Market Overview

Trend Trading: 4 Small-Cap Names Showing Strong Momentum

The vast universe of small-cap stocks trading on U.S. exchanges is often overlooked by both large buy-side investors as well as the major Wall Street brokerage houses. Due to liquidity constraints, companies with market caps between $50 and $300 million frequently are too small to warrant significant interest from institutional investors with billions of dollars under management.

As a result, these stocks are often under-followed by the Wall Street analyst community and their markets are much less efficient than larger, more liquid stocks. These inefficiencies can create opportunities for small, individual traders as these stocks have a tendency to be volatile and also to trend more than larger names. As many traders can attest, catching a strong trend in a small-cap name is one of the better ways to make huge returns in a short amount of time in the stock market.

Unfortunately, these opportunities also bring with them heightened risk. For this reason, risk management and proper position sizing are absolutely essential. The vast majority of successful small-cap traders use stop losses to protect their downside, and make certain that their position size is conservative versus the size of their trading account.

In order to find promising opportunities in the small-cap space, I ran a simple scan seeking names that are showing unusual volume activity, and near-term relative strength. Specifically, I was looking for names that are trading at new 20-day highs, are up at least 20% over the last month, have an RSI of at least 60, and are rated "buy" or better by the majority of analysts following them. Also, the screen dictated that relative volume be 300% or more above average during Monday's trading session. The screen turned up four names, all with market-caps below $200 million.

It is important to note that this trading idea is geared towards short-term traders looking to capitalize on a strong near-term trend and may not be suitable for investors with longer time horizons. Specifically, over the next week these names may be good candidates to add to their recent gains on the back of increased volume and momentum.

Beasley Broadcast Group (NASDAQ: BBGI) - This stock bottomed out at the beginning of the year and has been moving aggressively higher ever since. Year-to-date, BBGI shares have jumped over 90% and volume has been trending higher in recent trading sessions. Unfortunately, BBGI is extremely thinly traded, which makes it difficult to establish larger positions. Nevertheless, the stock could be presenting an opportunity this week. On Monday, BBGI jumped another 7.72% and volume was more than 500% above the daily average with 25,000 shares traded. The stock closed the session at $6.00. Traders interested in taking a long position in the name will want to keep a close eye on how the stock reacts around this $6.00 level. On Monday, BBGI put in a new 52-week high at $6.12 before pulling back into the close. Given the strong trend in the name, a convincing break higher above $6.00 could trigger more substantial gains. As recently as April 30, BBGI was trading below $5.00 and once this level was breached, the stock headed straight for $6.00. A similar run to $7.00 seems possible.

Homeowners Choice (NASDAQ: HCII) - Thankfully, this stock is quite a bit more liquid than BBGI and most traders shouldn't have a problem getting in and out of larger positions. Homeowners Choice, Inc. is a property and casualty insurance holding company with a current market cap of around $104 million. On Monday, the stock jumped another 4.72%, adding to its strong uptrend. The move came on heavy volume with more than 251,000 shares trading hands versus a 3-month daily average of 76,000. This increased volume activity is potentially a very good sign that the trend can continue in HCII. Year-to-date, the stock has surged more than 91%, including 24% over the last month. Not only is HCII moving aggressively higher, but the stock also offers a dividend yield above 5% at current levels.

Hudson Technologies (NASDAQ: HDSN) - This company is involved in refrigerant services and provides solutions to recurring problems within the refrigeration industry. At current levels, HDSN has a market cap of around $94 million after jumping 174% year-to-date. This stock has created a bullish "high consolidation" pattern in 2012 whereby the shares jumped in the month of January and have been consolidating at these higher prices ever since. In recent days, HDSN has broken above this basing area and another powerful breakout may be imminent. The stock added 5% on Monday on very heavy volume and closed the session just below $4.00 at $3.97. The 52-week high in the name is at $4.15. Traders should look for HDSN to break above $4.00 in the coming days and then for it to take out its 52-week high on heavy volume. Specifically, traders could buy HDSN if it breaks above $4.00 and then add to the position if it clears $4.15.

John B Sanfilippo & Son (NASDAQ: JBSS) - This stock has created a beautiful trending chart in 2012, with the shares rising on an almost daily basis. Ever since breaking above the $10.00 level in early February, JBSS has been gently, but very consistently, moving higher. The result has been a gain of over 100% already in 2012. On Monday, JBSS added another 1.78% to $15.43, giving the company a market cap of $165 million. Volume continues to pick up in this name, and nearly 92,000 shares traded hands on Monday compared to a 3-month daily average of under 28,000. The 52-week high in JBSS is $15.84 and trend-traders may want to step into this stock on a break above this level.

Posted-In: Long Ideas Dividends Small Cap Analysis Technicals Intraday Update Analyst Ratings Movers Trading Ideas Best of Benzinga

 

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