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Deal or No Deal: Hedge Funds Like 6 Small Cap Stocks Under 5 Dollars
Posted:11/05/13 By:James Dennin
http://wire.kapitall.com/investment-idea/deal-or-no-deal-hedge-funds-like-6-small-cap-stocks-under-5-dollars/

The S&P 500 has climbed 23% so far this year, and is poised to have its best year since 2003 assuming the current pace continues. But analysts are arguing that after a robust summer for the stock market, investors are starting to become wary as to how long the positive numbers will last.

One of the main causes behind volatility in the markets is a deeply-rooted skepticism among investors about the utility and virtues of quantitative easing (QE), a debate I will try to sum up right now.

What federal banks essentially do is print money and control interest rates, with a goal to keep inflation stable and relatively low. Now, inflation is usually thought of as a bad thing. In my distant youth an apple only cost a dollar, and now it costs two. I also went to school in a frozen, one room shack – and the walk there was uphill both ways.

I might be exaggerating, but inflation is actually even more complicated than that. Because with some inflation, my debt can be easier to pay, and my liabilities go down, which means I can spend a greater portion of my assets on myself. This means that, theoretically, if you encourage just the right amount of inflation, consumers (and businesses) will be more likely to hire, expand, and spend – without people worrying that they won't be able to afford things like apples.

Now, usually the Federal Reserve controls inflation levels by raising or lowering interest rates on the debt that it issues. By doing so, they're easing or expanding the amount of capital in the market.

But in the wake of the financial crisis interest rates hit rock bottom. This left the Fed with no way to add extra liquidity to the markets without printing extra money – which it did, and still does to this day.

Critics say this makes it difficult to tell whether stocks are doing well because of a healthy economy, or because of easy money. However, a large consensus also agrees that without some QE, the recession would have been a lot worse.

Investing ideas

The only way to completely beat the uncertainty – in the markets and in your wallet - is to pull out of the stock market altogether. But we like to play the market, so instead we have to find ways to minimize risk. One of the ways this can be done is through diversification. By ensuring your portfolio includes investments across multiple industries, markets, and types of companies, you lower the risk of losing too much on one bad call.

We decided to search among small cap stocks for investing ideas, with the hope that just the right amount of inflation would encourage these smaller businesses to spend and grow.

We began by screening for positive sentiment from institutional investors, demonstrated by significant net institutional purchases over the last quarter, representing at least 5% of share float. This indicates that hedge fund managers and mutual fund managers expect these stocks to outperform going forward.

Next we narrowed down our list by only looking at small cap stocks with prices below $5.

We were left with six stocks on our list. Can QE and changing inflation rates help them outperform in the future?