With themarket moving ever higher, investors are "moving out on
the risk curve." This means the positiveprice action is beginning
to spread to more speculativestocks -- small- and micro-caps.
Indeed, investors can score stunning gains in the micro-cap arena
-- if they pick the right stocks.
Of course, whenever you focus upon stocks with significant
potentialupside , it's wise to keep your enthusiasm in check. The
"swing-for-the-fences" approach can be quite rewarding, but it also
brings increased risk of an occasional flameout. That's why a
basket approach is best. But by owning several speculative plays,
with each comprising less than 5% of your portfolio, you may be
richly rewarded.
Here are three micro-cap stocks that could generate significant
gains in the year ahead.
1. Capstone Turbine (Nasdaq:
CPST
)
Roughly a decade ago, this company was expected to revolutionize
the power-generation industry. Its micro-turbines held the promise
of providing off-the-grid powerback up for many factories. They
were also seen as a potential savior for remote villages in
countries like India, where electricity was still scarce or even
nonexisiting.
Capstone'sshares briefly moved above $80 in late 2000, but after
a decade of operating losses, shares now trade below $1. In fact,
the company generated positive gross margins for just the first
time in its history in fiscal (March) 2012.
Yet gross margins are finally starting to move up meaningfully,
hitting 9% in the company's fiscal second quarter ended September.
When fiscal third-quarter results are released on Monday, Feb. 11,
gross margins should reach double-digits for the first
time.Analysts at JMP Securities expect gross margins to rise to 13%
in the company's current fiscal fourth quarter.
Equally important, the company's turbines are finally seeing the
rising demand many had hoped to see a decade ago. Thanks to a 21%
jump in orders in the September quarter (compared with a year
ago),backlog swelled to a company record $141million, and likely
stayed at that level in the December quarter as well.
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The shale gas revolution is helping to drive results.
Energy-drilling companies are installing the company's
micro-turbines right at drilling sites, where they can tap right
into the fuel that's being generated. Office towers are also
installing them as well. The Palace hotel in New York City
recentlyput a micro-turbine in its basement. In fact, Hurricane
Sandy helped to trigger orders for dozens of new turbines,
highlighting the company's role in storm-ravaged locations.
Analysts at JMP say Capstone's "backlog growth is progressing
nicely andwill position the company for solid 30% growth in FY14."
The focus for investors, they add, "will likely remain on margins
and we expect FY14 to be a critical inflection point for the
company to validate its' LT target of mid-30%." Their $1.80price
target is based on the notion that Capstone is "in the very early
stages of a multi-year uptake cycle for micro turbines."
2. Abtech Holdings (Nasdaq: ABHD)
This is another energy play, albeit more speculative because of its
weakbalance sheet and a still-low base of sales. Yet the company's
technology is quite intriguing.
Abtech's engineers have developed a sponge-like material that
may prove to be quite effective in sopping up all of the
contaminants produced in the wastewater process of natural gas
drilling. The company claims its "SmartSponge" can remove 99.99% of
contaminants from fracking wastewater, which could enable gas
producers to save considerablemoney on the back-end, as the massive
volumes of water would no longer need to be trucked out, and
instead could be discarded locally.
SmartSponge gained alot of buzz last summer, when it was handed
the Third Annual World Shale Oil & Gas Award for technological
innovator. Since then, the company has been showing its technology
to many natural gas drillers, though none have signed up to use the
technology just yet. But Abtech has a five-year deal with
Waste Management (NYSE:
WM
)
, which plans to use the SmartSponge in treating municipal sewer
runoff. This relationship has yet toyield significantrevenue ,
though.
And therein lies the rub. This is a company that burns through a
few million dollars every quarter, and will have to keep scrambling
to raise money until the day that sales take off. As is the
case with many young technology companies, that day may never come.
Simply put, that's why this company is worth just $50 million. But
if Abtech can gain traction with SmartSponge, then itsmarket value
could end up being far higher.
3. Derma Sciences (Nasdaq:
DSCI
)
This company generates roughly $70 million in annual sales from a
line of wound care products that are resold by major health care
companies on a rebrandedbasis . But it's the company's DSC127 drug
that is set to enter Phase III clinical trials later this year that
could really propel thisstock far higher. Testing results from
earlier clinical trials found that DSC127, when applied to a wound
care material, was quite effective in treating people with diabetic
foot ulcers.
Derma Sciences is already profitable in its core business,
butinvestments in the development of DSC127 have led to roughly $3
million in quarterly operating losses. A fresh capital raise in
December means the company has more than $40 million incash , which
should be enough to cover the operating losses for several years to
come. If DSC 127 hits the market, then the company's current $160
million market value could double or even triple in size.
Risks to Consider:
Capstone and Derma Sciences have plenty of cash on hand but
will need to keep making progress in their development tracks to
overcome investors' current wait-and-see attitude. Abtech Holdings
is in a far weaker financial position, and will likely need to
raise more money in coming months.
Action to Take -->
Each of these companies is pursing "game-changing"
technology, and each one could generate significant sales growth in
coming years. But as they also carry significant risk, it's wise to
start with small positions and build from there as these business
models progress.
-- David Sterman
P.S. -- Interested in finding the next game-changing stock? Andy
Obermueller has spent the past several months putting together a
special report on an opportunity in natural gas that he thinks is
so powerful, that it could actually solve high unemployment
problems, put an end to the U.S. trade and budget deficits, and
bring on the third industrial revolution. Click here to learn
more.
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.