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In
This Edition... |
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We've got a
special edition for you this week... an in-depth look at some emerging
industry leaders within the small cap world, and a snapshot
comparing the stocks within those groups. This may be the key to a
successful 2010 for small cap enthusiasts. We'll get to it below, but first
a quick update of what's been going on in the blog:
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Emerging
Small Cap Leaders, by Industry |
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In
2008, every stock of every size in every industry was pretty much pointed
lower. In 2009, every stock of every size in every industry was pretty
much pointed higher. The only 'right and wrong' was being in the market
or not.
 As
we roll into 2010 though, we're finally seeing clear leaders emerge -
it's finally stock picker's market again.To that end, we've scoured
the market's small cap stocks, broken them down by industry, and found
some surprising hot spots.... areas nobody thought could do well
at this point.
In some cases
that strength is unmerited, and is at risk. In other cases, the
underlying fundamentals actually support the technicals, implying these
emerging trends aren't just due to a little volatility. Those are
the ones we're particularly interested in.
So with that,
here's our latest small-cap-centric outlook for the newest industry leaders.
Bear in mind
that just being a top-performer for the year so far does not automatically
qualify a group/industry as bullish. Only the leadership which we felt
had some longevity is being detailed, which requires a combination of positive
technicals and fundamentals.
 Take
the S&P Small Cap Movies and Entertainment Index for instance. It's
presently overbought, and it's near impossible to draw a bead on the fundamentals
of its underlying stocks. What we can glean, however, does not look compelling.
Besides, the definition of a 'movie and entertainment' overlaps with the
fourth-best performing group of the year.... the 'media industry' group.
Some of the individual names in either/both look interesting, but the group
is so amorphous that it would be dangerous to make a call on it as a whole.
Home furnishings
is one of the groups that looks decent from a fundamental point of view,
but technically speaking looks a tad troubling. The S&P Small Cap Home
Furnishings Index is pushing off a recent low like most other industry
charts are, but its January peak barely topped the September high. This
indicates weakening momentum.
Anyway, you
get the idea - it takes more than just a good month and a half to be considered
a leader going forward.
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Projected
Small Cap Leading Industries |
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The rest of
our top-ten list actually looks solid, and based on what we know to date,
should provide the best growth opportunities for 2010. That's not to say
right now is the exact time to step in though, as we anticipate
more turbulence over the next several days. Once we're at a more permanent
bottom, then it may make sense to start wading into the following
groups:
 Insurance
Brokers
Not that the
group isn't without its sore spots, but when three out of seven stocks
in an industry sport single-digit projected P/Es, it's time to get interested.
What you'll want to watch out for are slim margins. That should be less
of a problem for the group than it has been in the recent past, but it's
still a tripwire for some.
Either way,
the S&P Small Cap Insurance Broker Industry Index broke above a key
resistance level this week. Though a little overbought in the near-term,
getting over this hurdle has freed the index up for better movement in
the long run.
Computer
Hardware
This group includes
a lot of stocks, so we've limited our look to just the most important ones
on our earnings/outlook
matrix.
That said, even
the most important ones in terms of size or notoriety may have problems.
Though one would expect margins to be thin coming out of a recession, we're
pretty far into the recovery phase and these companies are still
barely squeezing out a profit. Notable exceptions include Nice Systems
Ltd. (ADR) (NASDAQ:NICE) and Super Micro Computer, Inc. (NASDAQ:SMCI),
if the projected improvements become reality.
Even so, the
S&P Small Cap Computer Hardware Index indicates that a long-standing
streak of lower highs has been broken, and a streak of higher lows is unfolding.
The
chart just worked its way past a key resistance line.
 Chemicals
Now would
be a great time to actually step into one of the holding in the
S&P Small Cap Diversified Chemical Index. It's just coming off a short-term
low within a longer-term uptrend.
And the underlying
numbers support the strength. The average operating P./E of the top six
small cap chemical names is a decent 25.0, but the forward-looking
average P/E is 12.3. A couple of these names are expected to really turn
things around in 2010 too, so make sure to check out the matrix for this
group.
Homebuilding
Surprised?
Most people are.
This is a tricky
one, as the Micro Cap Press has contended - and continues to believe
- that there is simply too much construction capacity and not enough sustainable
demand no matter how strong the real estate environment is. So,
it's with hesitation that we even mention the current uptrend of
the S&P Small Cap Homebuilding Index.
The matrix,
however, should wave enough red flags to make the more important point....
that some of these companies will survive because there will always be
at least some demand for new construction, yet others won't survive. The
challenge is picking the winners and losers; the side-by-side comparison
in the matrix will help get you started to that end.
 Commercial
Printing
You'll also
find some of these names classified as 'business service' stovks, which
lumps them with a whole different set of tickers. Not that the general
business service arena is a bad business to be in right now, but in this
case
the emerging trend specifically refers to the companies that print things.
We'll warn you
now that some of these names are small to the point of being unknown. That's
your edge though - snatching up a name that nobody else is thinking about.
InnerWorkings,
Inc. (NASDAQ:INWK) may be a particularly good bet, as it's garnered lots
of attention lately, done well corporately, and has just found a floor.
Biotechnology
There are way
more stocks in this group than we could ever reasonably process, so we'll
just list the most important ones on the matrix.
That should be still plenty to make some generalizations about the health
of the overall group.
In any case,
we're seeing the S&P Small Cap Biotechnology Index do something that
its mid and large cap counterparts can't generally do.... move
higher. There are so many bad stocks of all sizes in the biotech industry,
that the clunkers tend to weigh down the winners and not let the indices
produce much movement. The fact that the small cap versions of the biotech
indices are actually progressing hints that there's a solid bullish undertow
here.
Oh, don't misunderstand
- when you see the matrix
you'll see more unprofitable stocks than profitable ones. That's
the norm. Remember, biotech names tend to trade not based on current valuations,
but future potential.
That said, some
of these names are currently profitable, or expected to be profitable by
the end of 2010. Combining real results with an industry tailwind could
make for a very strong holding. Martek Biosciences Corp. (NASDAQ:MATK)
and Cubist Pharmaceuticals, Inc. (NASDAQ:CBST) come to mind.
Industrial
Conglomerates
Like movies
and media, the 'conglomerate' group can be a little tough to define as
well. It's not quite as bad as other areas on the front, but it's still
a challenge. Either way, it's worth a little more effort in this case,
as there are a couple of really interesting stocks within the group (and
the group's been pretty solid on its own anyway).
Crane Co. (NYSE:CR)
may be the yardstick here, with a single-digit operating P/E, and a solid
uptrend from the stock since late 2008. Don't dismiss 7 Days Group Holdings
Ltd. (NYSE:SVN) though. The ADR may benefit from the likely swing to a
profit this year.
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Updated: 6:01 am PDT (13:01 GMT), September 9, 2010
