This week, I've been working on a list of penny stocks to buy. Given that any recovery is likely to be led by the small-cap space, I'm looking closely at the smallest of the small to drive my portfolio higher.

Not for the faint of heart, these so-called penny stocks can generate some really fat returns. I'm not talking about just doubling your money here. Stories abound of returns of 300% or much more on stocks that started out trading for less than $5 per share.

One of the stocks on my list is in the poker space, and to give you a bit of a preview, I want to visit one other player in the space that was worthy of consideration, but did not make the final list.

CryptoLogic (NASDAQ: CRYP) is a leading provider of software for the Internet gaming space for non-U.S. players. It is that last piece about non-U.S. players that has me quite excited about the stock.

The company has benefited from the explosion of online poker playing, but stagnated due to tough enforcement of rules and regulations against U.S. players. It is illegal to gamble online, and that is a huge problem for companies like CRYP.

My take on this stock is that regulations will change for a few reasons. At the top of the list is a new administration that claims to bring a non-lobby-based form of governing to Washington.

That means the Vegas lobby is out of luck when it comes to online gaming. Every other modern country allows it, why not ours?

Another big plus is the taxable revenue that would come from legalizing online gaming. Given the economy and massive debt loads, one would think this would make sense.

I think the space makes for a reasonable speculation, and CRYP looks like a strong play in my opinion.

With shares at $2 and change, off a 52-week high of $21.97, there is plenty of fuel here.

Of course, there is risk, but that's what penny stocks are all about.

I am merely suggesting that there is a legitimate trigger here for some serious upside. Sometimes that's all it takes for a penny stock like CRYP to take off.

And if you're interested in penny stocks, be sure to check out my Top 5 Penny Stocks to Buy Now.

Jamie Dlugosch is a contributor to InvestorPlace.com.

This is the part of a new series of columns called "The Naked Truth," by retirement expert Dan Solin. Please bring him your questions, in the comments box, and he will answer as many as he can.

Question: Can I find inefficiencies in the pricing of small and microcap stocks?

Answer: A common misconception is that small cap and small value stocks provide fertile territory for "making a killing" by finding mispriced stocks. However, the data tells a different story.

One study of the performance of 157 small cap value funds over a five -year period found that almost 90% of them under performed a small cap value index.

Another study of 53 small value mutual funds over a 15-year period found that 89% of them under performed a small cap value index.

If the highly paid managers of these funds, with all the resources available to them, can't out perform the index, what are the chances that individual investors will be able to do so?

A more intriguing question is: Why are you doing this?

The volatility of a small value stock (as measured by standard deviation) is about 75%. But its expected return is roughly the same as the index, which has a risk of only 30%. Why would you take significantly more than twice the risk to achieve the same expected return? You would be much better off just buying the index.

I understand the lure: You might hit it big with a huge return. If this is what motivates you, go ahead and take a shot, but realize that you are speculating, with an expected return of zero, minus costs.

Dan Solin is the author of The Smartest Investment Book You'll Ever Read (Perigee Books 2006) and The Smartest 401(k) Book You'll Ever Read (Perigee Books, June 24, 2008). Visit his website at Smartestinvestmentbook.com.