LSG I owns all three stocks

"The SEC is very sensible about this," he says.Of course, not everyone believes we need a new stock exchange. "The global stock markets are not fundamentally broken," says Scott Laue of Savant Capital Management. Market Profile Theorems research director Michael Painchaud thinks theories about a broken stock market are just part of the overwhelmingly negative sentiment toward stocks.3 small-cap buysPainchaud also thinks the shortage of research on small-cap stocks can actually help investors, because it creates opportunities for anyone who does the homework needed to find good, undervalued companies.A great example of this is the LSGI Technology Venture Fund, run by Joe Dancy. His fund has produced 11% annualized returns during its 11-year life -- compared with 4.6% returns for the Russell 2000 Index ($RUT.X) small-capitalization index -- by digging up cheap small-cap stocks with good prospects."Most folks don't have the time to research microcap firms, and institutions are ignoring them," Dancy says. He believes the current rush to bonds has particularly punished microcap stocks, creating some "incredible" opportunities for long-term investors. "Stock valuations for small companies are way out of line with their true value," says Dancy.One small company he likes is oil and gas producer Geo Resources (GEOI, news). The company's expected production Rosetta Stone Spanish (Latin) is worth $22 a share, says Dancy, but the stock sells for just $14.70. He also likes Evolution Petroleum (EPM, news), a domestic crude-oil producer that revives old oil fields by injecting them with carbon dioxide, which helps oil flow. This company's future production is worth $10 to $12 a share, but the stock sells for under $5 a share.A third favorite is Ebix (EBIX, news), which sells software used by insurance companies that's increasingly popular. LSG I owns all three stocks. But wait a minute. If these stocks look cheap because they're ignored by the market, won't they always remain cheap?Not really. You might have to be patient, but sooner or later, they can pay off big. With relatively few shares in the market, stock prices can rise quickly when a company's story catches on. And if investors fail to recognize these companies, competitors will -- and take them over. Shares of network security software company ArcSight (ARST, news), also an LSGI holding, shot up 39% last week when news leaked that it was shopping itself around."The merger-and-acquisition frenzy has just begun," says Dancy. "In a slow-growth economy, what better way to expand than by buying a fast-growing, profitable small- or microcap firm that is undervalued?"Michael Brush is the editor of Brush Up on Stocks, an investment newsletter. Click here to find Brush's most recent articles and blog posts.At the time of publication, Brush did not own shares of any company mentioned in this column.

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