If you’re a trader who’d like to earn higher short-term returns, here’s a tip…

Don’t look for bargains in the stocks making new lows. Look instead for opportunities in the stocks making new highs.

It seems counterintuitive to many, but decades of research have shown that the stocks that reward investors with the biggest short-term returns are the ones that are already the strongest price performers.

Nvidia (NVDA) is a fine example.

As Isaac Newton said (in a very different context), “an object in motion tends to remain in motion.”

Market outperformers are generally companies that have outstanding sales and earnings growth, a durable competitive advantage, and increasing ownership by mutual funds, hedge funds and other institutional investors.

By contrast, stocks making new lows have often disappointed investors with subpar sales and earnings growth and margin contraction. The big financial institutions are bailing out.

In short, a long-term investor wants to buy low and sell high. But a short-term trader should look to buy high and sell higher.

(Of course, when you sell high, your entry price always looks low.)

However, there’s a way for traders to tweak their investment strategy to increase their short-term returns.

Yet it requires them to take a page from the long-term investor’s playbook.

Let me explain…

A New Cycle Has Begun
Sophisticated investors know that their asset allocation – how they divide their portfolio up among different types of stocks and bonds – is responsible for 90% of their long-term return.

Since their goal is to buy low, they generally invest in the asset classes that are laggards.

Why? Because they want to be holding that asset class when it returns to being a leader again.

Take small cap stocks, for example.

Companies with a market capitalization of $3 billion or less have averaged about 12% a year over the past century.

(Market cap is determined by multiplying the price per share times the number of shares outstanding.)

That is considerably better – 20% a year better – than the roughly 10% average annual return of large cap stocks.

Right now, however, small cap stocks are inexpensive based on price-to-earnings, price-to-sales, book value and dividend yield.

(That’s what makes them so attractive to asset allocators.)

Over the past decade, U.S. large cap stocks have returned 12.6% annually vs just 7% for small caps.

Yep. Small caps have been big laggards.

But when the cycle turns – as it always does eventually – small companies will once again outperform big ones.

That’s why contrarian asset allocators are now piling into the Russell 2000 index, the most prominent small cap benchmark.

However, if you blend these two approaches – buying market leaders but in an unappreciated asset class (the small cap sector) – you can seriously goose your returns.

How Sweet It Is
Let me give you an example…

In April, I recommended ADMA Biologics (ADMA) in my small cap trading service, Oxford Microcap Trader.

The company develops, manufactures and sells specialty plasma-derived biologics for the prevention and treatment of immune deficiencies.

And it’s the only U.S.-based producer of plasma-derived therapeutics.

At the time… I called it “an undervalued biotech with huge upside potential.”

The stock soared after the biotech firm crushed first quarter expectations and raised guidance.

We exited the position for a 64% gain in less than four months.

Here’s another example. On December 19, I recommended that subscribers purchase Sweetgreen (SG).

I told them that the company was revolutionizing the fast-food industry with delicious, seasonal meals made with fresh, locally sourced ingredients.

The company was opening new stores at a torrid pace, using proprietary robots to assemble meals and cut costs. Revenue was growing at a 24% annual pace.

I told readers that, “rising sales, additional stores and the new efficiencies created by automation should drive earnings per share substantially higher in the months ahead.”

That’s exactly what happened. Sweetgreen smashed estimates.

We locked in a 109% gain less than five months later. And earned an 892% return on a related call option.

What do these two trades have in common? AI? Semiconductors? Software-as-a-Service?

Absolutely not. The two companies are not tech-related at all.

But they were rapidly growing companies in an underperforming sector: small caps.

And the asset class remains inexpensive… for now.

Yet if you look for rapidly growing companies in this asset class, you’ll be surprised by the short-term gains they can deliver.

As the old Alka-Seltzer ad promised: “Try it. You’ll like it.”

— Alexander Green

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Source: Total Wealth Research