It’s often said that the definition of insanity is doing the same thing over and over and expecting different results. In the investing world, I’d disagree… Instead, for investors, it’s insane to be presented with a slew of data on Wall Street’s best performing stocks and not to look for a common thread to try to reproduce their gains.

With that in mind, here’s a glimpse at the top-performing penny stocks for 2010 – and a look at how we can use their attributes to fuel more gains this year…

We live in a world where a bevy of financial information is available to us freely if we’d only look. With a couple of keystrokes, anyone with the internet can look up detailed stock information on Google Finance, a sophisticated technical candlestick chart on Stockcharts.com, or up to the minute financial news on Bloomberg. That sort of access has significantly squeezed the gap between individual investors and the big boys on Wall Street – but the information itself isn’t going to pave the way to gains… you have to use it too.

That said, let’s take a quick look at the 10 best-performing penny stocks for the year so far, and try to see a common denominator that’s tradable:

Top 10 Penny Stocks of 2010

Jazztel (OTC:JAZTF) – Shares of this Iberian data transmission company spiked sharply in early February on speculation over a potential takeover.

Remy International (OTC:RMYI) – Aftermarket auto parts manufacturer Remy International saw shares dive in late December, only to be followed by a colossal rally in January.

Geospatial Holdings (OTC:GSPH) – this tiny pipeline management company saw shares make a big move back in February when the company was featured in Time Magazine, and again earlier this month when it made an appearance in Wired.

Graham Packaging Company (NYSE:GRM) – This $665 million packaging company saw its stock price move after a significant earnings release.

Somaxon Pharmaceuticals (NASDAQ:SOMX) – While tiny drug developer Somaxon has paid stock promoters to pump its stock in the past, this year’s pop was more above board – it was predicated on some FDA news on its newest drug.

China Swine Genetics (OTC:CSWG) – This bizarre Chinese pig breeding stock got legs – and the attention of traders – when it was featured on a prominent penny stock promotion website.

Wave Systems Corp. (NASDAQ:WAVX) – Like China Swine, this tiny semiconductor play got additional trader attention when it was picked up by penny stock promoters.

Tuesday Morning Corporation (NASDAQ:TUES) – This name should sound familiar to Sleuth readers… I put this play on our Monday Watchlist following a technical breakout. I hope you took my advice — the company has rocketed 122% since then.

RESVERLOGIX Corp. (PINK SHEETS:RVXCF) – This extremely volatile pink sheets stock has become a favorite of traders after its cholesterol drug got courted by some big pharma companies.

Wabash National Corp. (NYSE:WNC) – Wabash National, a small-cap truck trailer manufacturer got additional coverage after it signed a significant deal.

Connecting the Dots

Although these ten companies seem pretty different, there are a couple of dots worth connecting. For starters, each of them moved quickly on a catalyst that was difficult to predict. Who would have known that a major drug would get approved or that a company would see amazing earnings growth? But even though 2010’s top gaining penny stocks didn’t give many hints to investors, three things could have increased your probability of catching one of them.

1. Don’t Shoot for the Top Gainers

While it sounds anti-intuitive, trying to search out one of the top gaining stocks is a great way to lose your shirt in the market. That’s because these plays are volatile and they move quickly – in both directions. Instead, focus on getting repeatable moderate gains on a consistent basis, as we try to do each week with the Monday Watchlist. Making 9% in a week on a diversified basket of penny stocks is much more desirable than making 500% per year on a single risky play… Focusing on high-probability trades increases the chances that you’ll run into a top gainer on your own (like we did with TUES).

2. Stick With a Strategy

Be it technical or fundamentals-based, you need to have a strategy before, during, and after you make a trade. After all, it’s futile to try to bank consistent trades unless you have a system that works on a repeatable basis. This is perhaps the toughest step toward penny stock profits since not everyone has the financial acumen to piece together a trading system. Luckily, we’re here to help…

3. Look for the Telltale Signs for Gains

Even though the biggest gains are typically impossible to predict there are telltale signs that can help you find the stocks that are most likely to produce a big pop. First of all, focus on OTC stocks. While OTC plays may be a bit riskier than their exchange-traded brethren, they also accounted for 40% of 2010’s top gainers. Also, focus on industries, like pharmaceuticals or semiconductors, that are prone to big, fast news-based gains. And be vary weary of stocks that are being promoted by paid pumpers… (More on that in Saturday’s Weekend Sleuth)

There’s no question that finding the next triple-digit gaining penny stock is a tall order. With tons stock promoters pumping their latest clients’ stocks, small-time investors opining their latest trades, and brokers trying to nickel and dime you on commissions, it can be overwhelming. But by taking a look at penny stock plays that actually made massive gains in 2010, we can better prepare ourselves to make sizable gains in the future.

Cheers,
Jonas Elmerraji
Managing Editor, Penny Sleuth

March 11, 2010

Jonas Elmerraji

A big-four public accounting alum, Jonas Elmerraji brings his readers extensive expertise in small-cap stocks and broad market moves. Elmerraji’s interest in the market started with an investing course in elementary school – today he holds a degree in financial economics from UMBC and specializes in blending fundamental and technical analysis. Elmerraji has contributed to Forbes, TheStreet.com, and Investors Business Daily among others. He is managing editor of the Penny Momentum Trader, and a co-editor of Penny Stock Fortunes.

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