Small caps have the ability to produce huge returns for
investors. These young companies with innovative ideas and
personnel pose a huge threat to industry leaders with the ability
to adjust quickly to dynamic markets.
Amazon (Nasdaq: AMZN)
is a great example.
Back in the late 1990s, the company blazed a trail in e-commerce
by creating a platform for consumers to buy goods online.
Traditional brick-and-mortar retailers like
Sears Holdings (Nasdaq: SHLD)
were slow to respond to the new online paradigm, enabling Amazon
to capture themarket and catapult to a $120 billion valuation.
These are the kind of innovative companies Andy Obermueller
profiles in his
newsletter. Take a look at the biggain below.
Of course, small caps don't always grow into global mega-caps.
Many small caps fall victim to overly ambitious growth
projections or a severe lack of demand. And that can lead to huge
losses for investors.
A123 Systems (
is a great example of small-cap business risk. This company
specializes in lithium-ion batteries and was hot after its April
2011IPO . But with demand coming in much weaker than expected,
the company quickly took a nosedive, withshares falling into the
pennies and creating a 100% loss for investors.
Small caps can deliver biggains , but they can also create
big-time losses. That's why I like to look at what I consider to
be one of the most important indicators when evaluating small-cap
Small caps with heavyinsider ownership send a big message to the
market and investors.
The first is that management is putting itsmoney where its mouth
is. Part of management's job description is to bebullish onsales
. It doesn't do management any good to present abearish
disposition to the Street. But actual inside ownership enables
investors to evaluate howinsiders really feel about company
High inside ownership is a clear indication that management is
bullish on growth -- and has actual skin in the game. This
creates a clear financial incentive that directly ties
compensation to company success. That aligns the interests of the
board, management and shareholders.
That's why I always check inside ownership when evaluating new
small-cap opportunities. Below is a list of seven small caps from
the Small Cap 600Index with high inside ownership.
From the list, I'm highlighting
Boston Beer Co. (
because of its strong upward momentum and
Hi-Tech Pharmacal (Nasdaq: HITK)
for its compelling valuation.
Boston Beer Co.
Boston Beer Co. has seen big gains in the pastyear , with shares
up a market-beating 42%.
That upward momentum has been driven by steady growth in the
both sales andearnings , with the brewer of the popular Samuel
Adams beer successfully navigating a tepid consumer environment
and highercommodity costs.
[See also: "
Profit From Customer Loyalty With These 7 'Sin
Analysts are projecting full-year earnings of $4.98 a share in
2013, up 10% from last year, and earnings growth of 13% in 2014.
Shares currently trade with a forward price-to-earnings (P/E )
ratio of 30, just below the 10-year high of 33.
But what Boston Beer Co. lacks in value, it makes up for in
momentum, with shares looking strong on the chart despite the
higher valuation. Inside ownership of 36% shows that management
is invested in the success of the company.
Hi-Tech Pharmacal is a specialty pharmaceutical company that
develops, makes and sells generic and branded drugs in the United
Although shares are down 5% on the year, Hi-Tech Pharmacal is
up 270% in the past five years. Those are the kind of outsize
gains that small caps can produce as they grow into mid- andlarge
Hi-Tech Pharmacal's gains have been driven by earnings growth,
pushing the company's share price into value territory despite
its gains. With a forward P/E of 11, the stock trades at a
discount to its 10-year average of 13 and its peer average of 25.
The inside ownership percentage stands at 18%.
Risks to Consider:
Small caps are more volatile than mid- and large caps. In a
highly competitive environment, some small capswill go out of
Action to Take -->
Small caps are companies in the early stages of growth and have
the ability to produce big gains. But small caps are also known
for volatility. That's why I like small caps with big inside
ownership. These seven small caps have the highest inside
ownership in the Small Cap 600 Index, meaning the interests of
management and investors are aligned.