It sure feels like a challenging investing environment --
especially for smaller stocks, since they are usually seen as the
riskiest. But did you know the Russell 2000, a handy
for small-cap stocks, has risen a hefty 15% since late November?
Then again, the
fell so sharply in August and September, the recent rebound only
makes a dent.
Indeed, a broader look at small-cap performance leaves something to
be desired: The
Russell 2000 Index
remains below levels seen five years ago.But there's a real reason
for optimism for small caps, as that recent 15% upward move
suggests. Small caps perform quite well at the depths of a
and coming out of it.
In October 1990, for instance, the Russell 2000 stood at 120 as the
United States entered into a recession. (That slump led Bill
Clinton's campaign strategist James Carville to drum up the slogan
, Stupid.") Well, savvy investors looked beyond that recessionary
phase and loaded up small-cap stocks, knowing they would pick up
sharply after the slump.
And that's exactly what happened.
By early 1992, the Russell 2000 had rebounded more than 65% to
around 200. (It reached new highs throughout the subsequent years
The recent 15% rebound in the Russell 2000 may be telling us a
similar move is afoot.
I looked at the most appealing stocks in that index in the past,
but am switching gears to the S&P SmallCap 600, another index
that also houses some potentially robust rebounders.
In the table below, you'll find a group of small-cap stocks that
are poised to boost sales at least 15% in 2012 and
earnings per share (
by a nice 40% -- or more, according to analysts' consensus
forecasts. Best of all, these stocks have reasonable downside
protection, trading at less than 16 times projected 2012
With low valuations and robust growth ahead of them, all of these
companies are worthy of further research, but I'm especially keen
on the prospects of the companies in the oil and gas industry.
Gulf Island Fabrication (Nasdaq:
Pioneer Drilling (NYSE:
ION Geophysical (NYSE:
don't actually produce oil and gas, but provide important goods and
services to the drillers and producers.
The combination of high prices for oil and high
production for natural gas producers means that many potential
customers are flush with cash and keen to spend. This helps explain
why analysts say each of these companies can sharply boost profits
in 2012. Gulf Island Fabrications trades less than 100,000
a day, which is too
for my taste, but the other two names surely appeal. Let's take a
1. Parker Drilling
this stock would rise 40% to around $8. Shares have almost hit that
target and they still sport a reasonable multiple.
As I noted back then, Parker Drilling rents a wide range of tools
used by drillers, from basic hardware all the way up to complex
deep-water rigs. The company's rally has been due to the end of the
moratorium placed on drilling in the Gulf of Mexico, which was
ultimately lifted last summer.
Demand for the company's tools, rigs and other items is rising only
slowly, as evidenced by the 4% jump in sales the company is
expected register in 2011. But the sales mix has become much more
favorable as items like rigs, which carry higher margins,
predominate the revenue base. As a result, per-share profits are
expected to have risen roughly 500% to roughly $0.50 in 2011.
Parker Drilling's results strengthened as the year wore on --
the company blew past
estimates in each of the last two quarters of 2011, which is why
analysts say sales and profits could grow at a fast pace this year.
2. ION Geophysical (NYSE:
This company seems to have gone out of its way to frustrate
investors. It holds a solid base of technology and should be
growing at a fast clip. Instead, management failed to anticipate
slow-to-build demand for its products, so Ion Geophysical boosted
sales around 15% in 2011 to $500 million, a growth rate half as big
as investors had expected when the year began. The company has
missed quarterly expectations three times in a row, and its stock
trades for roughly half of its
Ion Geophysical offers a wide range of technologies to customers in
the energy-exploration field, from software that maps out
subterranean deposits of oil and gas, to services that help clients
make the most of that mapping data. Ion saw great demand for its
services in the middle of the past decade, when sales rose from
$150 million in 2003 to $700 million in 2007. The sharp pullback in
energy prices that resulted from the global recession of 2008
quashed demand as clients sought to conserve cash. As a result,
sales fell to $444 million by 2010.
Yet with a stock that has been tossed aside, it may be worth
tracking what looks like a potential
. Management laid out a roadmap for the company on Dec. 9 (you can
read the transcript here
In this roadmap, management spent a lot of time discussing the
oceanographic and land-based seismic analysis trends. (Seismic
analysis involves 3-D imaging of surfaces to
pockets of oil and gas that may be buried deep in land and sea
As more companies are venturing to Alaska, the ocean bottoms and
massive tar sand fields, they need the type of services Ion
provides in order to map out a number of important areas in those
topographies. The key is to lure a rising number of clients to pay
up for already-mapped data or yet-to-be-mapped areas. Ion
Geophysical also operates other energy-searching divisions, which I
won't go into here, but the entire company appears positioned for
an improving 2012 and beyond -- if the company can deliver on
some of the opportunities laid out in that early December
Risks to Consider:
Ion Geophysical has delivered several weak quarters in a row,
so it pays to see business turn up before buying into this stock.
Parker Drilling and Ion Geophysical would see a drop in demand for
their products and services if oil prices fall sharply.
Action to Take -->
Energy producers are generating ample amounts of cash but are
working harder and harder to find new hard-to-tap fields and wells.
This sets up a perfect backdrop for these two companies, each of
which are expected to see sales and profits rise higher in 2012.
I strongly suggest listening to Ion's fourth-quarter
. An inflection point for this business may finally be at hand.
Parker Drilling, despite a recent strong run, still trades for less
than 10 times profits, making it a good candidate for strong
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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.