It was 1996, and one stock picking system was working extraordinarily well for everyone.

It worked for the stockbrokers who used it to bring in hundreds of millions of dollars in client assets. It worked for their clients, too, who were making an average 17.7% per year following this system. And on top of being profitable, it had the extra-added bonus of being extremely easy to follow.

All you had to do was look at the 30 industrial companies that make up the Dow Jones Industrial Average. By selecting the 10 Dow stocks of the 30 with the highest dividend yields, the five cheapest of that bunch — according to the system — represented the best values amongst this high quality group.

It was called the “Dogs of the Dow” Strategy.

It was simple. Of the Dow 30, the five cheapest of the 10 highest yielders were the ones to buy — and hold — for one year. In one year’s time — the “anniversary day” of the day you bought them — you took all of the dividends those stocks paid you, sold the original Dow 5, and rolled all of that money into the new Dow 5. The beauty of the system was that the money you invested at the beginning appreciated, and along with the dividend income, allowed you to buy even more stock in next year’s five.

Simple, right? It was. And it worked for years.

Eventually, though, as with many successful stock market strategies, it collapsed under its own weight. Once “everyone” knew the secret, it got harder and harder to make a profit doing it.

I have a strategy designed to harness the power of small-cap stocks — and I’m confident that it could be just as successful as Dogs once was. And right now, only a few people know about it. But before we get into that, let’s check out another great stock market system…

Joel Greenblatt, Founder and Managing Partner at Gotham Capital, has his own strategy he calls the “magic formula.” Using this formula over the last 17 years, you would have beaten the market in every single three-year period since 1988, turning $11,000 into over $1 million.

Greenblatt’s formula is remarkably simple: He devised a point system ranking the companies with the best earnings yields and returns on invested capital. He then invests in the companies with the highest scores.

Your own system doesn’t have to be complicated; it just needs to keep you on track. The reason I recommend you use a set strategy for your investments is simple: It trumps your emotions. If you have a system in place, you won’t rush to your broker to buy every “hot stock” on the market or carelessly sell a lagging stock because it feels like the right time.

Taking your emotions out of your investing is the perfect way to avoid making the most common mistakes of every other investor out there — buying high and selling low. You know how it works: You get a tip from the television/a friend/a co-worker, you buy the stock when everyone else is buying, and the price drops a few months later and you sell for a loss.

Not anymore…

I’ve been busily perfecting a 10-point small-cap stockpicking system and its 10-point screen for more than a year now. And while it’s tough to improve on a screen that’s been so successful in the past, I’m still working to adapt it to flag stocks that could produce the biggest gains.

I’ve wanted to share this with you for some time now, but I refused to publish it until it was near perfection. It’s taken many early morning brainstorming sessions and plenty of coffee, but I’m confident that this system has the potential to open your small-cap portfolios to the best (and most overlooked) companies out there.

Here are the nuts and bolts:

1. Market capitalization must be less than $1.5 billion — We’re only interested in the smallest, fastest growing companies on the market.
2. Must trade on a major exchange — We’ll only be looking at stocks that are easy to buy and provide timely financial updates to investors. Stocks listed on the NYSE, NASDAQ and AMEX are held accountable for their financial practices, so you can be sure you’re getting a fair look at the financials.
3. Share price must be $10 or less — Let’s look at stocks that are affordable for every investor to buy a reasonable position.
4. The stock must exceed $1 million in trading volume every day — We want to look at liquid stocks that don’t experience wild price fluctuations.
5. Revenue growth should be up year over year — As I mentioned before, we’re searching for fast-growing companies that can show us massive gains.
6. Net income must be up year over year — The business should be making money and keeping it.
7. Gross profit margin should be up year over year — Don’t forget, the business should be improving its margins along with its sales.
8. Price/Sales should be less than 1.5 — A company trading at a price close to its sales could be undervalued.
9. Price/Book should be less than 1.5 — Again, a company trading near its book value could be undervalued by the Street.
10. Price/Earnings should be less than 25 — We don’t want to be chasing after stocks that could already be overvalued by investors.

Those are the criteria. However, the system I use to make my picks is proprietary. The good news is that my readers are the sole beneficiaries of my work. I don’t have to answer to investment bankers or institutional traders and salespeople. My job is simply to make the best recommendations possible, and publish them for you.

This screen is so selective that it only yielded six companies. That’s six out of the 5,585 public companies with market caps under $1.5 billion. The system is obviously very selective — and it should be. After all, in order to maximize your returns, you’ll need to find the fastest-growing, undervalued, “underground” stocks on the Street. Then you can ditch your broker and laugh all the way to the bank…

I’ll break some of them down for you next week, as well as the origins of this successful system and where you’ll be able to find it in the near future.

Until then,
Gunner
October 23, 2006
P.S.: You have only seven more days to secure your copy of a brand new, 8-page report with the next two stocks that are set to outpace the markets by 19-fold or more. The report will come out at 11:00 a.m. sharp on November 1 and will never be re-published.

Greg Guenthner

Greg Guenthner heads up Agora Financial’s small-cap division and is the founder of one of the only independent OTC research advisories in the industry. A graduate of George Mason University, Guenthner joined Agora in 2005 after several years as a journalist. He is managing editor of Penny Stock Fortunes and Bulletin Board Elite.

View articles by Greg Guenthner