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Five
Micro Caps to Pump Up Sagging Portfolios |
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Having spent
the better part of the last few weeks talking about the market, where it's
going, and where it should be going, today we're going to take a
break and actually look at a few specific stock ideas.
And yes, we'll
stick with the small and micro cap names, for two reasons. One,
if the market isn't done pulling back yet, then the smaller the stock,
the more resistant it is to the broad bearish tide. Two, the smaller
the stock, the more undiscovered it is, and the stronger the opportunity.
No fanfare needed
- let's just dive into a few stocks you probably haven't heard of, but
probably should have.
These
investment ideas are presented in no particular order. All of them,
however, are just that.... investment ideas (as opposed to trading
ideas). Per our mantra, technical potential as well as fundamental factors
played a role in their selection.
Image Sensing
Systems Inc. (ISNS)
 We
mentioned in our most
recent newsletter that technology may be something you want to overweight
going forward, as the sector displayed stronger earnings and revenue growth
than most other groups, as well as doled out more than its fair share of
upside surprises. Consider Image Sensing Systems a way to play that theme.
The fundamentals
are certainly in place - a projected 2011 P/E ratio of 10.9 is made plausible
by the trailing P/E of 13.8 (yes, micro caps can be profitable). Net margins
are rolling in at a solid 21.4%, and have been in that range for a while.
The Achilles
heel here is an undeserved one.... the chart. ISNS has been stuck in a
range between $12.20 and $14.50 since February, despite the encouraging
projections. The stock is 'worth' more than its current price of $13.50,
but other investors have to believe that too if it's to go higher.
Streamline
Health Solutions Inc. (STRM)
Remember our
bullish call on the healthcare data management, billing, and record-keeping
stocks we made way back on March
27th? It wasn't that we had forgotten about the group; we just hadn't
had a chance to post a micro cap pick based on the industry outlook. Problem
solved today - it's Streamline Health Solutions.
Note that the
company's going to announce earnings on Thursday. If you're a gambler who
believes in it, you'll be in before then. If you're looking to play it
safe and want to weigh the most recent numbers before pulling the trigger
(we tend to fall in that category), you'll wait to see what they've
got to say.
The success
formula here is simple, but has also been very effective..... increase
revenue more than you increase expenses. Streamline Health has done
just that for a while, but really seemed to turn the corner last
quarter with a record $0.17 EPS, without any assistance from an accounting
maneuver. Even bad news on Thursday may not be all that bad, considering
the projected P/E from here is 5.8.
As was the case
with Image Sensing Systems, the STRM chart can be tough to navigate. Pick
and choose your spots.
RG Barry
Corp. (DFZ)
Yes, apparel,
footwear, and accessories are boring. Boring is fine though, when the company
managed to continue ramping up its top and bottom line (operating,
anyway) between 2007 and 2009 as if the recession never happened. Reliability
counts.
Where RG Barry
really stands out ahead of the other picks is the chart, though it's fully
justified by the fundamentals. While DFZ is a little over-extended in the
very
short run, there's certainly not a lack of upward momentum here. Just buy
on the dips, because the value is there.
Scientific
Learning Corp. (SCIL)
 Like
Image Sensing System, Scientific Learning shares have been trapped in a
range for a while, though one has to wonder if SCIL actually broke out
of that rut over the past few days by the virtue of its move above a falling
resistance line. The top horizontal edge of the range is at $5.78 though
(versus the stock's current price of $5.34), so we'll use that as a make-or-break
point until further notice.
With a projected
2011 P/E ratio of 14.4 and a trailing P/E of 17.4, it's not like Scientific
Learning Corp. is priced at rock-bottom levels (though it's certainly not
expensive either). The real story here, however, is growth.
As was the case
with RG Barry, Scientific Learning Corp. continued to ramp up revenue and
operating earnings largely as if the recession wasn't happening. For 2010,
the expected EPS of $0.32 would be a record, but considering we've seen
upside surprises in two of the last three quarters, perhaps that outlook
isn't optimistic enough.
AXT Inc.
(AXTI)
We hate to keep
looking at tech stock ideas, but if that's where the opportunities are,
then that's where they are. Semiconductor maker AXT Inc. simply looks like
a bargain based on its projected 2010 EPS of $0.36, which would be a record
for the company.
Let's not pull
any punches here - AXT had a miserable 2009, losing $0.06 per share. However,
the company turned the corner three quarters ago, earning $0.07, $0.09,
and $0.08 per share (respectively) in those quarters; the 2010 expectation
of $0.36 per share is more than reasonable. More importantly, that translates
into an expected P/E of 12.36. 2011's anticipated P/E is 11.1. Best of
all, the company's been profitable for the last three quarters, boasting
margins of nearly 10%.
Like RG Barry
shares, AXT Inc. doesn't lack bullish momentum. In fact, it may have a
little too much at times. Look for short-term pullbacks to use as entry
points into the long-term uptrend.
The usual caveats
apply here.... this isn't a complete portfolio solution, talk to financial
professional who is familiar with your personal financial situation before
choosing any or all of these stocks for your portfolio, and don't take
risks you don't understand or are uncomfortable with - you're in charge
of your own portfolio.
That said, we
think these micro cap stocks represent solid ideas for the aggressive portion
of your holdings, and deserve a closer look and a little DD at this point
in time.
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Updated: 8:15 pm PDT (03:15 GMT), November 2, 2010
