To hear from
Wall Street
traders, the "machines are taking over the world." These stock
jockeys lament that computer-driven trading programs now account
for 60%, 70% or even 80% of daily trading
volume
on the major markets, by some estimates. It's not just the
professional traders that feel the pain. Individual investors can
see their holdings decimated when the machines decide to issue sell
orders across the board -- regardless of company-specific
fundamentals.
The pain can be especially deep for small cap stocks (which I
define as having a
market value
between $250 million and $1 billion), as their lower trading
volumes can make them vulnerable to sell orders of as few as 5,000
or 10,000
shares
. As a result, there are many small caps stocks that have been
plundered in this
market
.
Some surely deserve to be sold off. Logically, a slower
economy
will take a bite out of future growth prospects for many companies.
Yet this is also a good time to re-focus on the newly-cheaper small
caps that still possess bright
futures
. If the market rebounds, they could score robust gains. Here are
five small cap stocks in my sights right now.
1. Wabash National (
WNC
)
The nation's roads are filled with tractor-trailers, and even as
the tractors (i.e. the trucks pulling theload ) wear out, so do the
trailers. Wabash is a leading provider of trailers and has recently
noticed an upturn in demand as a replacement cycle kicks in.
First-quarter sales of $278 million were roughly 25% higher than a
year ago. Management's comment on the quarterly press release:
"This continued healthy demand environment, coupled with a strong
backlog
of approximately $583 million as of March 31, 2012, reaffirms our
belief that we remain in the early stages of a trailer replacement
cycle that we believe could turn out to be one of the strongest in
history."
Investors, pushing this stock down to a recent $6.50 from $11 in
February, obviously have their doubts about such a
bullish
outlook. They're seemingly oblivious to the fact that analysts
expect Wabash to boost
earnings per share (
EPS
)
300% this year to around $1, and another 50-60% in 2013 to around
$1.60. Do shares deserve to trade at just four times that 2013
forecast? Even if you assume the forecasts are too aggressive, and
2013
EPS
comes in closer to $1 in 2013, this is still a remarkably cheap
stock.
2. Newpark Resources (
NR
)
This company sells and rents a wide range of equipment used by
energy exploration firms, including items such as drilling fluids,
drilling mats and environmental remediation services.
As drilling activity has rebounded in the Gulf of Mexico, so
have Newpark's metrics. Sales rose more than 30% in 2011 to $958
million, while EPS surged 60% to $0.80. But it's a cyclical
business, and the company's cycle is settling down from previous
expectations of continued very strong growth to merely good growth
in 2012. First quarter sales rose 29% (to $262 million), slightly
below expectations of growth in the low 30s. Moreover,
profit
margins slumped a bit, leading to EPS of $0.16 that was a nickel
shy of forecasts. As a result, EPS likely remains stuck in the
$0.70 to $0.80 range for 2012 and likely again in 2013. Still, the
stock's move to below $6 now from $10 just a few months ago overly
discounts the cooling off: Shares trade for less than eight times
trailing and
forward earnings
.
3. Netspend (Nasdaq: NTSP)
I profiled this financial services company
nearly a year ago
, and though shares went on to post a solid rally, they've been
knocked back down by this challenging market.
Since my bullish outlook last September, Netspend's quarterly
results have been even stronger than I would have guessed.
First-quarter sales rose 19% to $91 million, and the company
appears set to continue boosting EPS at a 15% clip.
Netspend's shift toward
direct deposit
accounts is leading to a locked-in customer base that yields a
higher degree of recurring revenue. Netspend is also working with
more retail outlets such as 7-11, and financial services providers
such as Paypal. As analysts at D.A. Davidson note, "Only 5% of
current revenues are derived from the retail channel, providing
plenty of room for growth." They see shares rising to $12, or 9.5
times projected 2012
EBITDA
.
4. Vera Bradley (
VRA
)
This handbag maker was a hot
IPO
that has now been taken out to the woodshed. Growth cooled a bit
and IPO investors that had been expecting continued scorching
growth felt burned. I'd explain why I think this stock is due for a
rebound, but my colleague Ryan Fuhrmann has already done a nice
job, which you can
read about here
.
5. iRobot (Nasdaq: IRBT)
This technology firm has shed nearly half its value in the past 52
weeks, reducing it from being a
mid-cap
stock to a small-cap in the process. The blame for that falls on
concerns about the company's defense segment, which provides
automated mobile devices that can be used in environments that are
too risky for soldiers.
Yet investors may be overlooking the fact that iRobot's consumer
business, which consists of vacuum cleaners, gutter washers and
other devices, is quite healthy. So healthy that iRobot recently
delivered estimate-topping first-quarter results for the fourth
straight quarter.
To be sure, the defense slowdown hurts. EPS is likely to fall by
a third this year to around $0.95. But continued strength in the
consumer business is expected to boost EPS back up to around $1.25
in 2013. This was once a high multiple stock that can now be had
for around 17 times projected 2013 profits. And despite recent
failings, the defense business shouldn't be overlooked either. The
sector is in
consolidation
mode, and iRobot has been rumored as a
buyout
candidate.
Risks to Consider:
These are high-beta stocks, which can work against them in a
falling market.
Action to Take -->
It's always wise to maintain watch lists on your favorite growth
stocks. They will occasionally stumble, which makes for a nice
entry point for patient investors. These small cap stocks should be
on your list.
-- 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.