How Dogs Become Darlings and Which Stocks Could Be Next

by: Mark Gomes

Having written several SeekingAlpha articles on "Stocks That Are Poised to Triple", I am often asked how the out-of-favor stocks I recommend could have any chance of ever becoming winners.

Most recently, these questions have surrounded picks like companies like Cereplast (CERP), Pervasive (NASDAQ:PVSW), Quepasa (QPSA) and Zhone (ZHNE). I would agree that these stocks have been dogs for a very long time. However, past results are never a good indication of future potential. I learned this with mega-dogs turned mega-darlings, like Concur (NASDAQ:CNQR), Radware (NASDAQ:RDWR) and Pegasystems (NASDAQ:PEGA):

  • CNQR was a big-time dot-com dog, but the market came around to their way of thinking, and its stock went from 30-cents to $13 -- a 40-bagger -- in 2-years. As of May, it was nearly a 200-bagger (not 20...200!).
  • PEGA languished, pushing business processes to a world that was focused on technical integration until the world decided that business processes should unpin technical integration. It shares have gone from 5 to 50 in 6-years and still haven't stopped.
  • RDWR was tiny Israeli company offering software to a market where F5 boxes dominated. Then came the Cloud, and its shares went from less than 5 to nearly 45 -- a 9 bagger -- in 2-years.

The common thread with all of these companies is that market dynamics changed in their favor. The great thing about owning these stocks is that they were dogs for so long that their market caps almost couldn’t get any lower. In other words, the risk was minimal. Meanwhile, unbeknownst to skeptical investors, the potential was explosive.

When I write about "Stocks That Appear Poised to Triple", I rarely believe that tripling is the limit. Every company’s market cap has to pass through $10M on the way to $100M and $100M on the way to $1B. Each time one does, the lucky investors have a 10-bagger on their hands. Tripling is just the beginning.

Companies like CERP, PVSW, QPSA and ZHNE remind me of CNQR, PEGA and RDWR. Each of them have been labeled as dogs for a long time. Simultaneously, all of them are sitting in the midst of market dynamics that appear to be changing in their favor. I discuss each of these names in the Seeking Alpha article, “Revisiting Stocks That Are Poised to Triple”.

There, you can also find links to more detailed articles on why these and other stocks could be ready for takeoff. Keep an open mind, and remember the stories of CNQR, PEGA, and RDWR before dismissing the next dog you hear about -- you could find yourself holding a 10-bagger too

Disclosure: I am long CERP, PVSW, QPSA, ZHNE.