Even in a strong market like we have right now, good small-cap ideas are hard to come by. And when I do find them, I have many pages to fill in both Small-Cap Strategy Report and Small-Cap Insider with my best ideas of the moment.

But The Sleuth is very important, too. In fact, it’s just as important as each and every newsletter issue I write. It’s the only chance apart from end-of-week reviews that I can communicate with my SCSR and SCI readers between issues. It’s also a chance to contact those readers who only read The Sleuth, so I like to present compelling ideas suitable for a very large audience.

Since Sleuth readers easily outnumber SCSR and SCI readers put together, I need to take great care in the stock recommendations I write about each Thursday afternoon. They can’t trade too lightly or else we’ll create a lot of unnecessary volatility, and readers will never be able to establish a position. Also, it’s pointless to recommend stocks that are too small or have too few shares available. It’s a tricky balancing act.

But, so far, so good.

In the last three issues of The Sleuth, we’ve written about three stocks: One we warned you to steer clear of, another we were waiting to buy when it got cheaper, and the third we thought was a great speculation.

Well, for those of you who stayed away from our “steer clear” stock, I’m happy you did. That stock, of course, is Midway Games (MWY: NYSE). This is the video game maker that hasn’t made a profit since it was churning out coin-operated arcade machines 10 years ago. And, as I wrote last month, this is a company that missed out on the previous “video game bull market”…and it doesn’t look like they will catch the current one as Playstation 3, Xbox 360 and Nintendo’s Wii usher in a new gaming cycle:

With Midway shares closing at $8.66 on November 9, we warned you to stay away from this one. Since then, MWY has dropped to $7.64 — a 12.2% drop in three weeks. This one might get some sympathy if the rest of the video game group rallies, but it’s clearly the runt of the litter right now.

On November 16, we wrote about HEICO (HEI: NYSE), a small-cap aerospace/defense company. Two weeks ago, it was trading at $39.56. We said we needed to wait for a pullback in its share price because we thought it was trading too high for us to get in. Yesterday, it closed up at $38.31…after dropping to the $37 level earlier this week. We have this one in our crosshairs, but haven’t seen the valuation levels that will make us squeeze the trigger…yet.

Our big winner so far has been Mobility Electronics (MOBE: NASDAQ). We recommended this as a speculative buy last Thursday at a price of $3.21. It closed yesterday at $4.14 — a gain of 29% in just four trading days! In fact, Tuesday it was up 10.5% alone! This actually highlights one of the powers of small-caps — a $0.38 rise in this stock was worth 10.5%:

Mobility remains a good speculative buy at $4.14.

That’s it for this week. Next week, we hope to have another good buy for you to round out your 2006.

Until then,

Craig Walters
December 7, 2006

Craig Walters

Craig Walters spent years entrenched in the investment industry doing what he loves best: performing financial research on scores of small-cap companies. Craig was formerly an equity analyst and Systems Director for Ferris, Baker Watts.

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