For some, choosing the right stock is an art and a science.
It's important to weigh in factors from the economy and the stock's growth prospects in relation to its past performance in order to make a sensible investment decision.
Market veterans often stir these factors together, crunch the numbers and use their experience to choose stocks they believe are most likely to produce strong returns. Many other investors, however, don't want to put in much effort in their decision. Those people are better off buying an index fund or mutual fund. This might allow them to reduce single-company risk, but it also mutes their potential for big gains.
My stock-picking philosophy has a heavy contrarian element. I like going against the crowd when searching for potential investments -- and then cashing out when the idea has reached a fever pitch.
Right now, for example, as we approach the presidential election, most investors are looking for safety, stability and dividend income. I, on the other hand, am screening for stocks that can provide me with outsized growth during these turbulent times. The majority of investors are ignoring these high-growth gems. But what very few people realize is that as soon as the presidential election is over, investors will begin looking at riskier trades again, and I expect the crowd to pile into these stocks in pursuit of gains.
This plan works best when you use small-cap stocks. Small caps tend to be ignored during times of uncertainty, and thanks to their volatility, can produce serious gains as investor sentiment turns around.
So as we head into the November election, I've got my eye on two small-cap companies that have each posted solid gains for 2012 and will likely keep growing after the uncertainty of the election fades.
1. Darling International (NYSE: DAR)
This under-the-radar waste-recycling stock specializes in cooking oil and bakery waste recycling. Basically, Darling International transforms food product waste into animal feed for livestock. Not only is this smart for the environment, but it helps keep livestock prices lower by offering an alternative to traditional high-priced feed.
The company has a market cap of more than $2 billion, placing it on the upper side of the generally accepted definition of small caps, but I find the fact that the stock has gained more than 25% this year very attractive.
Shares have been in a dramatic uptrend since June. A double top may be forming on the weekly chart near $18. I think there is more upside to go with this stock. My plan would be to buy on the first close above $18, with a target price of $23 within the year. Stops at $16 make technical sense at this entry level.
2. Almost Family (NYSE: AFAM)
This home health care company provides visiting nurse and personal care services to the homebound infirmed. It reported slightly lower second quarter net income, falling 9% from $4.95 million a year earlier.
Despite the loss, revenue climbed 6% to $86.9 million from a year earlier. The slippage in income is attributed to Medicare rate cuts. I think these cuts will be short-lived -- and therein lays the long-term opportunity in this stock. No matter who wins the presidential election, the population will continue to age. The growing number of seniors will force increased Medicare spending over time, regardless of who is in office.
While many will not like the increases, the government will have little choice in the matter. Technically, a base is being formed directly below the 50-day simple moving average in the $21 area. It would not surprise me to see a break out of the base to the 200-day moving average in the $29 range.
Risks to Consider: These two stocks are small-caps, which means they have strong odds for further growth but also higher risk of wild swings in price. These high potential stocks should only be bought with money in your portfoli that's specifically allocated for riskier investments.
Action to Take --> I like both companies as high-growth holdings. Buying Almost Family now and Darling International on a breakout above $80 makes sense. Always remember to use stops and position size correctly.