The past two months have been brutal for small-cap stocks.

The saying says, “Sell in May, and go away,” but the selloff actually started in April.

The prices of many small-cap stocks have been decimated to the point where one would think we’re in a bear market.

Yet signs of economic activity abound, interest rates are low and even housing has perked up noticeably. In fact, just last week, the numbers showed a double-digit year-over-year gain in median home prices.

[ad#Google Adsense 336×280-IA]So what gives?

The simplest answer, which is usually the best, is that these small-cap names just aren’t performing as well as their large-cap counterparts.

Investors are still skittish, and when a small-cap name doesn’t deliver on its projections or expectations, the prices get trashed.

Additionally, projecting future sales, earnings, margins and growth are much more difficult for a small company than they are for a larger, more established one.

Combine that with a small float (fewer shares available for trading) and less overall liquidity (less trading volume), and significant downdrafts can occur in very short periods of time.

The upside to this, however, is that rebounds are that much more dynamic.

And right now, company insiders are signaling that small caps are undervalued … to the point that they are willing to bet big money on a bullish upturn.

The roster of buys in this space is filling up fast and significant money is being spent.

Over just the past few weeks the following companies have seen insiders pony up some big bucks:

  • Rait Financial (NYSE: RAS), a high dividend-paying REIT.
  • Meru Networks (Nasdaq: MERU), a purveyor of mobile internet communications hardware.
  • Windstream (Nasdaq: WIN), a telecommunications company paying a 10%-plus dividend.
  • Basic Energy (NYSE: BAS), a supplier of equipment and services to drillers.
  • Mela Sciences (Nasdaq: MELA), a company about to launch the most sophisticated Melanoma screening device.
  • And Mitek Systems (Nasdaq: MITK), the technology company behind some of the cutting-edge advancements in mobile banking.

In the case of Windstream and Basic Energy, those purchases amounted to millions of dollars.

What’s more, these buys happened when the general market was faltering, which is an even better sign.

That means we have an opportunity to lock-in some big gains by trading on patterns that point to upward momentum in certain stocks.

And remember, that’s the key: It’s not enough for insiders to simply buy shares, there has to be a pattern, as well as fundamentally sound reasons to invest.

Ahead of the tape,

Karim Rahemtulla

[ad#jack p.s.]

Source: Wall Street Daily