Taking Advantage of the Market's Mispricings with Top Penny Stocks

We love a good growth story. After all, that's why we invest in the tiniest companies on the market. It gives us the chance to get in on the ground floor — before the rest of the world tunes in to the potential that a particular company has to offer.

But believe it or not, some very credible insiders don't believe it's possible to beat the market.

If you've been investing for some time, you've probably come across Burton Malkiel's A Random Walk Down Wall Street. Malkiel is a proponent of efficient market theory. That is, he argues top stocks for 2010 are always "correctly" priced. The market uses all of the available information and news about any given company to price its stock. Therefore, any attempt to beat the market is misguided. According to efficient market theory, there's no way to beat the market. Your performance will always be average.

We couldn't disagree more…

That's why we follow penny stocks — with which we have opportunities to get in on mispriced stocks.

One reason a company's shares can fall short of its potential is a slower news cycle. Think of it this way: Companies like General Electric and Apple are covered by hundreds — if not thousands — of financial writers, reporters, analysts and bloggers. Within minutes, any rumor is disseminated to the masses. Quarterly reports are dissected and new opinions issued equally as fast.

However, an information gap is usually prevalent in the tiniest stocks. Without the constant media and analyst coverage, share prices are slow to react to positive news and other key events.

Take Bulletin Board Elite's position in one tiny gaming company for instance — we'll just call it XYZ for now. XYZ is a rapidly growing, consistently profitable company operating in the recession-resistant lottery industry. But without a flurry of analysts and commentators following this tiny stock, its share price was slow to react to its ever-changing situation.

When we issued an alert for our readers to buy shares of XYZ, the best stock was trading at a ridiculously cheap single-digit multiple, with new contracts pouring in from one of its $25 billion customers. As we said back in 2008: "[XYZ] has plenty of cash, no debt and strong organic growth." Its only crime is that the stock was so far under the radar that 99% of investors probably had never heard of the company.

It would be next to impossible to purchase shares this cheaply if XYZ traded on the NYSE. And XYZ's information gap won't last forever. Shares have been creeping up almost every day. Yesterday morning, the best stock hit a 52-week high. And we're up more than 114% right now…

As we mentioned a couple of weeks ago, after XYZ's earnings release, we're also waiting on new contract announcements. These are additional short-term catalysts that could really move the price of this best stock to buy.

So we'll continue to hold on as the information gap slowly narrows, and our gains rocket as a result. XYZ is far from the only company that's positioned to profit from the slow trickle of small-cap news…

And while many of those top stocks to buy are too small to mention here in the Penny Sleuth, it's essential to remember why penny stocks are the place to be in this economy — and why investing in top penny stocks gives prudent investors a huge advantage over the blue chips.