Chewing on Candies and Compudyne

Some small-caps are worth a look. Take Compudyne (CDCY Quote) and Candies (CAND Quote).

Compudyne makes everything from attack-resistant windows and doors to alarm systems to so-called safe rooms. Every metric I'm looking at suggests that business is getting better by the day -- and that the stock comes nowhere close to reflecting the company's improving fundamentals.

For starters, take a look at the backlog. At the end of the April quarter, total order backlog topped $135.5 million -- up 23% from the fourth quarter and up nearly 30% from the same period last year. That's huge!

Then check out its recent purchase of a company called Tiburon, which makes software that controls the command and structures and maintains records of more than 1,000 emergency agencies around the country. The deal is important for two reasons: Software products get higher gross margins, and the deal puts Compudyne in line to sell products to these government agencies down the road.

What did Compudyne pay for Tiburon?

Just $30 million in cash and stock! In my mind that's a steal given that the company will add north of $47 million in revenue over the next year, as well as more than $57 million in firm backlog.

Last, take a look at its valuation. The stock trades at under 0.8 times sales. That's extremely cheap given that the company has the potential to grow its earnings at a more than 25% clip over the next year, as its backlog indicates.

Bottom line: On the basis of Compudyne's improving backlog and earnings outlook, brighter days are ahead.

As for Candies, it has three distinct businesses that help smooth out the boom-and-bust cycles that are experienced by most stand-alone retailers.

It develops a variety of women's footwear that it sells under the Candies or Bongo names, it makes sneakers and the like for mass-market discounters such as Wal-Mart and Kmart, and it runs 14 retail outlets where it sells footwear, clothing, handbags and accessories. These stores compete with specialty stores including Deb Shops (DEBS Quote) and Claire's Stores (CLE Quote).

But even beyond its product diversity, management is doing several things that have the potential to drive this stock materially higher in the months ahead.

For starters, it recently inked a deal with Kelly Osbourne (from the MTV show "The Osbournes") and Vanessa Carlton (a singer) to spearhead a marketing campaign this fall. It also has made a conscious effort to flush out inventory through more frequent markdown sales. So far it's working: The company has managed to show an almost 700-basis-point sequential increase in gross margins from the fourth quarter because of these efforts.

The stock trades at just 8 times earnings estimates; Deb Shops, by contrast, trades at 11.8 times forward earnings.

The one caveat: This is a $4 stock, meaning not only that it may be unmarginable but also that few analysts will be willing to pick up research coverage with the stock under $5. Still, if the company can earn what it says it can earn, eventually the shares will eventually obtain some type of sponsorship.

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