These 4 Micro-Caps Are Now Great Buys

This market has been painful for many investors. Shares of many large and mid-cap stocks are off 20% to 30% in just the past month or two. And the lower down the food chain you go, the worse it gets. By the time you get to micro-cap stocks, you start to see just how deep the carnage has been. Many of these stocks have lost half of their value in a short period and can't find any investors willing to take a chance on them. But if the market starts to stabilize, then the trend is likely to reverse, since some of the hardest-hit stocks in this summer swoon could post a solid snapback rally.

Here are four micro-caps currently trading at bargain prices that look poised for a rebound.

1. Biolase Technologies (Nasdaq: BLTI )

I profiled this company in January with a case of impeccable timing because shares shot up from $1.50 to $3 in less than two weeks. They eventually moved up toward the $7 mark after this maker of dentistry and ophthalmology lasers delivered solid first-quarter results.

This run would lead to profit-taking from long-standing investors and, by Monday, Aug. 8, the recent market rout pushed the stock down to just $2.28. This led management to issue plans to buy up to two million shares of company stock back from investors. Judging by just-announced quarterly results, the buyback looks to be a wise investment: Shares rallied up to about $3 on the news, but still look quite cheap.

Biolase had struggled for years to gain real traction for its dental lasers, which are expensive, but yield much better patient outcomes and allow dentists to treat more patients in a day. Dentists are now coming on board. Sales have doubled in the first half of this year in comparison with 2010, while management has just guided for a very strong third quarter.

A weak spot has been international sales, though. Biolase had given exclusive international sales rights to dental distributor Henry Schein (Nasdaq: HSIC ) , but Schein dropped the ball, so Biolase re-acquired its international rights with plans to take a more direct sales approach. Analysts at Needham say shares can more than double to about $7, based on a multiple of 20 on projected 2012 earnings per share ( EPS ) of $0.35. The real catalyst for this stock: Biolase has partnered with Procter & Gamble (NYSE: PG ) with plans to develop a half-dozen dental products. Look for more announcements on this front in coming months.

2. BigFive Sporting Goods (Nasdaq: BGFV )

Consumers are ill-inclined to spend on outdoor goods right now, so this retailer is suffering from flat sales and a 40% drop in projected profits in 2011. Shares, which had been slipping all year, really cratered in the past few weeks and now trade right above tangible book value of $6.85.

Despite its woes, the company remains on track to earn about $0.65 a share this year. But you need to look past the current economic ennui to see the stock's true value. Big Five has earned at least $0.94 a share in five of the past six years. Shares trade for just six times the average earnings in this period. Shares trade right at book value and are very cheap in relation to normalized earnings, so this stock looks like quite the bargain. Analysts at Needham say shares could rebound to $14 (about 100% above current levels), but caution "the company needs to show sustained sales improvement for the stock to approach that level."

3. TheStreet Inc. (NYSE: TST )

This is a fairly easy stock to trade. In the past two years, it has moved up to the $3.50 mark when interest in financial information stocks rises, and it falls below $2.50 when gloom sets in. Any price under $2.50 is a great entry point, simply because it means the company's market value is at parity with its $75 million cash balance. TheStreet (which is also a former employer of mine), doesn't burn cash, so the cash balance is safe. New management has made a broad set of changes to the business plan, some of which are paying off, while others look ill-conceived. Still, look for this stock to move up 30% to 40% once the market mood turns. In the interim, shares have likely found a floor.

4. Talbots (NYSE: TLB )

When this women's apparel retailer reported fiscal (April) first-quarter results in early June, management admitted many of its aggressive merchandising moves -- which aimed to bring in younger buyers -- had not worked, especially in a line of sheer sweaters that would never be worn by the retailer's traditional 50-something clientele. Those sweaters have been deep-sixed and the fall product line has been designed to be a bit more conservative.

Investors shrugged anyway, sending shares down roughly 40% to $2.63 in just one session -- just a tenth of where they traded five years ago. In fiscal 2011, Talbots managed to earn $0.61 a share, but an equivalent loss looks to be the case this year. To move back into the black, Talbots will close more than 100 of its worst-performing stores (out of a current 580), while also expanding a set of revamped stores that evoke a French-couture environment.

Before any of this can happen, private-equity investors are circling while shares are so cheap. In early August, Sycamore Partners announced it had amassed a 9.9% stake in Talbots, with plans to discuss steps to unlock the stock's value with management. This helped the stock rebound to $4. Management subsequently put in a " poison pill " that would trigger lots of unwanted dilution if Sycamore or others made a move to buy the company, so shares dropped again near the $3 mark. But the poison pill is likely a formality to get all parties to sit down and agree on a new plan. Whether it's an outright sale or a fresh management team, catalysts are in play for this stock, which trades for just 0.2 times trailing sales -- about as low as it gets.

Action to Take --> Micro-caps have taken it on the chin, just as they did in late 2008 and early 2009. When the stock market stabilized in 2009, many micro-caps posted stunning snapback gains. These four stocks could repeat that history. Meanwhile, they appear to have protection in the form of buybacks, low price-to-earnings ratios, strong balance sheets, or private-equity interest.

-- David Sterman

The One Stock to Buy BEFORE President Obama's Emergency Briefing

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Disclosure: Neither David Sterman nor StreetAuthority, LLC 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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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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