When ratings agency Standard & Poor's set about to create a
group of stock indexes, it came up with the S&P 500, 400 and
600, representing large-cap,
and small-cap stocks, respectively. What about micro-caps? The
managers simply decided to ignore this
. Many other investors also overlook them, even though micro-cap
stocks (which I define as having market values up to $200 million)
represent more than half of all publicly-traded stocks.
Micro-caps are often seen as risky, speculative stocks that often
fail to deliver on the promise they hold. Yet this investment
category also contains many solid companies that generate steady
sales, and reasonable profits. So for the intrepid investor willing
to do a little extra homework, these stocks could provide robust
gains -- in many cases more so than their larger counterparts.
Here are three solid micro-caps that I've been tracking, all of
which could rise 30%, 50% or more during the next year or two.
1. BioLase Technology (Nasdaq:
I've written about this maker of dental laser equipment
on several occasions before
. Its stock has fluctuated between $0.50 and $10 during the past
five years, most recently trading at roughly $2.50 a share, which
gives it a
of about $80 million.
I keep returning to this stock because its lagging share price
fails to reflect a pretty solid growth story. Previous management
failed to fully
on the company's
opportunity, but current Chairman and
Federico Pignatelli, who took the reins in September 2010, has
helped the company cut production costs and build sales. Revenue in
2011, for instance, jumped more than 80% to $49 million in
comparison with 2010, while the
spiked 11 percentage points to 45%. In addition, the annual cash
burn reduced sharply from $11.5 million to $3.4 million.
Looking ahead, analysts at Needham say sales could finally outpace
expenses in 2012, and they anticipate robust profits in 2013. Sales
may rise more than 40% this year to about $70 million, and a
further 15% in 2013 to $80 million, which would
earnings per share (
in the $0.20 to $0.25 range. They figure robust growth could
eventually merit a fairly robust
multiple of 18, setting up a $6
that's more than double current levels.
2. GSE Systems (NYSE:
This provider of nuclear power plant training simulators saw its
stock take a big hit when the disaster in Japan last year led to
that nuclear energy would fall out of favor.
, which had already fallen from $10 five years ago to $3 before the
disaster, quickly plunged below $2. Management insisted that
business remained healthy, especially in energy areas beyond
nuclear, but few would listen.
Now, one year after the events in Japan, management's
view has finally been vindicated.
just released strong fourth-quarter results, pushing the stock up
sharply to $2.45, the mid-point of its 52-week range.
Fourth-quarter sales rose a healthy 21% to $15 million compared
with the same period in 2010, leading to
of $0.06 per share, well ahead of the $0.01 consensus forecast.
This is a company with more than $1 a share in cash, so if you back
this out, then shares trade for roughly six times annualized
Why should investors take that quarterly per-share earnings figure
and extrapolate it out to an annual basis? It's because GSE ended
the quarter with $51 million in
, and another $8 million in orders came through the door in January
alone. Analysts have yet to update their estimates, but look for
GSE's projected 2012
to move into the $0.25 range. In 2013, EPS should rise to the $0.30
to $0.35 range. Even after spiking on Friday, March 9, shares
remain quite cheap when measured against those numbers -- even
before you back out that hefty cash balance.
3. Axcelis Technologies (Nasdaq:
This maker of semiconductor fabrication equipment is also
cash-rich. The company has $47 million in net cash and $215 million
, though it's valued at just $173.5 million on the stock market.
As you'd imagine, annual results can be erratic, since Axcelis
operates in a very
. Sales averaged more than $400 million a year between 2004 and
2007, plunged below $150 million in 2009 and steadily rebounded
back above the $300 million mark in 2011.
The analyst consensus figure for Axcelis appears to be too
conservative, as one of the two analysts who track the stock
appears to fail to account for a series of cost-cutting moves that
should make the company decently profitable at current sales
levels. It's hard to gauge where profits will head in coming years,
because much depends on the nature of the semiconductor capital
equipment spending cycle, but that 19% discount to tangible book
value provides a solid floor for the stock.
Risks to Consider:
Micro-caps tend to perform especially well in the extended
phases of a
, which is where we are now. Any major market pullback, however,
would lead investors to flee this asset class rather quickly.
Action to Take -->
risky. The key with this asset class is to focus on companies that
have steady recurring revenue and the ability to
rising profits on moderate sales growth. Any one of the stocks I've
mentioned above seem to fit that bill.
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-- David Sterman
David Sterman does not personally hold positions in any
securities mentioned in this article. StreetAuthority LLC does not
hold positions in any securities mentioned in this article.