Fact: The S&P 500 is up more than +68% since the lows of
March 2009. In light of this bit of information, it might be
tempting for investors to become discouraged. After all, how much
farther can the market rise?
But looking at the past will only get you so far. What we're
looking for are tomorrow's winners. And if we only stick with the
"big dogs" on Wall Street, then we'll miss out on one of the
market's most potentially lucrative spaces.
I'm talking, of course, about small-capitalization stocks.
In general, the market-cap range for small-cap stocks is considered
to be between $150 million and $2 billion. It's easy to understand
why some might be leery about these stocks -- a small, upstart
company doesn't get the same amount of press that, say,
Apple (Nasdaq: AAPL)
does. Fewer analysts follow small caps, and share prices can also
be more volatile than larger stocks -- but that isn't always a bad
Don't forget, Apple was once a small company, too. In fact, it was
co-founder Steve Wozniak who built the first Apple computer by
hand. And before Wal-Mart became the world's largest public company
by revenue, founder Sam Walton's first store was called "Walton's
Five and Dime."
The point is, every successful company has humble beginnings. We
aren't quite looking for companies in their infancy, mind you. But
the earlier you can get in as an investor, the better. The goal of
today's Inside the Numbers isn't necessarily to find the next Apple
or Wal-Mart (although that would be nice), but rather to find
small, established, financially healthy companies that are poised
for substantial growth in the years ahead.
StreetAuthority's research team got to work looking for small-cap
winners using the following criteria:
- Companies operating in the United States
- Market cap between $150 and $2 billion
- Price/Earnings-to-growth ratio (
) ratio below 1.0
- Operating margins above 20%
- Profitable last quarter and on a trailing twelve-month
It's important to note that we narrowed our search down to small
caps with PEGs below 1.0. This way, we're not paying an excess
premium for growth -- we're actually getting a discount. Operating
margins and profitability are important, too: we want small-cap
companies that have already staked their claim and are just
beginning to enter their prime.
Here's what we found:
|Footwear & Apparel
|American Public Educ.
|GT Solar Intl.
|True Religion Apparel
|Questcor Pharma. (Nasdaq:
All of the stocks in the table above make for compelling
candidates worth investigating further, but let's take a look at a
few of the standouts:
Deckers Outdoor (Nasdaq: DECK)
makes active wear and casual shoes. Its flagship line, UGGS
Australia is responsible for about 85% of revenue. UGGS makes
comfortable, casual (and pricey) sheepskin boots that can be worn
throughout the year. Chances are, you've seen a few Hollywood
starlets sport the boots when they're snapped by the paparazzi --
or at the very least your wife, girlfriend or daughter is familiar
with the brand.
There are a number of factors that make Deckers shares interesting:
The stock trades for 15 times earnings, compared with an industry
average of 29. Analysts expect the company to grow earnings more
than +22% in the next five years. The stock could represent a solid
True Religion (Nasdaq: TRLG)
is another fashion brand. The company makes premium (read:
expensive) jeans and casual wear sold in department stores and
boutiques. Retailers were hit hard during the downturn, but you
wouldn't know it by looking at True Religion's stock price, which
has almost doubled in the past year. Earnings have been solid and
analysts expect the company to continue to grow, yet investors are
only assigning it a PEG of just under 0.5.
Impax Labratories (Nasdaq: IPXL)
is a generic drug maker specializing in controlled release
medicines. I've made the bullish case for generic drug makers
before, and it's the same for Impax: An aging population, plus more
insured people, plus the impending patent cliff, plus an emphasis
on controlling costs all equal more money spent on generic drugs.
Impax markets a generic version of the attention deficit disorder
drug Adderall XR and, in March, received approval from the Food and
Drug Administration to market its generic version of the
blockbuster drug Flomax, which treats enlarged prostates.
Aside from long-term trends, the company has another factor working
in its favor: size. It's just large enough to compete with the
name-brand drug giants, but small enough to where it's still
generating top-line growth with each new drug. And if that weren't
enough, Big Pharma and large generic competitors like
Teva Pharmaceuticals (
have been on a buying spree lately. With each new Impax generic
drug threatening to dethrone a blockbuster coming off patent
protection, the company becomes more and more enticing as a
Analyst estimates were blown away when fourth-quarter sales grew by
more than +400% from a year earlier to $176 million, while earnings
grew by more than +300%. to $38 million. The company reports 2010's
first-quarter earnings on May 4th -- don't be surprised to see more
Disclosure: Brad Briggs does not own shares of any security
mentioned in this article.