil & Gas (AMEX:AEZ - News), Pioneer Drilling (AMEX:PDC - News), Puda Coal (AMEX:PUDA - News), Rexx Energy (NasdaqGM:REXX - News), and Resolute Energy (NYSE:REN-WT - News) warrants make the list in recent days. And today, Warren Resources (NasdaqGM:WRES - News) was on he list with a 10% gain.

We've also identified some REITs breaking out, like Maguire Properties (NYSE:MPG - News), Strategic Properties (NYSE:BEE - News), and Roberts Realty Investors (AMEX:RPI).

Now, we're seeing new stock issues do well. In the last 6 trading days, 3 IPOs have moved higher in their first day of trading. We saw A123 Systems (NasdaqGM:AONE - News) rise on the 24th, Talecris Biotherapeutics  (NasdaqGS:TLCR - News) had a good day yesterday, and Education Management (Nasdaq:EDMC) moved 20% higher today.

Over the next 6 trading days, watch for IPOs from Verisk Analytics (proposed symbol VRSK, expected to debut at $21-$22 on October 6), Omeros Corp (proposed symbol OMER, expected to debut in the $10-$12 range on October 7), Mistras Group (proposed symbol MG, expected to debut in the $14-$16 range on October 7) and Chinese stock DST Digital Networks (proposed symbol ZSTN, expected to debut in the $7.50 to $8.50 range on October 12).

I'll check in and see how they do on their opening days.

Ian Wyatt is the founder of Business Financial Publishing and author of the book, "The Small-Cap Investor: Secrets to Winning Big with Small-Cap Stocks." You can learn more about his book at http://www.smallcapbook.com, read his blog at http://www.IanWyatt.com, and follow him on Twitter at @IanWyatt.

Buzz up!