Small Victories, Big GainsBut in this economy, small-company stocks should keep leading the way. That's because the economy is rebounding in this recovery at a slower pace than usual, and it looks like growth will remain relatively modest even as the recovery continues. That will play to the leverage that's built into small-company stocks, which are far more likely to react to even modest increases in sales and earnings than big companies. The latter have to show massive increases in sales volume to produce a measurable change in their bottom lines. Think of it this way. General Electric ( GE) added $668 million in sales in the third quarter of 2003 from the same quarter of 2002. But that was a paltry 2% of the company's $33.4 billion in third-quarter revenue. On the other hand, a company like Calavo Growers ( CVGW), one of the stocks on my list of micro-cap winners, increased sales of its avocados and papayas by a comparatively tiny $4.9 million in the third quarter of its fiscal 2003 from the same period in 2002. But that amounted to a 6.5% increase from the $76 million in sales recorded in the fiscal third quarter of 2002. Guess which stock is up more in the last three months? Calavo Growers, which began life as an avocado cooperative in California and bills itself "the first name in avocados," gained 16% in the period. GE is down 1%.
10 Likely Micro-Cap Winners
In other words, the way to make macro profits from the current economic recovery is by putting some money in micro-caps. And I've put together two screens and followed up with some due diligence on individual stocks to identify 10 micro-caps likely to outperform the average stock.
|10 Micro-Caps Under the Microscope |
Sometimes good stocks come in little packages
|Stock||Industry||Market Cap ($ million)||Shares Outstanding (million)||Analysts Covering Stock||YTD Return|
|American Vanguard (AVD:NYSE)||Agricultural chemicals||$166||5.8||0||94%|
|Atlas Pipeline (APL:NYSE)||Natural gas pipelines||152||4.4||1||46|
|Calavo Growers (CVGW:Nasdaq)||Avocados and produce||108||12.9||0||19|
|Cohesant Technologies (COHT:Nasdaq)||Adhesives||14||2.6||0||38|
|Concorde Career Colleges (CCDC:Nasdaq)||Education and training||124||5.9||0||67|
|Fargo Electronics (FRGO:Nasdaq)||Business software and services||166||12.4||4||53|
|Great Northern Iron Ore (GNI:NYSE)||Iron ore||132||1.5||0||50|
|Middleburg Financial (MBRG:Nasdaq)||Banking||141||3.8||1||62|
|Onesource Information Services (ONES:Nasdaq)||Internet information||117||11.3||2||34|
|Silent Witness (SILW:Nasdaq)||Security and protection services||64||7.5||0||109|
|Source: MSN Money|
OK, so what's a micro-cap stock, anyway? And how did I put together this list of what I believe are good ones?
These Aren't Penny Stocks
A micro-cap isn't the same as a penny stock. The latter term is used for any stock that sells for a low price per share, often $5 or less. A micro-cap stock, on the other hand, can sell for a high price per share: For example, Great Northern Iron Ore (GNI), another stock that made my micro-cap list, sells for $89 a share.
What makes a micro-cap a micro-cap is the combination of price per share and a very small number of outstanding shares. Great Northern Iron, for example, has only 1.5 million shares of stock outstanding. Contrast that with the 10 billion shares of General Electric stock outstanding.
Multiply the price per share and the number of outstanding shares, and the total market capitalization of Great Northern Iron is a tiny $133 million, despite its high share price. General Electric, on the other hand, trades for a lower price per share of $28 but has a much higher market capitalization of $280 billion because the company has issued so many shares.
By my definition, then, if you ranked all of the stocks in the market by market capitalization, the micro-caps would be those in the lower 25% of the pyramid, with a market capitalization of $200 million or less.
Before you dive into the micro-cap market, you should know that there is a downside. (There's no free lunch in investing.) Because there are so few shares outstanding, very few shares of these stocks trade on the average day.
Sifting for WinnersHow do you identify good investments in the world of micro-caps? Forget about Wall Street analysts. As you can see in the table above, most micro-caps aren't followed by any analysts. That's not surprising. Because there's almost no institutional buying or selling interest in these stocks, Wall Street doesn't have a reason to produce research on them. Micro-caps aren't exactly profitable investment banking clients, either. So count out investment banking fees as motivation. In the micro-cap world, stock screens -- and word of mouth -- are an investor's best friends. To come up with my list of 10 micro-caps for macro profits, I tweaked two screens that I built recently to look for unknown mid-cap blue-chips. You can see my original thinking on unknown stocks in my