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