Tiny Stock Could Double in the Next Year - TheStreet

STAMFORD, Conn. (TheStreet) -- You probably haven't heard of Information Services Group (III) - Get Report. This Conn.-based firm helps companies research and negotiate with outsourcers. While its stock has fallen 33% a year since 2007, the shares are among the cheapest in the market and some analysts expect them to more than double in the year ahead.

Most analysts focuse on large-cap stocks, which have the most recognition and predictability. Information Services, with a market value of $70 million, is classified as a micro-cap, one notch below small-cap. Still, it has caught the attention of researchers.

Deutsche Bank

(DB) - Get Report

,

Lazard Capital Markets

,

William Blair

and

EVA Dimensions

rate the stock "buy." No firms rate it "hold" or "sell." Deutsche Bank predicts that the stock will gain 121% to $5. Lazard Capital Markets expects it to rise 77% to $4.

Analysts expect Information Services to grow faster than the market. ISG's shares trade at a forward price-to-earnings ratio of 5.8, a price-to-book ratio of 0.6 and a price-to-cash-flow ratio of 6.9 -- discounts of more than 60% to peer averages. Value screeners for U.S. stocks rank ISG at the top of the heap.

Warren Buffett

has brought value investing into the popular lexicon. But not all cheap stocks offer value. Some are cheap because their prospects are dim. There is reason to be skeptical of cheap stocks, particularly when they represent undersized companies. ISG exhibits this flaw. But its fundamentals suggest that analysts' projections are justified.

Following a per share loss of $1.85 in 2008, ISG narrowed that deficit to just 9 cents in 2009. In the first quarter of 2010, net income dropped 15% to $460,000, or 1 cent a share. Revenue inched up 1.6%. The operating margin narrowed from 6% to 4.8%. Still, there are reasons for optimism. ISG was recently ranked as the world's top outsourcing consultant by the International Association of Outsourcing Professionals.

Chief Executive Michael Connors purchased 150,000 shares during the first quarter, enlarging his stake to 7.3%. He has acquired almost 500,000 shares during the past six months, an encouraging sign for investors. Other major holders of the stock include

Morgan Stanley

(MS) - Get Report

,

Wells Capital Management

and

Pine River Capital Management

.

Pine River Capital is a value-oriented hedge fund started by Brian Taylor in a lakeside cabin in Minnesota in 2002. The fund, whose assets have ballooned to more than $1 billion, returned an estimated 91% last year. On May 27, Pine River converted ISG warrants into equity to bring its stake to 9.1% and become the company's second-largest investor.

ISG's small-stature is deceptive. Its principle subsidiary

TPI

is the world's leading data and sourcing firm. It has advised many of the world's largest companies, including

Pfizer

(PFE) - Get Report

,

Johnson & Johnson

(JNJ) - Get Report

and

Chevron

(CVX) - Get Report

. ISG went public as a SPAC, or special purpose acquisition company, a unique corporate structure that raises capital from investors with the promise of acquiring businesses. TPI was its first target. Others are on the horizon.

ISG has $38 million of cash, translating to an ample quick ratio of 6.7, and $70 million of debt, for a debt-to-equity ratio of 0.5. It not only has fuel for acquisitions, but is poised to capitalize on global trends. American companies continue to outsource technology and manufacturing operations to emerging markets to cut costs. TPI's fee revenue has risen 15-fold since 1996. Such growth augurs well for ISG and its stock in the economic rebound.

-- Reported by Jake Lynch in Boston.

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