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.

Online Poker Play: CryptoLogic (CRYP) originally appeared on BloggingStocks on Fri, 12 Dec 2008 10:30:00 EST. Please see our terms for use of feeds.

In a column in Sunday's New York Times, newsletter guru Mark Hulbert makes the case that small-cap stocks are significantly overvalued, and that large caps are undervalued. His argument is based on expanding price/earnings multiple for small-cap stocks, while the average large-cap P/E is down to one third of what it was seven years ago. This, in part, explains the underperformance of stocks like Home Depot Inc. (NYSE:HD) and Wal-Mart Stores(NYSE:WMT), whose CEOs have taken some heat for their heavy compensation in the midst of a flat stock price. These companies have provided consistent earnings growth, but the multiples have contracted to the point where the stock has remained relatively flat.

But are these companies on the verge of reward, or at least avoiding the downturn that Hulbert seems to be predicting for small-caps? I wonder. The piece does not provide any data on this going back earlier than 2000. In his book The Only Three Questions that Count, Ken Fisher made the case that the price/earnings ratio of the market is not an accurate predictor of whether stocks will move up or down. In fact, stocks seem to move higher when they exhibit high P/E ratios. I wonder if this phenomenon would hold true for the spread in the P/Es between small-caps and large-caps.

Before you go off and dump your small-caps to buy General Electric Co. (NYSE:GE) and Exxon Mobile Corp.(NYSE:XOM), remember this: While small-caps may underperform large-caps as a whole, the predictive value of this for any one stock is almost nonexistent; there will be underperformers and out-performers in both categories. I believe that investors will find the most success with stock picking in small-caps and micro-caps, where research is more likely to pay off (with large-caps, everything is often already factored into the price).

Does the P/E ratio matter? originally appeared on BloggingStocks on Sun, 18 Mar 2007 11:10:00 EST. Please see our terms for use of feeds.