The Heisenberg Uncertainty Principle holds that it is impossible to determine both a particle’s precise placement and its speed and direction of movement because at least one of these characteristics is altered by the very act of measuring them.

I was reminded of this physical principle by one of the many new exchange-traded funds that has been announced and is awaiting regulatory approval. The Claymore-Sabrient Stealth Portfolio only invests in companies that, for the most part, are not followed by Wall Street research analysts.

The investment premise of this new ETF is that attractive investment opportunities lurk among companies that are otherwise neglected. The hope, of course, is that the very act of paying attention to these companies won’t push their prices up too much and thereby eliminate the profitability that otherwise is associated with neglect. No wonder the new ETF has “Stealth” in its name.

The idea that neglected stocks are worth paying attention to has a long and illustrious history. Back in the 1970s and early 1980s, several academic studies found that the average stock followed by no analyst on Wall Street performed better than the average stock that did have such a following. This pattern came to be known as the “neglected stock effect”.

One of the primary authors of this research was a Cornell University finance professor named Avner Arbel. Prof. Arbel became so convinced of the profitability of the neglected stock effect that, in the late 1980s, he inaugurated an investment newsletter to exploit it, called The Generic Stock News. Unfortunately, the newsletter didn’t last very long, and the Hulbert Financial Digest has too short a track record (less than a year, in fact) to shed much light on the approach’s longer-term potential.

But, the HFD did follow this newsletter long enough to know that the analogy to the Heisenberg Uncertainty Principle is most definitely a cause for concern. The stocks neglected by Wall Street tend to be companies with very small market capitalizations and / or very little liquidity.

Furthermore, their bid-ask spreads tend to be enormous, so gains that look good in an academic study often evaporate in the real world. However, I can say that, to the extent that neglected stocks have promise, an exchange-traded fund would appear to be a preferable way of investing in them. This is because you can buy and sell neglected stocks via an ETF with much lower bid-ask spreads than you can on your own.

Wall Street neglects micro-cap and illiquid stocks because it doesn’t pay to follow them. Even if a Wall Street analyst were to identify such a stock with huge upside potential, the very small number of its outstanding shares means that the potential profit from it is too small to make it even worth bothering about.

Investment newsletters don’t suffer from these institutional barriers because they cater more to smaller individual investors. So, it makes sense that Prof. Arbel chose the investment newsletter arena to put his money where his mouth is.

Indeed, I have often defended the investment newsletter industry’s role because it provides research coverage for stocks neglected by Wall Street. To test this proposition, I analyzed a list of 62 stocks that were provided to me by Scott Martindale, senior managing director at Sabrient Systems, the quantitative research firm whose Sabrient Stealth Index is the basis of this new “Stealth” ETF. According to Martindale, in the month of June, out of the nearly 250 stocks in the index, these 62 stocks were “at the top”.

Then I looked to see how many of these neglected stocks are not only followed by one of the nearly 200 investment newsletters the HFD monitors, but actually recommended for purchase by at least one of them. It turns out that 24 jump over this hurdle, or 39 percent of the list of 62 that Sabrient provided me.

Of these 24, it turns out that 7 are recommended by two or more of the newsletters the HFD monitors. They are:

Don’t forget: The very act of focusing on these otherwise-neglected stocks, including this column, renders them less neglected.

Mark can be contacted via email at mhulbert@marketwatch.com.

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