These Small Stocks Could Provide BIG Gains Very Soon


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Investors focused on larger companies saw their ups and downs in 2011. Rather than focus on the usual suspects, perhaps they should have been focused on antimony. It's an obscure -- and toxic -- element that has some appealing industrial applications such as flame retardants and in solder and ball bearings. Antimony helped micro-cap U.S. Antimony Corp. (Nasdaq: UAMY ) boost prospects, and the stock more than quadrupled in value in 2011.

The question for investors: Can this hot stock along with its other high-flying peers post new highs in 2012? Let's take a closer look at a group of micro-cap stocks that rose by at least 100% last year.


U.S. Antimony's gains present a typical challenge facing micro-cap investors. The company is so small, it's hard to grasp where the business may be headed and what it's worth. We know sales are rising at a 50% clip and may have exceeded $13 million in 2011. We also know a recent capital raise should help mining output climb even higher, perhaps toward $20 million this year (an educated guess, to be sure).

Still, with close to 60 million shares outstanding , the company's current market value is likely around eight times that possible 2012 sales rate. This is the kind of stock you'd need to spend a good bit of time researching further.

Other micro-caps don't make you work quite so hard just to glean an initial value assessment. Take consumer electronics retailers Conn's (Nasdaq: CONN ) as an example. Last June, I noted the stock traded far below tangible book value and was due for a rebound. Shares have doubled since then, and the stock now trades just above book value. Surely, shares aren't the bargain they were back then.

In a similar vein, investors should forget about further gains for e-tailer (Nasdaq: STMP ). In September 2011, I suggested shares could keep running on expectations that business would improve as more post offices were closed due to budget cutbacks. The stock has risen more than 50% since then and now looks overvalued . This company is unlikely to ever boost sales more than 15% annually. It is largely mature and the number of post offices slated for closure comprises only a small percentage of the total base. Profits likely hit about $1.30 a share in 2011 and analysts don't see much profit growth in 2012. As such, the forward price-to-earnings (P/E) ratio of around 23 seems too rich.

More gains for eGain?
One of the major technology trends of the past decade has been the outsourcing ofcall centers. Even as they seek to save money by hiringcall center staff in countries such as India and the Philippines, companies still must be sure they are providing a high level of customer service. To make sure the call center operators have access to all of the important information they need, they rely on specialized software that marries the world of customer service and corporate data. That's where by eGain Communications (Nasdaq: EGAN ) software comes in.

It took a while for eGain to really gain traction: Annual sales were stuck at around $30 million in fiscal (June) 2008, 2009 and again in fiscal 2010. Yet the company saw sales spike 44% in fiscal 2011 to almost $50 million as new customers such as Vodafone, AMR and Alliant Telecom joined the client roster. What had been a $1 stock back in the fall of 2010 reached almost $10 last fall.

These days, the stock is back down below $6, which translates into a still-considerable gain for 2011. Why the pullback? Because eGain delivered such robust growth back in calendar 2010, year-over-year comparisons in recent quarters haven't looked quite as robust. For example, sales in the fiscal first quarter of 2012 (ended last September) fell 20% from a year earlier to $10.3 million.

Investors should take a fresh look at this business when eGain reports fiscal second-quarter results on Feb. 8. Right now, the stock appears somewhat inexpensive at around 2.5 times the annualized sales run rate. Software vendors can garner a much higher multiple -- when growth is in evidence.  

$100 oil does the trick
Steadily rising prices for crude oil helped push shares of Saratoga Resources (Nasdaq: SARA ) up nearly 200%, and the upward move may continue.  This company drills for oil, primarily in "transitional zones" that lie between major shale formations in Louisiana. Its main focus: The Grand Bay field, roughly 70 miles southeast of New Orleans.

In this industry, success begets success. Higher oil prices boost cash flow , which allows for increased investments in yet-to-be-tapped oil wells. Saratoga likely generated $77 million in revenue last year, and this figure is expected to exceed $100 million in 2012, thanks to new wells that are coming into production.

Shares currently stand about 15% below the company's stated net asset value ( NAV ) of about $7.30, but this figure may prove to be conservative. Analysts at C.K. Cooper figure NAV would be assessed at $8.04, assuming $100 oil and $3.50 per MCF (metric cubic foot) in gas prices. If these figures moved up to $110 and $4, respectively, which is the long-term target that many energy analysts use, then NAV would be about $10, or roughly 50% higher than the current stock price. That's actually the target price that C.K. Cooper uses, as the firm assumes current stated NAV and then also assumes that 50% of Saratoga's unproven reserves ultimately get exploited.

Risks to Consider: After a strong run in 2011, these stellar performers have a tough act to follow. Insiders may look to book profits and unload shares, now that they've made plenty of money in these fast-rising stocks.

Action to Take --> Despite big gains, many of these stocks remain off the radar for most investors. You have a chance to dig deep into these names before the rest of the herd shows up.

My favorite approach for these big gainers is to watch for pullbacks. That's a natural event as long-term shareholders secure profits, and it isn't necessarily a sign of trouble. Stocks like eGain, noted above, are well above their recent peaks and may be set to make another run at the 52-week high . Saratoga, on the other hand, might make for a good 50% gain if you research the stock further and agree with the analyst estimate.

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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.

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

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This article appears in: Investing , Investing Ideas
More Headlines for: CONN , EGAN , SARA , STMP , UAMY

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