These Micro-cap Stocks Are Surging -- And Still Have 50% to 100% Upside

By
A A A

When I write about micro-capstocks (which typically havemarket values of less than $200 million), I always focus on several at once.

This approach highlights the necessity of ensuring that any one of these speculative stocks doesn't account for more than a sliver of a portfolio. Some micro-caps can fare quite well, while others sink like a stone.

I was thinking about this basket approach to micro-caps recently while reviewing a column I wrote early lastyear .

Since then, GSE Systems ( GVP ) has been a dud, dropping 26% as the company's focus on nuclear power-plant training services has fallen out of favor. But the other two picks in that column are faring quite well and appear to still have ampleupside . Looking at the reasons why that's the case can also point the way to the pillars of success in micro-capinvesting .

1. Biolase Technology (Nasdaq: BIOL)
Stock in this maker of laser-based dental drills moved sideways for the rest of 2012, but it has risen more than 150% in 2013. A key shift insales tactics gets thecredit .

Biolase had been relying on dental products distributor Henry Schein (Nasdaq: HSIC) to help boost sales but found that the indirect sales approach was just too tough. Biolase's equipment is relatively pricey, and dentists need to develop a deep understanding of why this upfrontinvestment in laser drills can reap biggains for a dental practice down the road. Patients love them because they are relatively pain-free, and dentists love them because they can drill much more precisely.

Asanalysts at AscendiantCapital recently noted, "because it is designed to provide clinically superior performance with less pain and faster recovery times, the company's Waterlase device has the potential, in our view, to become the instrument of choice for common procedures such as cavity removal or root canals."

The decision to ditch Henry Schein and emphasize direct sales has really begun to pay off. Sales are on track to rise 20% this year and again in 2014 (to around $80 million), according to consensus forecasts. Even at that level, total penetration in the domestic dental industrywill still be less than 10% (and below 3% on a globalbasis ), highlighting ample growth opportunities formarket share gains.

Yet a broad review of Biolase's 160patents (and 150 patents pending) shows that this company is aiming far beyond the dental market. Biolase's lasers have the potential to provide similar benefits in the fields of dermatology, ophthalmology, orthopedics and urology. Biolase has limited resources, and it will probably need to pursue licensing orpartnership agreements to crack these markets, but these niches represent huge potential upside if the company gains traction.

As noted, this micro-cap has several important features you should look for, including:

  • Positivecash flow , which means the share count won't need to be diluted to keep the business going.
  • A relatively low penetration rate, which implies robust long-term growth potential.
  • A management team that is delivering solid sales execution.
  • Rising daily tradingvolume (which was around 100,000shares a day when I looked at the company last year, but now exceeds 300,000 on most days, highlighting increasedWall Street awareness of the company).

I see thisstock rising from a recent $4.75 to $7, which equates to three times projected 2014 sales, a reasonablemultiple for a high-growth company with gross margins approaching 50%.

2. Axcelis Technologies (Nasdaq: ACLS)
My pick of this semiconductor capital equipment was admittedly premature. I noted that shares traded below tangiblebook value and simply needed catalysts to move back above tangible book. Well, shares fell even further over the rest of 2012, moving deeper below book value.

Make no mistake: This is a company that seemingly lost relevance in the very competitive chip equipment industry. Sales slumped from $500 million in 2004 to just $200 million in 2012. Equally important, an extended period of negativefree cash flow broughtcash levels down from $200 million six years ago to just $45 million by the end of 2012.

Yet as is the case with Biolase, this stock is finally gaining traction, moving up sharply in the past few months.

Why the sudden spike? Because a recently launched new product line appears to be on the cusp of solid traction. Axcelis launched the Purion product line in 2012, which is used to implant ions on semiconductor wafers. Whereas Axcelis' legacy product line, known as Optima, was focused on just a 15% slice of the $1 billion ion implantation market, Purion is aimed at the other 85%.

The company has already sold three Purion systems to a leading (if undisclosed) memory chip maker and a semiconductor foundry. These sales are for "evaluation systems" and are often a harbinger for an order for many more units to come -- if the Purion product line lives up to the company's billing.

This isn't just about product line upgrades. Shares are also gaining from an expectation that the broader chip equipment industry is on the cusp of a sustained upturn. You can see that newfound optimism by noting that shares of industry leader Applied Materials (Nasdaq: AMAT) have risen 40% over the past six months.

And AMAT's rise highlights just how cheap Axcelis remains. While shares of AMAT, Lam Research (Nasdasq: LRCX) and KLA-Tencor (Nasdaq: KLAC) all trade for roughly two times forwardrevenue , on anenterprise value basis, Axcelis trades for just 0.7 times projected 2013 revenue. Simply moving that multiple up to 1.5 implies a double for this stock.

Thatgain will come only if Axcelis' Purion product line gains the traction that management is anticipating. But the spate of recent orders for evaluation systems is promising.

Risks to Consider: Micro-caps are starting to gain traction as the market moves higher and investors move out on the risk curve. TheiShares Russell MicrocapIndex ETF ( IWC ) is up 23% over the past six months, compared with a 17% gain for the S&P 500. Yet these stocks can get hit hard if the market changes direction and investors make a flight to safety.

Action to Take --> Both Biolase and Axcelis had fallen off of many investors' radars in 2012 but are moving back into vogue this year, as seen by impressive recent price gains. Crucially, these companies' management teams are laying the foundation for solid growth in the years ahead. If they can execute on their plans, then ample upside could be ahead for these stocks.




The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

© Copyright 2001-2010 StreetAuthority, LLC. All Rights Reserved.


This article appears in: Investing , Investing Ideas , Stocks

Referenced Stocks: GVP , IWC

StreetAuthority

StreetAuthority

More from StreetAuthority:

Related Videos

Stocks

Referenced

50%
100%

Most Active by Volume

100,376,898
  • $17.62 ▲ 0.51%
83,231,837
  • $25.62 ▲ 1.91%
75,739,329
  • $111.78 ▼ 0.77%
65,297,937
  • $36.37 ▼ 1.76%
59,053,093
  • $47.66 ▲ 0.29%
53,482,350
  • $2.59 ▼ 0.38%
51,504,284
  • $7.34 ▲ 2.37%
51,434,656
  • $8.14 ▲ 6.96%
As of 12/19/2014, 04:15 PM


Find a Credit Card

Select a credit card product by:
Select an offer:
Search
Data Provided by BankRate.com