How Institutional Investors Handed Me An 87% Profit

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Back in February I recommended Health Grades to subscribers of my Penny Stock Breakouts advisory service.  I believed the shares offered huge upside potential.  You see, Health Grades was a perfect example of the kind of small cap company I love.

Strong growth with a significantly misvalued stock price.

Check out these stunning five year growth rates.  Revenue increased 35% annually.  And earnings grew an impressive 28% a year.

And the outlook for 2010 was also very good.

Revenue was expected to jump 20%.  And analysts were forecasting eye-popping earnings growth of 27%.

But the shares were badly misvalued by the market.

At a price of $4.34, Health Grades was trading at just 15.5x the 2010 earnings estimate.  That’s a PEG ratio of 0.57.  In other words, the stock was trading at a 43% discount to the projected earnings growth rate.

I knew these shares wouldn’t stay down for long.

Investors would surely send them rocketing higher in no time.  And that’s exactly what happened.  Take a look at the chart below.


I recommended Health Grades in early February at $4.34 per share.  The shares immediately took off.  Over the next three months, they climbed in a strong uptrend.

The shares blew through my price target of $7.00 in early May.  In my mid-month update, I told subscribers to sell half their position.  Many of them booked gains of 60% or more!

With the market declining sharply, I made certain my subscribers took some profits off the table.

However, I believed Health Grades had more upside potential.  So I also recommended holding onto half the position.  It turns out this call was spot on as well.

When news of the acquisition broke yesterday, the shares soared more than 28%.  I immediately put out a sell alert to subscribers.  The shares were trading at $8.12 which gave us an impressive 87% gain!

Not too shabby.

Here’s the key…

When you buy fast growing small-cap stocks with misvalued prices, good things can happen.  Misvalued companies are prime M&A targets.  And buyout firms often pay hefty premiums for solid growing companies.

That’s exactly what happened with Health Grades.  And that’s how institutional investors handed my subscribers and me an 87% profit in just six months time.

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