Exactly one month ago in DailyWealth, I told you to buy microcap stocks…

The story was compelling…

You’d have made 20 times your money in a basket of the smallest microcap stocks, coming out of the 1970s recession… Coming out of nine recessions, you never would have lost money. But so far, after the Great Recession, microcap stocks haven’t exploded – yet.

[ad#Google Adsense]Microcaps look like they’re finally exploding. A stealth bull market has begun in tiny stocks. You don’t hear much about it on TV or in the news. But it’s happening… 

A month ago, I told you about three microcap stock funds: PZI, FDM, and IWC.

All of these funds are up between 4.5% and 6.5% in just the last month. For comparison, the Dow Jones is DOWN for the month. Take a look:

When the market goes down, and these three microcap funds go UP significantly, that’s a strong bull market.

If you go back a couple more months, you can see the stealth bull market really kicking in…

So what do I recommend?

I recommended buying shares of FDM, the First Trust Dow Jones Select Microcap Index Fund, to my True Wealth subscribers back in October.

This fund is an excellent way for us to own tiny stocks…

This fund’s underlying index started in 1992. It has since soared over 1,100%, versus an 8% annual gain for the big stock indexes.

Bad times don’t seem to derail this performance… Since the start of 2000 (the peak of the tech bubble), the overall stock market has lost money. But the Dow Jones Select Microcap Index rose over 11% per year.

Now, you might think that, after all these gains over all these years, the Dow Jones Select Microcap Index should be overvalued – that the stocks in the index are probably overpriced. They’re not. They’re cheap.

Why are the microcap stocks in the index so cheap? It’s because of that word “Select” in the name…

Dow Jones explains its Select Microcap Index as follows: “Stocks are screened based on market cap, trading volume, and financial indicators including trailing P/E ratio, trailing price/sales ratio, per-share profit change for the previous quarter, operations profit margin, and six-month total return.”

First Trust lists this fund’s median price-to-earnings ratio at a stunningly cheap 9.53. The stocks in the fund are also cheap on other measures… 1.4 times book value, 0.74 times sales, and 8.4 times cash flow. That’s cheap, cheap, cheap! (And the expense ratio on this fund is low – a maximum of 0.6%, through at least May 2011.)

As I told you a month ago, you want to own small stocks coming out of a recession. The First Trust Dow Jones Select Microcap Fund (FDM) is what I recommended to my paid subscribers. It’s my favorite way to play it…

Good investing,

— Steve Sjuggerud

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* Source:  Daily Wealth