Everyone loves a single-digit priced stock.

This is despite the fact that academics tell us there is no advantage to buying a low-priced stock; instead, they say, a move from $5 to $8 is the same as a move from $50 to $80.

That is not exactly true: much of the time, it takes less dollar volume to push the lower-price stocks from $5 to $8. But real-world inflation like that rarely infiltrates the ivory towers of academia.

Academia also ignores the appealing physiological aspects of buying low-priced stocks. It is a lot more stratifying to be the owner of 1000 shares of a $4 stock than it is to own 10 shares of a $400 stock.

There is a secret to making money in low-priced stocks. My own affection for value investing has led me to own, and profit from, many low-priced stocks over the last three decades.

Let me show you…

Wall Street firms also hate low-priced stocks. Many will not let you trade them in your account. And having been a broker for years, I understand this: in addition to loving low-priced stocks, far too many people love the tantalizing combination of a good story and a pipe dream.

But when the pipe dream inevitably turns into a pipe bomb that destroys the value of their portfolio, adventurous dreamers tend to become litigious pests. Lawyers at most big brokerage firms are far too busy defending the firm against much more serious charges and have little time for these claims.

As more people have become active investors and the pile of institutional money has grown into the trillions, the stock markets have become relatively efficient.

The companies in the S&P 500 have hundreds, in some cases, thousands, of analysts, pundits, and research services studying their every move. For these stocks, there are only bargains to be had when the market turns ugly or huge surprises create a short-term opportunity to buy a good business at a bargain price.

That changes when you get to the low-priced stocks with a smaller market capitalization.

Wall Street is not paying as much attention to these companies. The hedge funds do not care that much, either. Many of these companies are too small to matter to them—if you are trying to be the big boy on the block with billions of dollars under management, you must focus on bigger stocks with more liquidity.

Over the last thirty-plus years, I have discovered the secret to making money in low-priced stocks: you must be in the waste disposal business.

There is a lot of garbage among low-priced stocks. You have to get rid of those companies with bad balance sheets, and that are struggling to keep the lights on. Cash-burning biotechs with odds of success that make playing keno look mathematically more attractive need to be dumped. Businesses that need to issue stock to stay alive must be hauled away.

You want to narrow the universe down to those small-cap, low-priced stocks that have good business with excellent fundamentals and strong balance sheets.

The “take out the trash” approach lies at the heart of the approach in both The Takeover Letter and The MVP Report. Both add some valuation and quality parameters, but the process starts with taking out the trash. And today, I want to give you a quick look at a company that passes the trash can tests.

Iteris Inc. (ITI) is a solid company with a great business selling traffic management systems that help cities and towns develop smart mobility systems that move traffic around more efficiently.

The company uses cloud computing, high-tech sensors, and artificial intelligence to help cities manage traffic. It sells hardware and software to all levels of government, including cities and towns, states’ departments of transportation, and the federal government.

Iteris is growing, generating free cash flow, and has a solid balance sheet.

There is little-to-no chance this company will face any financial distress in the foreseeable future.

Small-cap investing still works very well and is one of the best ways to build wealth using a patient, aggressive approach to investing.

You just have to learn how to take out the trash.

— Tim Melvin

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Source: Investors Alley