These 4 Small Stocks Could Continue Their Incredible Run

Just like most of the rest of the stock market, September was a surprisingly strong month for small caps. And October started out with a bang, but ended in a whimper.

Together, however, it was an impressive two-month rise in stocks with market capitalizations under $2 billion, as the Russell 2000 index of smaller stocks rose +12.3% in September, and a smaller but respectable +4.1% last month. By comparison, the S&P 500 Index was up nearly +9% in September and gained +3.7% in October — which still was its best percentage return for that month since 2003.

Still, as traders finished out the month on Oct. 29, which marked the 81st anniversary of the Crash of 1929, called “Black Tuesday,” they’re looking ahead to what the midterm elections might bring and what Federal Reserve Chairman Ben Bernanke might have up his sleeve to try to kick-start a stagnant economy in the waning months of 2010. [How the Fed Will Affect Your Portfolio This Week ]

With that in mind, here is a look some of the best-performing small-caps in October…

ZAGG (Nasdaq: ZAGG)
Technology lifted the Nasdaq Index, and that trend carried over to small caps as well. One of the better performers was ZAGG, which rose +73% in October. The Salt Lake City company makes protective gear (screen shields and cases) plus other accessories for gadgets, primarily for Apple’s (Nasdaq: APPL) iPod, iPhone and iPad products. ZAGG’s stock reflects these products’ popularity, with its share price nearly doubling this year.

Some wonder if its reliance on Apple’s success will come back to haunt it, but I don’t think the growth spurt is over for ZAGG’s business — or its stock.   

Rumors are rampant that Verizon Wireless (NYSE: VZ) will start selling the iPhone sometime early in 2011, which promises to give ZAGG millions more potential customers. Apple is also  expected to come out with a second-generation iPad, which could further generate buzz and send business ZAGG’s way. Apple has also been cracking down on non-authorized third-party accessory companies, which have undercut ZAGG, so more customers will turn to ZAGG and others that wear the “made for” iPad and iPhone seal of approval.

Motricity (Nasdaq: MOTR)
Motricity turned in the best monthly return among the Russell 2000 membership, popping nearly +83% higher. In the final week of October, the provider of mobile Internet services that only went public in June was catching a lot of Web chatter and attention from Jim Kramer on CNBC. On Oct. 25, shares jumped +14%, and it closed out the month with a +12% gain. The IPO was priced at $10 to $11, but traded around $8 the first day. The stock is currently trading for twice the offering price — mostly on gains since mid-October and could continue higher as demand for mobile Internet services continues to increase.
#-ad_banner-#3D Systems (Nasdaq: TDSC)
Also gaining traction in October was 3D Systems, up +64.5%. The provider of 3-D printing technology reported a strong third quarter, with sales rising +50% as net income climbed to $5.4 million from $900,000 the year before. Shares are up an impressive +135% in 2010, as the 3-D craze carries over from movies into printing and object modeling. The stock hasn’t caught the attention of many analysts, but after the strong quarter that sent shares to a 52-week high and blowing past 12-month price targets, this one still might have some room to grow.  

MedQuist (Nasdaq: MEDQ)
MedQuist shares posted a +62% gain in October, as the provider of medical transcription technology paid a $4.70 special dividend upon completion of some financing activities — a rather hefty payout for a stock that was trading around $7 at the time.

The stock has risen about +27% year-to-date, but the verdict is still out on this one. After several years of losses, 2009 was a turnaround year, but it has yet to be seen if the trend is indeed continuing in 2010 and beyond.

Action to take –> Small-cap stocks get hit hard when the economy sours, but usually after the better-known stocks in the Dow Jones Industrial Average and the S&P 500 Index have capsized. They’re also the first to regain traction as a recession’s effects wear off. Tradition has held so far: small caps have helped lead the stock market back into positive territory in 2010.

But while some analysts already are looking elsewhere to make money, don’t sell small caps short. It’s not too late to explore small-cap stocks for places to invest as part of a broader investment strategy, as Motricity and 3D Systems demonstrate. Both appear to have some room to grow because of their unique positions in niche businesses.