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[Originally published on 10/30/2013.]

When I first took interest in investing in stocks in 2011, it was after I had finally saved some money up to get invested. I tried various theories and strategies only to always come up disappointed. By the end of 2011, I decided to take a crack at my own stock picking. Using my handy stock screener, I plugged in some data that made stocks attractive to me. I started a watch list to simulate what I would have earned.

My screener went something like this:

  1. Share Price under $10
  2. EPS growth 25-50% growth in the next fiscal year
  3. Revenue growth 25-50% in the next fiscal year
  4. Pays a dividend

Needless to say I would end up with a laundry list of high-risk, high-beta small and micro-cap stocks. As I sifted through the results, I noticed several little dandies that had a track record or were well established companies. I checked debt on balance sheets and payout ratios to make sure the downside was limited.

Although it's a good idea to be diversified, the strategy I chose to employ for this portfolio did not dictate any diversity at all, only based upon the potential for future growth.

Stock Picks:

Acorn Energy (OTCQB:ACFN)

Acorn Energy (the "Company") is a holding company focused on improving the efficiency and environmental impact of the energy infrastructure, fossil fuel and nuclear industries. The operating companies leverage advanced technologies to transform the existing energy infrastructure.

At the time, this highly speculative stock showed a great potential for growth. It had several high profile contracts in the works worth millions. At one point during 2012 it was up 100% only to trend back down to reality when management could not deliver. Overall the position is down 25%.

Aceto Corporation (NASDAQ:ACET)

Aceto was incorporated in 1947 in the State of New York. It is a global leader in the sourcing, quality assurance, regulatory support, marketing and distribution of chemically derived pharmaceuticals, biopharmaceuticals, specialty chemicals and crop protection products.

This is one of my favorites, a small chemical company that hit some snags from the financial crisis turned comeback kid. This one pays a great dividend and management was superb in turning things around. Overall this position is up 144%.

KeyCorp (NYSE:KEY)

This is a bank holding company and a financial holding company under the Bank Holding Company Act of 1956, as amended ("BHCA"), and one of the nation's largest bank-based financial services companies, with consolidated total assets of $93.3 billion at December 31, 2009. KeyCorp is the parent holding company for KeyBank National Association ("KeyBank"), its principal subsidiary, through which most of its banking services are provided.

In 2011, the banking sector was hated, and completely unloved. The Justice Department was out for blood and not even Jim Cramer was recommending any banks. However my screener saw a gem here as EPS and revenues were set to go much higher in 2012. Overall this position is up 76%.

Steelcase (NYSE:SCS)

Steelcase Inc. (Steelcase) is engaged in furnishing the work experience in office environments. The Company creates great work experiences in business, education and healthcare environments.

Steelcase has been a great company, adding value and growth in the last couple of years. It pays a nice dividend and overall, the position is up 147%.

Huntington Bancshares (NASDAQ:HBAN)

This is a multi-state diversified financial holding company organized under Maryland law in 1966 and headquartered in Columbus, Ohio. Through its subsidiaries, it provides full-service commercial and consumer banking services, mortgage banking services, automobile financing and equipment leasing.

Another popular bank that was yielding almost 3% at the time, it had growing revenues and EPS in consecutive quarters. I chose this because of the rising EPS year over year estimates. Looked like it had great potential and overall, the position is up 72%.

US Home Systems Inc. (NASDAQ:USHS)

Home Systems was bought out by Home Depot (NYSE:HD) last year, the initial position was bought at $6.22 and the buyout closing price was $12.50 for a total gain of 100%.

I cannot say I had any foresight into the buyout. My speculation on this stock was purely growth. Management executed very well and was bought out for double their starting price which is a long shot in the stock picking business. I never recommend investing in a company on buyout speculation. More times than not, you will be wrong.

Goals Achieved

The strategy of this portfolio was not of dividend accumulation but of growth potential. The rationale of a small cap stock paying a dividend was one that I feel makes the company more attractive to investors as well as institutions. A non-dividend paying small cap is much more speculative as you are only depending on pure growth to outpace hiccups in the market or corrections. Dividends play a vital role in a portfolio to limit downside risk for you to recoup paper losses as you wait for the stock to recover.

Conclusion

Using the strategy above you can find highly undervalued growth stocks that pay a dividend. Needless to say, reinvesting the dividends as the stock goes up compounds your gains. As the portfolio stands today, it's at 55% overall gain. Earlier in the year when the markets made their all-time highs, it was at 87%. However since this is a watch list, I only use it as an example of what timely stock picking on value based stocks can do. Small caps did extremely well this year. Good luck, happy stock picking!

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.