LOTM Under $10 is all about finding “real” companies at attractive valuation metrics with lower risk chart patterns. “Real” companies are companies with sales and cash flow – not story stocks which are still in the research & development stage. Lower risk chart patterns are companies in basing chart patterns or early moving out of a basing chart pattern. We want to avoid fundamentally over valued companies and/or companies whose share price is extended in an upward move.

We screen our ideas through more than 20 separate criteria that have proven themselves over time to be part of every long term sustainable business model. We then check the price action for an attractive technical chart pattern.

If the company’s share price is under $10.00 or really close to $10.00, we may add the idea to our LOTM Under $10 idea list.

The LOTM suggested approach to using this list is to divide your investable money into units of 3% to 5% of the cash you have available. At 3% you would be able to have a portfolio of 33 companies. With a 5% of cash per investment, you would be able to own twenty companies. The idea is to own enough companies that no one or two companies can harm you significantly. This is protection from company risk. You choose the percent – you can always change it in the future, it is not a big deal.

All stock prices could drop in price if the low priced stock group goes down but now we are talking market risk not company risk. The reason to divide your money in to 3% to 5% amounts is to protect against company risk. Remember we profiled these companies so they are healthy “real” companies. Market risk, when it happens, can be more easily recovered from than company risk.

Once a year, in December and January, LOTM Under $10.00 will rebalance (or purge) the list. We eliminate “companies” that are not doing as we expected them to do and are no longer considered a “buy” candidate. We also eliminate all ideas that are above $10.00. This is because we want to keep our target buying price under $10.00. However just because a stock is above $10.00 does not mean it is going to stop going up! In some cases it is only beginning it move. Of course we will sell and add companies to the list during the year as well.

So how do we handle stocks whose prices are above $10.00 but dropped from the list?

If a company’s percent of the portfolio gets above 10% of the overall portfolio value, we sell enough shares to bring the percentage back into the high end of our target percent of holdings. In this case it is 5%. Another different approach would be to place a trailing stop loss about 20% below the price on at least half the share position. That way, should the market or stock enter a correction, we harvest some of our profit back to cash. You decide if you are going to use a trailing stop loss to sell. Consider if you want to sell -  a third of the shares – half of the shares or all of the shares. You get to choose!

In working this plan we are always renewing our account. We have money for new and fresh ideas at least once a year. We are letting our winners run but not forgetting them if the market enters a new and more dangerous phase. One key to success in the market is to let your winners run because one never knows how high a stock can go! That is why we want to try and keep our winning stocks in the portfolio and weed out the non-performers at least once a year.

So have fun – we’ll do the work of stock selection. You’ll also want to read our LOTM Criteria for picking a winning Small or Micro Cap stock! In that article we share our criteria for selecting companies to be included on the LOTM Under $10 List of ideas.